Computer Boutique sells computer equipment and home office furniture

Computer Boutique sells computer equipment and home office furniture. Currently, the furniture product line takes up approximately 50% of the company's retail floor space. The president of Computer Boutique is trying to decide whether the company should continue offering furniture or just concentrate on computer equipment. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13%. Allocated fixed costs are assigned based on relative sales.

Computer Home
Office Equipment Furniture Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold 700,000 500,000 1,200,000
Contribution margin 500,000 300,000 800,000
Less direct fixed costs:
Salaries 175,000 175,000 350,000
Other 60,000 60,000 120,000
Less allocated fixed costs:
Rent 14,118 9,882 24,000
Insurance 3,529 2,471 6,000
Cleaning 4,117 2,883 7,000
President's salary 76,470 53,350 130,000
Other 7,058 4,942 12,000
Total costs 340,292 380,708 649,000
Net Income $159,708 ($ 8,708) $151,000

Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line.

Click here for the solution: Computer Boutique sells computer equipment and home office furniture

On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process

E11-10 Double-declining-balance method; switch to straight line

On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $30,625. The expenditures made to acquire the asset were as follows:

Purchase price $154,000
Freight charges 2,000
Installation charges 4,000

Jackson's policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipment's life and then switch to straight line halfway through the equipment's life.

Required:
1. Calculate depreciation for each year of the asset's eight-year life.
2. Discuss the accounting treatment of the depreciation on the equipment.

Click here for the solution: On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process

The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee

E21-9 Lessee and Lessor Accounting Issues

The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee. Assume that the lease payments are made at the ginning of each month, interest and straight-line depreciation are recognized at the end of each month, and the residual value of the leased asset is zero at the end of a three-year life.

REQUIRED:
1. Record the lease (including the initial receipt of $2,000) and the receipt of the second and third installments of $2,000 in the accounts of the Anson Company. Carry computations to the nearest dollar.

Click here for the solution: The following information is available for a non-cancelable lease of equipment that is classified as a sales-type lease by the lessor and as a capital lease by the lessee

On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease

P21-1 Determining Type of Lease and Subsequent Accounting

On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay $70,000 annually at the beginning of each year under the non-cancelable lease. Superior Equipment Company, the lessor, agrees to pay all executor costs, estimated to be $3,450 per year. The cost and also fair value of the equipment is 305,000. Its estimated life is 10 years. The estimated residual value at the end of five years is $64,000 and is not guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. During 2010, Superior Equipment pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties surrounding the amount of un-reimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method both companies.

REQUIRED:
1.Identify the type of lease involved for Alice Company and Superior Equipment Company and give reasons for your classifications.
2.Prepare appropriate journal entries for 2010 for the lessee and lessor.
3.If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value.

Click here for the solution: On January 1, 2010, the Alice Company leases equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the non-cancelable lease

Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000

E10-11 (Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000. The vendors credit terms were 2/10, n/30. Presented below are two independent cases related to equipment. Assume that the purchases of equipment are recorded gross. (Round to nearest dollar)

a.) Geddes paid cash for the equipment 8 days after the purchase.
b.) Geddes traded in equipment with a book value of $2,000 (initial cost $8,000) and paid $9,500 in case one month after the purchase. The old equipment could have been sold for $400 at the date of trade. Assume the exchange has commercial substance.

Instructions
Prepare the general journal entries required to record the acquisition and payment in cash of the independent cases above. Round to the nearest dollar.

Click here for the solution: Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000

(ACC 422 Week 5) On January 1, 2007, Bensen Company leased equipment to Flynn Corporation

ACC 422 Week 5
Chapter 13 and Chapter 21
E21-7 (Lessee-Lessor Entries; Sales-Type Lease) On January 1, 2007, Bensen Company leased equipment to Flynn Corporation. The following information pertains to this lease.

1. The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2007.
3. The fair value of the equipment on January 1, 2007, is $150,000, and its cost is $120,000.
4. The equipment has an economic life of 8 years, with an unguaranteed residual value of $10,000. Flynn depreciates all of its equipment on a straight-line basis.
5. Bensen set the annual rental to ensure an 11% rate of return. Flynn’s incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown.
6. Collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.

Instructions
(Both the lessor and the lessee’s accounting period ends on December 31.)
(a) Discuss the nature of this lease to Bensen and Flynn.
(b) Calculate the amount of the annual rental payment.
(c) Prepare all the necessary journal entries for Flynn for 2007.
(d) Prepare all the necessary journal entries for Bensen for 2007

Click here for the solution: (ACC 422 Week 5) On January 1, 2007, Bensen Company leased equipment to Flynn Corporation

Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time

E22-11 (Change in Estimate—Depreciation) Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2008, it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.

Instructions
(a) Prepare the entry (if any) to correct the prior years’ depreciation.
(b) Prepare the entry to record depreciation for 2008.

Click here for the solution: Peter M. Dell Co. purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time

The cost of equipment purchased by Charleston, Inc., on June 1, 2010 is $89,000

P11-2 (Depreciation for Partial Periods—SL, Act., SYD, and DDB)

The cost of equipment purchased by Charleston, Inc., on June 1, 2010 is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of its service life. Its service life is estimated at 7 years; its total working hours are estimated at 42,000 and its total production is estimated at 525,000 units. During 2010 the machine was operated 6,000 hours and produced 55,000 units. During 2011 the machine was operated 5,500 hours and produced 48,000 units.

Compute depreciation expense on the machine for the year ending December 31, 2010, and the year ending December 31, 2011, using the following methods.

a) Straight-line.
b) Units of output.
c) Working hours.
d) Sum of the years' digits
e) Declining balance (twice the straight-line rate)

Click here for the solution: The cost of equipment purchased by Charleston, Inc., on June 1, 2010 is $89,000

Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2011

E 15-4 Direct financing lease; lessor

Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2011. Edison purchased the equipment from International Machines at a cost of $112,080.

Related Information
Lease term 2 years (8 quarterly periods)
Quarterly rental payments $15,000 at the beginning of each period
Economic life of asset 2 years
Fair value of asset $112,080
Implicit interest rate
(Also lessee’s incremental borrowing rate) 8%

Required:
Prepare a lease amortization schedule and appropriate entries for Edison Leasing from the inception of the lease through January 1, 2012. Edison's fiscal year ends December 31.

Click here for the solution: Edison Leasing leased high-tech electronic equipment to Manufacturers Southern on January 1, 2011

Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2009

P10-2 (Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2009, had the following balances.

Land $ 300,000
Land improvements 140,000
Buildings 1,100,000
Machinery and equipment 960,000

During 2010 the following transactions occurred.
1. A tract of land was acquired for $150,000 as a potential future building site.
2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of $37 per share on a national stock exchange. The plant facility was carried on Mendota’s books at $110,000 for land and $320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are $230,000 and $690,000.
3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows.
Freight and unloading $13,000
Sales taxes 20,000
Installation 26,000
4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years.
5. A machine costing $80,000 on January 1, 2002, was scrapped on June 30, 2010. Double-declining balance depreciation has been recorded on the basis of a 10-year life.
6. A machine was sold for $20,000 on July 1, 2010. Original cost of the machine was $44,000 on January 1, 2007, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of $2,000.

Instructions
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2010.
Land
Land improvements
Buildings
Machinery and equipment
(Hint: Disregard the related accumulated depreciation accounts.)

(b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.
(AICPA adapted)

Click here for the solution: Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2009

LasikLook is involved in producing and selling high-end golf equipment

ACC 560 Week 5 Assignment

E8-2 LasikLook is involved in producing and selling high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLasik, appears to have a very large potential market. Because of competition, LasikLook does not believe that it can charge more than $90 for LittleLasik. At this price, LasikLook believes it can sell 100,000 of these laser guns. LittleLasik will cost $8,500,000 to manufacture, and the company wants an ROI of 20%.

Determine the target cost for one LittleLasik.

Click here for the solution: LasikLook is involved in producing and selling high-end golf equipment

Newbirth Coatings Company purchased waterproofing equipment on January 2, 2009, for $380,000

PR 10-2A Newbirth Coatings Company purchased waterproofing equipment on January 2, 2009, for $380,000. The equipment was expected to have a useful life of four years, or 8,000 operating hours, and a residual value of $36,000. The equipment was used for 3,000 hours during 2009, 2,500 hours in 2010, 1,400 hours in 2011, and 1,100 hours in 2012.

Instructions
Determine the amount of depreciation expense for the years ended December 31, 2009, 2010, 2011, and 2012, by (a) the straight-line method, (b) the units-of-production method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:

Click here for the solution: Newbirth Coatings Company purchased waterproofing equipment on January 2, 2009, for $380,000

Razar Sharp Company purchased tool sharpening equipment on July 1, 2008, for $48,600

PR 10-3A Razar Sharp Company purchased tool sharpening equipment on July 1, 2008, for $48,600. The equipment was expected to have a useful life of three years, or 7,500 operating hours, and a residual value of $3,000. The equipment was used for 1,800 hours during 2008, 2,600 hours in 2009, 2,000 hours in 2010, and 1,100 hours in 2011.

Instructions
Determine the amount of depreciation expense for the years ended December 31, 2009, 2010, 2011, and 2012, by (a) the straight-line method, (b) the units-of-production method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:

Click here for the solution: Razar Sharp Company purchased tool sharpening equipment on July 1, 2008, for $48,600

At December 31, 2009, certain accounts included in the property, plant, and equipment section of Reagan Company's balance sheet

P10-1 (Classification of Acquisition and Other Asset Costs) At December 31, 2009, certain accounts included in the property, plant, and equipment section of Reagan Company's balance sheet had the following balances.

Land $230,000
Buildings 890,000
Leasehold improvements 660,000
Machinery and equipment 875,000

During 2010 the following transactions occurred.
1. Land site number 621 was acquired for $850,000. In addition, to acquire the land Reagan paid a $51,000 commission to a real estate agent. Costs of $35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for $13,000.

2. A second tract of land (site number 622) with a building was acquired for $420,000. The closing statement indicated that the land value was $300,000 and the building value was $120,000. Shortly after acquisition, the building was demolished at a cost of $41,000. A new building was constructed for $330,000 plus the following costs.

Excavation fees $38,000
Architectural design fees 11,000
Building permit fee 2,500
Imputed interest on funds used during construction (stock financing) 8,500

The building was completed and occupied on September 30, 2010.

3. A third tract of land (site number 623) was acquired for $650,000 and was put on the market for resale.

4. During December 2010 costs of $89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2012, and is not expected to be renewed. (Hint: Leasehold improvements should be handled in the same manner as land improvements.)

5. A group of new machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was $87,000, freight costs were $3,300, installation costs were $2,400, and royalty payments for 2010 were $17,500.

Instructions
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2010.

Land Leasehold improvements
Buildings Machinery and equipment

Disregard the related accumulated depreciation accounts.

(b) List the items in the situation that were not used to determine the answer to (a) above, and indicate where, or if, these items should be included in Reagan's financial statements.

Click here for the solution: At December 31, 2009, certain accounts included in the property, plant, and equipment section of Reagan Company's balance sheet

Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a new garden tool

EX 10-4 Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 9,000 units at $42 each. The new manufacturing equipment will cost $156,000 and is expected to have a 10-year life and $12,000 residual value. Selling expenses related to the new product are expected to be 5% of sales revenues. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor $7.00
Direct materials 23.40
Fixed factory overhead-depreciation 1.60
Variable factory overhead 3.60
Total $35.60

Determine the net cash flows for the first year of the project, Years 2-9 and for the last year of the project.

Click here for the solution: Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a new garden tool

The following data are accumulated by Reynolds Company in evaluating the purchase of $104,000 of equipment, having a four-year useful life

EX 10-7 The following data are accumulated by Reynolds Company in evaluating the purchase of $104,000 of equipment, having a four-year useful life:

Net income net cash flow
Year 1 $38,000 $64,000
Year2 $23,000 $49,000
Year 3 $11,000 $37,000
Year 4 (1,000) $25,000

a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 appearing in Exhibit 1 of this chapter.
b. Would management be likely to look with favor on the proposal?

Click here for the solution: The following data are accumulated by Reynolds Company in evaluating the purchase of $104,000 of equipment, having a four-year useful life

Dinkle Manufacturing Company manufactures a variety of tools and industrial equipment

ACC 560 Week 6 Assignment

P10-5A Dinkle Manufacturing Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for the year ended December 31, 2008, and relevant budget data are as follows.

Actual Comparison with Budget
Sales $1,500,000 $100,000 favorable
Variable cost of goods sold 700,000 60,000 unfavorable
Variable selling and administrative expenses 125,000 25,000 unfavorable
Controllable fixed cost of goods sold 170,000 On target
Controllable fixed selling and administrative expenses 80,000 On target

Average operating assets for the year for the Home Division were $2,500,000 which was also the budgeted amount.

Instructions
(a) Prepare a responsibility report for the Home Division.
(b) Evaluate the manager’s performance. Which items will likely be investigated by top management?
(c) Compute the expected ROI in 2009 for the Home Division, assuming the following independent changes to actual data.
1. Variable cost of goods sold is decreased by 6%.
2. Average operating assets are decreased by 10%.
3. Sales are increased by $200,000, and this increase is expected to increase contribution margin by $90,000.

Click here for the solution: Dinkle Manufacturing Company manufactures a variety of tools and industrial equipment

(Evaluating McGraw Industries Capital Structure) McGraw Industries, an established producer of printing equipment, expects its sales to remain flat

McGraw Industries, an established producer of printing equipment, expects its sales to remain flat for the next 3 to 5 years because of both a weak economic outlook and an expectation of little new printing technology development over that period. On the basis of this scenario, the firm’s management has been instructed by its board to institute programs that will allow it to operate more efficiently, earn higher profits, and, most important, maximize share value.

In this regard, the firm’s chief financial officer (CFO), Ron Lewis, has been charged with evaluating the firm’s capital structure. Lewis believes that the current capital structure, which contains 10% debt and 90% equity, may lack adequate financial leverage. To evaluate the firm’s capital structure, Lewis has gathered the data summarized in the following table on the current capital structure (10% debt ratio) and two alternative capital structures—A (30% debt ratio) and B (50% debt ratio)—that he would like to consider.
Capital structure*

Source of capital Current (10% debt) A (30% debt) B (50% debt)
Long-term debt $1,000,000 $3,000,000 $5,000,000
Coupon interest rate** 9% 10% 12%
Common stock 100,000 shares 70,000 shares 40,000 shares
Required return on equity*** 12% 13% 18%

*These structures are based on maintaining the firm’s current level of $10,000,000 of total financing.
**Interest rate applicable to all debt.
***Market-based return for the given level of risk.

Lewis expects the firm’s earnings before interest and taxes (EBIT) to remain at its current level of $1,200,000. The firm has a 40% tax rate.

Use the current level of EBIT to calculate the times interest earned ratio for each capital structure. Evaluate the current and two alternative capital structures using the times interest earned and debt ratios.


Click here for the solution: (Evaluating McGraw Industries Capital Structure) McGraw Industries, an established producer of printing equipment, expects its sales to remain flat

What are the major elements of an internal control over property, plant, and equipment?

What are the major elements of an internal control over property, plant, and equipment? For the specific control procedures identified, indicate their importance to the audit.


Click here for the solution: What are the major elements of an internal control over property, plant, and equipment?

Bair Company is a manufacturer of standard and custom-designed bottling equipment

Bair Company is a manufacturer of standard and custom-designed bottling equipment. Early in December 20x0 Lyan Company asked Bair to quote a price for a custom-designed bottling machine to be delivered in April. Lyan intends to make a decision on the purchase of such a machine by January 1, so Bair would have the entire first quarter of 20x1 to build the equipment. Bair’s pricing policy for custom-designed equipment is 50 percent markup on absorption manufacturing cost. Lyan’s specifications for the equipment have been reviewed by Bair’s Engineering and Cost Management departments, which made the following estimates for direct material and direct labor.

Direct material ............................................ $307,200
Direct labor (11,000 hours at $18) .................. 198,000

Manufacturing overhead is applied on the basis of direct-labor hours. Bair normally plans to run
its plant at a level of 15,000 direct-labor hours per month and assigns overhead on the basis of 180,000 direct-labor hours per year. The overhead application rate for 20x1 of $10.80 per hour is based on the following budgeted manufacturing overhead costs for 20x1.

Variable manufacturing overhead ......................... $1,166,400
Fixed manufacturing overhead .............................. 777,600
Total manufacturing overhead ................... $1,944,000

Bair’s production schedule calls for 12,000 direct-labor hours per month during the first quarter. If Bair is awarded the contract for the Lyan equipment, production of one of its standard products would have to be reduced. This is necessary because production levels can only be increased to 15,000 direct labor hours each month on short notice. Furthermore, Bair’s employees are unwilling to work overtime.

Sales of the standard product equal to the reduced production would be lost, but there would be no permanent loss of future sales or customers. The standard product for which the production schedule would be reduced has a unit sales price of $14,400 and the following cost structure.

Direct material ....................................................................... $ 3,000
Direct labor (250 hours at $18) .............................................. 4,500
Manufacturing overhead (250 hours at $10.80) .................. 2,700
Total cost ...................................................................... $10,200

Lyan needs the custom-designed equipment to increase its bottle-making capacity so that it will not have to buy bottles from an outside supplier. Lyan Company requires 5,000,000 bottles annually. Its present equipment has a maximum capacity of 4,500,000 bottles with a directly traceable cash outlay cost of 18 cents per bottle. Thus, Lyan has had to purchase 500,000 bottles from a supplier at 48 cents each. The new equipment would allow Lyan to manufacture its entire annual demand for bottles at a direct-material cost savings of 1.2 cents per bottle. Bair estimates that Lyan’s annual bottle demand will continue to be 5,000,000 bottles over the next five years, the estimated life of the special-purpose equipment.

Required:
Bair Company’s management plans to submit a bid to Lyan Company for the manufacture of the special-purpose bottling equipment.
1. Calculate the bid Bair would submit if it follows its standard pricing policy for special-purpose equipment.
2. Calculate the minimum bid Bair would be willing to submit on the Lyan equipment that would result in the same total contribution margin as planned for the first quarter of 20x1.
3. Suppose Bair has submitted a bid slightly above the minimum calculated in requirement (2). Upon receiving Bair’s bid, Lyan’s assistant purchasing manager telephoned his friend at Tygar Corporation: “Hey Joe, we just got a bid from Bair on some customized equipment. I think Tygar would stand a good chance of beating it. Stop by the house this evening, and I’ll show you the details of Bair’s bid and the specifications on the machine.” Is Lyan Company’s assistant purchasing manager acting ethically? Explain.


Click here for the solution: Bair Company is a manufacturer of standard and custom-designed bottling equipment