Market vs Book Value: The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology. He then formed a corporation and invested $200,000 in setting up a production plant. He believes that he could sell his patent for $50 million.
a. What are the book value and market value of the firm?
b. If there are 2 million shares of stock in the new corporation, what would be the price per share and the book value per share?
Click here for the solution: The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology
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Tuesday, April 12, 2016
Monday, October 5, 2015
Hardy Fiber Company is the creator of Y-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat
E7-4 Hardy Fiber Company is the creator of Y-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat. Y-Go has become very popular as an undergarment for sports activities. Operating at capacity, the company can produce 1,000,000 undergarments of Y-Go a year. The per unit and the total costs for an individual garment when the company operates at full capacity are as follows.
Per Undergarment Total
Direct materials $2.00 $2,000,000
Direct labor 0.50 500,000
Variable manufacturing overhead 1.00 1,000,000
Fixed manufacturing overhead 1.50 1,500,000
Variable selling expenses 0.25 250,000
Net income $5.25 $5,250,000
The U.S. Army has approached Hardy Fiber and expressed an interest in purchasing 200,000 Y-Go undergarments for soldiers in extremely warm climates. The Army would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. In addition, the Army has agreed to pay an additional $1 per undergarment to cover all other costs and provide a profit. Presently, Hardy Fiber is operating at 70 percent capacity and does not have any other potential buyers for Y-Go. If Hardy Fiber accepts the Army's offer, it will not incur any variable selling expenses related to this order.
Using incremental analysis, determine whether Hardy Fiber should accept the Army's offer.
Click here for the solution: Hardy Fiber Company is the creator of Y-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat
Per Undergarment Total
Direct materials $2.00 $2,000,000
Direct labor 0.50 500,000
Variable manufacturing overhead 1.00 1,000,000
Fixed manufacturing overhead 1.50 1,500,000
Variable selling expenses 0.25 250,000
Net income $5.25 $5,250,000
The U.S. Army has approached Hardy Fiber and expressed an interest in purchasing 200,000 Y-Go undergarments for soldiers in extremely warm climates. The Army would pay the unit cost for direct materials, direct labor, and variable manufacturing overhead costs. In addition, the Army has agreed to pay an additional $1 per undergarment to cover all other costs and provide a profit. Presently, Hardy Fiber is operating at 70 percent capacity and does not have any other potential buyers for Y-Go. If Hardy Fiber accepts the Army's offer, it will not incur any variable selling expenses related to this order.
Using incremental analysis, determine whether Hardy Fiber should accept the Army's offer.
Click here for the solution: Hardy Fiber Company is the creator of Y-Go, a technology that weaves silver into its fabrics to kill bacteria and odor on clothing while managing heat
Sunday, September 13, 2015
Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes
Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During the summer of 20X8, the joint costs of processing the tomatoes were $420,000. There was no beginning or ending inventories for the summer. Production and sales value information for the summer is as follows:
Product
Cases
Sales Value at Splitoff Point
Separable Costs
Selling Price
Catsup
100,000
$6 per case
$3.00 per case
$28 per case
Juice
150,000
8 per case
5.00 per case
25 per case
Canned
200,000
5 per case
2.50 per case
10 per case
Determine the amount allocated to each product if the estimated net realizable value method is used, and compute the cost per case for each product.
Click here for the solution: Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes
Product
Cases
Sales Value at Splitoff Point
Separable Costs
Selling Price
Catsup
100,000
$6 per case
$3.00 per case
$28 per case
Juice
150,000
8 per case
5.00 per case
25 per case
Canned
200,000
5 per case
2.50 per case
10 per case
Determine the amount allocated to each product if the estimated net realizable value method is used, and compute the cost per case for each product.
Click here for the solution: Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes
Zenon Chemical, Inc. processes pine rosin into three products: turpentine, paint thinner, and spot remover
Zenon Chemical, Inc. processes pine rosin into three products:
turpentine, paint thinner, and spot remover. During May, the joint costs
of processing were $240,000. Production and sales value information for
the month is as follows:
Product
Units Produced
Sales Value at Splitoff Point
Turpentine
6,000 liters
$60,000
Paint thinner
6,000 liters
50,000
Spot remover
3,000 liters
25,000
Determine the amount of joint cost allocated to each product if the physical-measure method is used.
Click here for the solution: Zenon Chemical, Inc. processes pine rosin into three products: turpentine, paint thinner, and spot remover
Product
Units Produced
Sales Value at Splitoff Point
Turpentine
6,000 liters
$60,000
Paint thinner
6,000 liters
50,000
Spot remover
3,000 liters
25,000
Determine the amount of joint cost allocated to each product if the physical-measure method is used.
Click here for the solution: Zenon Chemical, Inc. processes pine rosin into three products: turpentine, paint thinner, and spot remover
Oregon Lumber processes timber into four products
Oregon Lumber processes timber into four products. During January, the joint costs of processing were $280,000. There was no inventory at the beginning of the month. Production and sales value information for the month is as follows:
Sales Value at
Product
Board feet
Splitoff Point
Ending Inventory
2 x 4's
6,000,000
$0.30 per board foot
500,000 bdft.
2 x 6's
3,000,000
0.40 per board foot
250,000 bdft.
4 x 4's
2,000,000
0.45 per board foot
100,000 bdft.
Slabs
1,000,000
0.10 per board foot
50,000 bdft.
Determine the value of ending inventory if the sales value at splitoff method is used for product costing. Round to three decimal places when necessary.
Click here for the solution: Oregon Lumber processes timber into four products
Sales Value at
Product
Board feet
Splitoff Point
Ending Inventory
2 x 4's
6,000,000
$0.30 per board foot
500,000 bdft.
2 x 6's
3,000,000
0.40 per board foot
250,000 bdft.
4 x 4's
2,000,000
0.45 per board foot
100,000 bdft.
Slabs
1,000,000
0.10 per board foot
50,000 bdft.
Determine the value of ending inventory if the sales value at splitoff method is used for product costing. Round to three decimal places when necessary.
Click here for the solution: Oregon Lumber processes timber into four products
In 2011, Western Transport Company entered into the treasury stock transactions described below
E 18-13 Treasury stock
In 2011, Western Transport Company entered into the treasury stock transactions described below. In 2009, Western Transport had issued 140 million shares of its $1 par common stock at $17 per share.
Required:
Prepare the appropriate journal entry for each of the following transactions:
1. On January 23, 2011, Western Transport reacquired 10 million shares at $20 per share.
2. On September 3, 2011, Western Transport sold 1 million treasury shares at $21 per share.
3. On November 4, 2011, Western Transport sold 1 million treasury shares at $18 per share.
Click here for the solution: In 2011, Western Transport Company entered into the treasury stock transactions described below
In 2011, Western Transport Company entered into the treasury stock transactions described below. In 2009, Western Transport had issued 140 million shares of its $1 par common stock at $17 per share.
Required:
Prepare the appropriate journal entry for each of the following transactions:
1. On January 23, 2011, Western Transport reacquired 10 million shares at $20 per share.
2. On September 3, 2011, Western Transport sold 1 million treasury shares at $21 per share.
3. On November 4, 2011, Western Transport sold 1 million treasury shares at $18 per share.
Click here for the solution: In 2011, Western Transport Company entered into the treasury stock transactions described below
In 2011, Borland Semiconductors entered into the transactions described below
E 18-12 Retirement of shares
In 2011, Borland Semiconductors entered into the transactions described below. In 2008, Borland had issued 170 million shares of its $1 par common stock at $34 per share.
Required:
Assuming that Borland retires shares it reacquires, record the appropriate journal entry for each of the following transactions:
1. On January 2, 2011, Borland reacquired 10 million shares at $32.50 per share.
2. On March 3, 2011, Borland reacquired 10 million shares at $36 per share.
3. On August 13, 2011, Borland sold 1 million shares at $42 per share.
4. On December 15, 2011, Borland sold 2 million shares at $36 per share.
Click here for the solution: In 2011, Borland Semiconductors entered into the transactions described below
In 2011, Borland Semiconductors entered into the transactions described below. In 2008, Borland had issued 170 million shares of its $1 par common stock at $34 per share.
Required:
Assuming that Borland retires shares it reacquires, record the appropriate journal entry for each of the following transactions:
1. On January 2, 2011, Borland reacquired 10 million shares at $32.50 per share.
2. On March 3, 2011, Borland reacquired 10 million shares at $36 per share.
3. On August 13, 2011, Borland sold 1 million shares at $42 per share.
4. On December 15, 2011, Borland sold 2 million shares at $36 per share.
Click here for the solution: In 2011, Borland Semiconductors entered into the transactions described below
During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity
E 18-5 Issuance of shares; noncash consideration
During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share.
Required:
Prepare the appropriate journal entries to record each transaction.
Feb. 12 Sold 2 million common shares, for $9 per share.
13 Issued 40,000 common shares to attorneys in exchange for legal services.
13 Sold 80,000 of its common shares and 4,000 preferred shares for a total of $945,000.
Nov. 15 Issued 380,000 of its common shares in exchange for equipment for which the cash price was known to be $3,688,000
Click here for the solution: During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity
During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share.
Required:
Prepare the appropriate journal entries to record each transaction.
Feb. 12 Sold 2 million common shares, for $9 per share.
13 Issued 40,000 common shares to attorneys in exchange for legal services.
13 Sold 80,000 of its common shares and 4,000 preferred shares for a total of $945,000.
Nov. 15 Issued 380,000 of its common shares in exchange for equipment for which the cash price was known to be $3,688,000
Click here for the solution: During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders' equity
Friday, September 11, 2015
On March 1, 2007, Winter Company entered into a contract to build an apartment building
On March 1, 2007, Winter Company entered into a contract to build an
apartment building. It is estimated that the building will cost
$2,000,000 and will take 3 years to complete. The contract price was
$3,000,000 The information that follows pertains to the construction
period:
2007 2008 2009
Costs to date: $600,000 $1,560,000 $2,100,000
Estimated costs to complete: 1,400,000 390,000 0
Progress billing to date: 1,050,000 2,100,000 3,000,000
Cash collected to date: 950,000 1,950,000 2,750,000
Instructions:
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2009.
(c) Prepare a partial balance sheet for December 31, 2008, showing the balances in the receivables and inventory accounts.
Click here for the solution: On March 1, 2007, Winter Company entered into a contract to build an apartment building
2007 2008 2009
Costs to date: $600,000 $1,560,000 $2,100,000
Estimated costs to complete: 1,400,000 390,000 0
Progress billing to date: 1,050,000 2,100,000 3,000,000
Cash collected to date: 950,000 1,950,000 2,750,000
Instructions:
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2009.
(c) Prepare a partial balance sheet for December 31, 2008, showing the balances in the receivables and inventory accounts.
Click here for the solution: On March 1, 2007, Winter Company entered into a contract to build an apartment building
Thursday, September 10, 2015
On March 1, 2010, Chance Company entered into a contract to build an apartment building
P18-3 (Recognition of Profit and Entries on Long-Term Contract) On March 1, 2010, Chance Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period:
2010 2011 2012
Costs to date: $600,000 $1,560,000 $2,100,000
Estimated costs to complete: 1,400,000 520,000 0
Progress billing to date: 1,050,000 2,000,000 3,000,000
Cash collected to date: 950,000 1,950,000 2,850,000
Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2012.
(c) Prepare a partial balance sheet for December 31, 2011, showing the balances in the receivables and inventory accounts.
Click here for the solution: On March 1, 2010, Chance Company entered into a contract to build an apartment building
2010 2011 2012
Costs to date: $600,000 $1,560,000 $2,100,000
Estimated costs to complete: 1,400,000 520,000 0
Progress billing to date: 1,050,000 2,000,000 3,000,000
Cash collected to date: 950,000 1,950,000 2,850,000
Instructions
(a) Compute the amount of gross profit to be recognized each year assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2012.
(c) Prepare a partial balance sheet for December 31, 2011, showing the balances in the receivables and inventory accounts.
Click here for the solution: On March 1, 2010, Chance Company entered into a contract to build an apartment building
Sunday, September 6, 2015
Venus Chocolate Company processes chocolate into candy bars
PR 20-2A Venus Chocolate Company processes chocolate into candy bars. The process begins by placing direct materials (raw chocolate, milk, and sugar) into the Blending Department. All materials are placed into production at the beginning of the blending process. After blending, the milk chocolate is then transferred to the Molding Department, where the milk chocolate is formed into candy bars. The following is a partial work in process account of the Blending Department at January 31, 2010:
Account Work In Process--Blending Department ACCT NO.
Date Item debit credit Balance Jan. Debit Credit
1 Bal.,6,000 units, % completed 21,840
31 Direct Materials,240,000 units 768,000(debit) 789,840
31 Direct Labor 153,200(debit) 943,040
31 Factory Overhead 38,160(debit) 981,200
31 Goods transferred, 242,000units ?(credit)
31 Bal.,?units,1/5 completed ?
INSTRUCTIONS:
1. Prepare a cost of production report, and identify the missing amounts for Work in Process - Blending Department.
2. Assuming that the January 1 work in process inventory includes direct materials of $18,600, determine the increase or decrease in the cost per equivalent unit for direct materials and conversion between December and January.
Click here for the solution: Venus Chocolate Company processes chocolate into candy bars
Account Work In Process--Blending Department ACCT NO.
Date Item debit credit Balance Jan. Debit Credit
1 Bal.,6,000 units, % completed 21,840
31 Direct Materials,240,000 units 768,000(debit) 789,840
31 Direct Labor 153,200(debit) 943,040
31 Factory Overhead 38,160(debit) 981,200
31 Goods transferred, 242,000units ?(credit)
31 Bal.,?units,1/5 completed ?
INSTRUCTIONS:
1. Prepare a cost of production report, and identify the missing amounts for Work in Process - Blending Department.
2. Assuming that the January 1 work in process inventory includes direct materials of $18,600, determine the increase or decrease in the cost per equivalent unit for direct materials and conversion between December and January.
Click here for the solution: Venus Chocolate Company processes chocolate into candy bars
Wednesday, September 2, 2015
Monat Construction Company, Inc., entered into a firm fixed price contract with Hyatt Clinic on July 1, 2010
Monat Construction Company, Inc., entered into a firm fixed price contract with Hyatt Clinic on July 1, 2010, to construct a four-story office building. At that time, Monat estimated that it would take between 2 and 3 years to complete the project. The total contract price for construction of the building is $4,400,000. Monat appropriately accounts for this contract under the completed-contract method in its financial statements and for income tax reporting. The building was deemed substantially completed on December 31, 2012. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to the Hyatt Clinic under the contract are shown below.
(a) Prepare schedules to compute the amount to be shown as “Cost of uncompleted contract in excess of related billings” or “Billings on uncompleted contract in excess of related costs” at December 31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations in good form.
(b) Prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations in good form.
Click here for the solution: Monat Construction Company, Inc., entered into a firm fixed price contract with Hyatt Clinic on July 1, 2010
(a) Prepare schedules to compute the amount to be shown as “Cost of uncompleted contract in excess of related billings” or “Billings on uncompleted contract in excess of related costs” at December 31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations in good form.
(b) Prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2010, 2011, and 2012. Ignore income taxes. Show supporting computations in good form.
Click here for the solution: Monat Construction Company, Inc., entered into a firm fixed price contract with Hyatt Clinic on July 1, 2010
Saturday, August 22, 2015
Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications
Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is non-cancelable, becomes effective on January 1, 2011, and requires annual rental payments of $413,971 each January 1, starting January 1, 2011. Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is $2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to un-reimbursable lessor costs.
(Round all numbers to the nearest dollar.)
(a) Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor.
(b) Prepare the journal entry or entries to record the transaction on January 1, 2011, on the books of Winston Industries.
(c) Prepare the journal entry or entries to record the transaction on January 1, 2011, on the books of Ewing Inc.
(d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2011.
(e) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2011. (Prepare a lease amortization schedule for 2 years.)
(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2011, for both the lessee and the lessor.
Click here for the solution: Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications
(Round all numbers to the nearest dollar.)
(a) Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor.
(b) Prepare the journal entry or entries to record the transaction on January 1, 2011, on the books of Winston Industries.
(c) Prepare the journal entry or entries to record the transaction on January 1, 2011, on the books of Ewing Inc.
(d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2011.
(e) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2011. (Prepare a lease amortization schedule for 2 years.)
(f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2011, for both the lessee and the lessor.
Click here for the solution: Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications
Saturday, August 1, 2015
Lemon Corporation enters into a merger with Lime Corporation
Lemon Corporation enters into a merger with Lime Corporation. Lemon has assets valued at $ 900,000 (basis of $ 980,000) and liabilities of $ 600,000. Lime transfers its stock for 90% of Lemon’s assets and liabilities. Lemon distributes the Lime stock and its remaining asset ( value of $ 90,000, adjusted basis of $ 80,000) subject to a liability ($ 60,000) to its shareholder, Lea, in exchange for her Lemon stock. Lea’s basis in her Lemon stock is $ 350,000. Lemon liquidates after collecting all of its stock from Lea.
a. What is the value of stock transferred from Lime to Lemon?
b. What is the amount of gain (loss) realized and recognized by Lea from the merger? What is Lea’s basis in her Lime stock?
c. What is the amount of gain (loss) realized and recognized by Lemon and Lime from the merger? What is Lime’s basis in Lemon’s assets?
Click here for the solution: Lemon Corporation enters into a merger with Lime Corporation
a. What is the value of stock transferred from Lime to Lemon?
b. What is the amount of gain (loss) realized and recognized by Lea from the merger? What is Lea’s basis in her Lime stock?
c. What is the amount of gain (loss) realized and recognized by Lemon and Lime from the merger? What is Lime’s basis in Lemon’s assets?
Click here for the solution: Lemon Corporation enters into a merger with Lime Corporation
Sunday, July 19, 2015
Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, its after tax cash flows would be the following: (Year 1) - 6,339; (Year 2) -4,764; (Year 3)-9,943; (Year 4) -5,640; all occurring at the end of respective years. The lease terms, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. Should the firm lease or buy?
Click here for the solution: Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
Click here for the solution: Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
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