(Cost Function for Expedia) Expedia provides travel services on the Internet

3-34 Cost Function for Expedia

Expedia provides travel services on the Internet. 2002 was an important year for Expedia as it reported positive operating income after three years of operating losses. In the first quarter of 2001, Expedia reported an operating loss of $19 million on sales revenue of $57 million. In the first quarter of 2002, sales revenue had more than doubled to $116 million, and Expedia had operating income of $18 million. Assume that fixed costs were the same in 2002 as in 2001.

1. Compute the operating expenses for Expedia in the first quarter of 2001. In the first quarter of 2002.

2. Determine the cost function for Expedia, that is, the total fixed cost and the variable cost as a percentage of sales revenue. Use the same form as equation (1) on page 100.

3. Explain how Expedia’s operating income could increase by $37 million with an increase in sales of $59 million, while it had an operating loss of $19 million on its $57 million of sales in the first quarter of 01

Click here for the solution: (Cost Function for Expedia) Expedia provides travel services on the Internet

The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010

E21-2 Lessee Accounting Issues

The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010. The lease terms, provision, and related events are as follows:

a)The lease term is five years. The lease is non-cancelable and requires equal rental payments to be made at the end of each year.
b)The computers have an estimated life of five years, a fair value of $300,000, and a zero estimated residual value.
c) Sax Company agrees to pay all executor costs.
d) The lease contains no renewal or bargain purchase option.
e) The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. The Sax Company is aware of this rate, which is equal to its borrowing rate.
f) Sax Company uses the straight-line method to record depreciation on similar equipment.

REQUIRED:
1. Determine what type of lease this is for Sax Company.
2. Calculate the amount of the asset and liability of the Sax Company at the inception of the lease (round to the nearest dollar).

Click here for the solution: The Sax Company signs a lease agreement dated January 1, 2010 that provides for it to lease computers from the Appleton Company beginning January 1, 2010

Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients

Problem 11-25 Effects of operating leverage on profitability

Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense CTS incurs is instructor salaries; it pays instructors $3,600 per course taught. CTS recently agreed to offer a course of instruction to the employees of Akers Incorporated at a price of $340 per student. Akers estimated that 20 students would attend the course.

Base your answer on the preceding information.

Part 1:
Required
a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?
b. Determine the profit, assuming that 20 students attend the course.
c. Determine the profit, assuming a 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
e. Explain why a 20 percent shift in enrollment produces more than a 20 percent shift in profitability. Use the term that identifies this phenomenon.

Click here for the solution: Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients

American Optical Corporation provides a variety of share-based compensation plans to its employees

E 19-5 Stock options

American Optical Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2011, that permit executives to acquire 4 million of the company's $1 par common shares within the next five years, but not before December 31, 2012 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes.

Required:
1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry to record the award of options on January 1, 2011.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

Click here for the solution: American Optical Corporation provides a variety of share-based compensation plans to its employees

Airport Connection provides shuttle service between four hotels near a medical center and an international airport

ACC 560 Week 4 Assignment

E5-11 Airport Connection provides shuttle service between four hotels near a medical center and an international airport. Airport Connection uses two 10 passenger vans to offer 12 round trips per day. A recent month's activity in the form of a cost-volume-profit income statement is shown below.

Fare revenues (1,440 fares) $36,000
Variable costs
Fuel $5,040
Tolls and Parking 3,100
Maintenance 500 8,640
Contribution margin 27,360
Fixed costs
Salaries 13,000
Depreciation 1,300
Insurance 1,128 15,428
Net income $11,932

Instructions
(a) Identify the above costs as variable, fixed, or mixed.
(b) Calculate the expected costs when production is 5,000 units.

Click here for the solution: Airport Connection provides shuttle service between four hotels near a medical center and an international airport

AirQual Test Corporation provides on-site air quality testing services

EXERCISE 10–16 Flexible Budget Performance Report

AirQual Test Corporation provides on-site air quality testing services. The company has provided the following data concerning its operations:

Fixed component Variable component Actual Per month per job total for February

Revenue . . . . . . . . . . . . . . . . . . . . . $360 $18950
Technician wages . . . . . . . . . . . . . $ 4600 $6 450
Mobile lab operating expenses . . . $ 2900 $35 $4530
Office expenses . . . . . . . . . . . . . . $2600 $2 $3 050
Advertising expenses . . . . . . . . . . $ 970 $995
Insurance . . . . . . . . . . . . . . . . . . $1680 $1680
Miscellaneous expenses . . . . . . . $ 500 $3 $465

The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses should be $2,900 plus $35 per job, and the actual mobile lab operating expenses for February was $4,530. The company expected to work 50 jobs in February, but actually worked 52 jobs.

Required:
Prepare a flexible budget performance report showing Air Qual Test Corporation’s activity variances and revenue and spending variances for February.

Click here for the solution: AirQual Test Corporation provides on-site air quality testing services

Southwest Blue Airways provides air transportation services between Seattle and San Diego

Southwest Blue Airways provides air transportation services between Seattle and San Diego. A single Seattle to San Diego round-trip flight has the following operating statistics:

Fuel $7000
Flight Crew Salaries $5400
Airplane depriciation $2600
Variable cost per business class ticket $ 50
Variable cost pereconomy class ticket $ 40
Round trip ticket business class $ 550
Round trip ticket economy class $ 290

It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight.

a. Compute the break-even number of seats sold on a single round-trip flight for the overall product. Assume that the overall product is 20% business class and 80% economy class tickets.
b. How many business class and economy class seats would be sold at the break-even point?

Click here for the solution: Southwest Blue Airways provides air transportation services between Seattle and San Diego

(Ethics Case) International Network Solutions provides products and services related to remote access networking

Ethics Case 19-7 International Network Solutions

International Network Solutions provides products and services related to remote access networking. The company has grown rapidly during its first 10 years of operations. As its segment of the industry has begun to mature, though, the fast growth of previous years has begun to slow. In fact, this year revenues and profits are roughly the same as last year.

One morning, nine weeks before the close of the fiscal year, Rob Mashburn, CFO, and Jessica Lane, controller, were sharing coffee and ideas in Lane's office.

Lane:  About the Board meeting Thursday. You may be right. This may be the time to suggest a share buyback program.
Mashburn:  To begin this year, you mean?
Lane:  Right! I know Barber will be lobbying to use the funds for our European expansion. She's probably right about the best use of our funds, but we can always issue more notes next year. Right now, we need a quick fix for our EPS numbers.
Mashburn: Our shareholders are accustomed to increases every year.

Required:
1. How will a buyback of shares provide a “quick fix” for EPS?
2. Is the proposal ethical?
3. Who would be affected if the proposal is implemented?

Click here for the solution: (Ethics Case) International Network Solutions provides products and services related to remote access networking

Farm Labs, Inc. provides mad cow disease testing for both state and federal governmental agricultural agencies

P11-5A Farm Labs, Inc. provides mad cow disease testing for both state and federal governmental agricultural agencies. Because the company's customers are governmental agencies, prices are strictly regulated. Therefore, Farm Labs must constantly monitor and control its testing costs. Shown below are the standard costs for a typical test.

Direct materials (2 test tubes @ $1.50 per tube) $3
Direct labor (1 hour @ $25 per hour) 25
Variable overhead (1 hour @ $5 per hour) 5
Fixed overhead (1 hour @ $10 per hour) 10
Total standard cost per test $43

The lab does not maintain an inventory of test tubes. Therefore, the tubes purchased each month are used that month. Actual activity for the month of November 2008, when 1,500 tests were conducted, resulted in the following:

Direct materials (3,050 test tubes) $ 4,270
Direct labor (1,600 hours) 36,800
Variable overhead 7,400
Fixed overhead 14,000

Monthly budgeted fixed overhead is $14,000. Revenues for the month were $75,000, and selling and administrative expenses were $4,000.

Instructions:
a) Compute the price and quantity variances for direct materials and direct labor.
b) Compute the total overhead variance.
c) Prepare an income statement for management.
d) Provide possible explanations for each unfavorable variance.

Click here for the solution: Farm Labs, Inc. provides mad cow disease testing for both state and federal governmental agricultural agencies

Jarman Consulting Inc. provides financial and estate planning services on a retainer basis for the executive officers of its corporate clients

Jarman Consulting Inc. provides financial and estate planning services on a retainer basis for the executive officers of its corporate clients. It incurred the following labor costs on services for three corporate clients during March 2006:

Direct Labor
Contract 1 $12,000
Contract 2 7,200
Contract 3 28,800
Total $48,000

Jarman allocated March overhead costs of $21,600 to the contracts based on the amount of direct labor costs incurred on each contract.

Required
a. Assuming the revenue from Contract 3 was $65,600, what amount of income did Jarman earn from this contract?
b. Based on the preceding information, will Jarman report finished goods inventory on its balance sheet for Contract 1? If so, what is the amount of this inventory? If not, explain why not.


Click here for the solution: Jarman Consulting Inc. provides financial and estate planning services on a retainer basis for the executive officers of its corporate clients

Gorky-Park Corporation provides postretirement health care benefits to employees who provide at least 12 years of service and reach age 62 while in service

Gorky-Park Corporation provides postretirement health care benefits to employees who provide at least 12 years of service and reach age 62 while in service. On January 1, 2011, following plan-related data were available

Accumulated postretirement benefit obligation 130
Fair value of plan assets none
Average remaining service period to retirement 25 years (same in previous 10 yrs)
Average remaining service period to full eligibility 20 years (same in previous 10 yrs)

On January 1, 2011, Gorky-Park amends the plan to provide certain dental benefits in addition to previously provided medical benefits. The actuary determines that the cost of making the amendment retroactive increases service cost for 2011 is $34 million. The interest rate is 8%.

Requirements
1. Calculate the postretirement benefit expense for 2011.
2. Prepare the journal entry to record the expense.


Click here for the solution: Gorky-Park Corporation provides postretirement health care benefits to employees who provide at least 12 years of service and reach age 62 while in service

The City of Sweetwater maintains an Employees’ Retirement Fund, a single-employer, defined benefit plan that provides annuity and disability benefits

7-13 The City of Sweetwater maintains an Employees’ Retirement Fund, a single-employer, defined benefit plan that provides annuity and disability benefits. The fund is financed by actuarially determined contributions from the city’s General Fund and by contributions from employees. Administration of the retirement fund is handled by General Fund employees, and the retirement fund does not bear any administrative expenses. The Statement of Net Assets for the Employees’ Retirement Fund as of July 1, 2011, is shown here:

CITY OF SWEETWATER
Employees' Retirement Fund
Statement of Net Assets
As of July 1, 2011

Assets
Cash $ 50,000
Accrued interest receivable 135,000
Investments, at fair value:
Bonds 4,500,000
Common stocks 1,300,000
Total assets 5,985,000

Liabilities
Accounts payable and accrued expenses 350,000
Net assets held in trust for preparation for benefits $5,635,000

During the year ended June 30, 2012, the following transaction occurred:

The interest receivable on investments was collected in cash.
Member contributions in the amount of $400,000 were received in cash. The city’s General Fund also contributed $600,000 in cash.
Annuity benefits of $700,000 and disability benefits of $150,000 were recorded as liabilities.
Accounts payable and accrued expenses in the amount of $900,000 were paid in cash.
Interest income of $240,000 and dividends in the amount of $40,000 were received in cash. In addition, bond interest income of $140,000 was accrued at year-end.
Refunds of $130,000 were made in cash to terminated, nonvested participants.
Common stocks, carried at a fair value of $500,000, were sold for $480,000. That $480,000, plus an additional $300,000, was invested in stocks.
At year-end, it was determined that the fair value of stocks held by the pension plan had decreased by $50,000; the fair value of bonds had increased by $30,000.
Nominal accounts for the year were closed.

a.) Record the transactions on the books of the Employees’ Retirement Fund.
b.) Prepared a Statement of Changes in Net Assets for the Employees’ Retirement Fund for the Year Ended June 30, 2012.
c.) Prepare a Statement of Net Assets for the Employees’ Retirement Fund as of June 30, 2012.


Click here for the solution: The City of Sweetwater maintains an Employees’ Retirement Fund, a single-employer, defined benefit plan that provides annuity and disability benefits

Highline Hospital provides a wide range of health services in its community

7-44 Cash Budgeting for a Hospital

Highline Hospital provides a wide range of health services in its community. Highline’s board of directors has authorized the following capital expenditures:

Intra-aortic balloon pump $1,400,000
Computed tomographic scanner 850,000
X-ray equipment 550,000
Laboratory equipment 1,200,000
Total $4,000,000

The expenditures are planned for October 1, 20X7, and the board wishes to know the amount of borrowing, if any, necessary on that date. Rebecca Singer, hospital controller, has gathered the following information to be used in preparing an analysis of future cash flows. Billings, made in the month of service, for 20X7 are shown below, with actual amounts for January through June and estimated amounts for July through December:

Month Actual Amount
January $5,300,000
February 5,300,000
March 5,400,000
April 5,400,000
May 6,000,000
June 6,000,000
July (estimated) 5,800,000
August (estimated) 6,000,000
September (estimated) 6,600,000
October (estimated) 6,800,000
November (estimated) 7,000,000
December (estimated) 6,600,000

Ninety percent of Highline billings are made to third parties, such as BlueCross, federal or state governments, and private insurance companies. The remaining 10% of the billings are made directly to patients. Historical patterns of billing collections are
Third-Party Billings Direct-Patient Billings
Month of service 20% 10%
Month following service 50 40
Second month following service 20 40
Uncollectible 10 10

Singer expects the same billing and collection patterns that have been experienced during the first six months of 20X7 to continue during the last six months of the year. The following schedule presents the purchases that have been made during the past three months and the planned purchases for the last six months of 20X7.

Month Amount
April $1,300,000
May 1,450,000
June 1,450,000
July 1,500,000
August 1,800,000
September 2,200,000
October 2,350,000
November 2,700,000
December 2,100,000

All purchases are made on account, and accounts payable are remitted in the month following the purchase.
• Salaries for each month during the remainder of 20X7 are expected to be $1,800,000 per month plus 20% of that month’s billings. Salaries are paid in the month of service.
• Highline’s monthly depreciation charges are $150,000.
• Highline incurs interest expenses of $180,000 per month and makes interest payments of $540,000 on the last day of each calendar quarter.
• Endowment fund income is expected to continue to total $210,000 per month.
• Highline has a cash balance of $350,000 on July 1, 20X7, and has a policy of maintaining a minimum end-of-month cash balance of 10% of the current month’s purchases.
• Highline Hospital employs a calendar-year reporting period.

1. Prepare a schedule of budgeted cash receipts by month for the third quarter of 20X7.
2. Prepare a schedule of budgeted cash disbursements by month for the third quarter of 20X7.
3. Determine the amount of borrowing, if any, necessary on October 1, 20X7, to acquire the capital items totaling $4,000,000.

Click here for the solution: Highline Hospital provides a wide range of health services in its community

Watson Technical Institute (WTI), a school owned by Tom Watson, provides training to individuals who pay tuition directly to the school

Watson Technical Institute (WTI), a school owned by Tom Watson, provides training to individuals who pay tuition directly to the school. WTI also offers training to groups in off-site locations. Its unadjusted trial balance as of December 31, 2005, follows. WTI initially records prepaid expenses and unearned revenues in balance sheet accounts. Descriptions of items a through h that require adjusting entries on December 31, 2005, follow.

Additional Information Items
a. An analysis of the school’s insurance policies shows that $3,000 of coverage has expired.
b. An inventory count shows that teaching supplies costing $2,600 are available at year-end 2005.
c. Annual depreciation on the equipment is $12,000.
d. Annual depreciation on the professional library is $6,000.
e. On November 1, the school agreed to do a special six-month course (starting immediately) for a client. The contract calls for a monthly fee of $2,200, and the client paid the first five months’ fees in advance. When the cash was received, the Unearned Training Fees account was credited. The fee for the sixth month will be recorded when it is collected in 2006.
f. On October 15, the school agreed to teach a four-month class (beginning immediately) for an individual for $3,000 tuition per month payable at the end of the class. The services are being provided as agreed, and no payment has yet been received. g. The school’s two employees are paid weekly. As of the end of the year, two days’ wages have accrued at the rate of $100 per day for each employee.
h. The balance in the Prepaid Rent account represents rent for December.

Required
1. Prepare T-accounts (representing the ledger) with balances from the unadjusted trial balance.
2. Prepare the necessary adjusting journal entries for items a through h and post them to the T-accounts. Assume that adjusting entries are made only at year-end.
3. Update balances in the T-accounts for the adjusting entries and prepare an adjusted trial balance.
4. Prepare Watson Technical Institute’s income statement and statement of owner’s equity for the year 2005 and prepare its balance sheet as of December 31, 2005.

Check (2e) Cr.Training Fees Earned, $4,400; (2f ) Cr.Tuition Fees Earned, $7,500; (3) Adj.Trial balance totals, $301,500; (4) Net income, $38,500; Ending T.Watson, Capital $62,100

Click here for the solution: Watson Technical Institute (WTI), a school owned by Tom Watson, provides training to individuals who pay tuition directly to the school