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

The Carbondale Hospital is considering the purchase of a new ambulance

Problem 4.5 The Carbondale Hospital is considering the purchase of a new ambulance. The decision will rest partly on the anticipated mileage to be driven next year. The miles driven during the past 5 years are as follows:

Year Mileage
1 3,000
2 4,000
3 3,400
4 3,800
5 3,700

a) Forecast the mileage for next year using a 2-year moving average.
b) Find the MAD based on the 2-year moving average forecast in part (a). (Hint: You will have only 3 years of matched data.)
c) Use a weighted 2-year moving average with weights of .4 and .6 to forecast next year’s mileage. (The weight of .6 is for the most recent year.) What MAD results from using this approach to forecasting? (Hint: You will have only 3 years of matched data.)
d) Compute the forecast for year 6 using exponential smoothing, an initial forecast for year 1 of 3,000 miles, and a= .5.


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On October 10, 2010, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment

On October 10, 2010, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment. Under the terms of the agreement, the equipment may be purchased now or Mason may wait until January 10, 2011, to make the purchase. The cost of the equipment is $400,000. It will be financed by a note bearing interest at the market rate. Straight-line depreciation over a 10-year life will be used for book purposes. A double-declining balance over seven years will be used for tax purposes. (One-half year of depreciation will be taken in the year of purchase regardless of the date of purchase.)

Required:
a. Discuss the financial statement impacts of postponing the purchase of the equipment. Would the market price of the firm’s common stock be affected by any or all of these impacts? Do not assume in your discussion that the postponement will affect revenues or any operating costs other than depreciation.
b. Discuss any cash flow impacts related to postponing the purchase of the equipment.
c. Efficient markets assume that stockholder wealth is affected by the amount and timing of cash flows. Which alternative is more favorable to them: purchasing before year-end or waiting until January? Explain your answer.


Click here for the solution: On October 10, 2010, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment

Journalize the following transactions for Wilson Company using the gross method of accounting for purchase discounts

Journalize the following transactions for Wilson Company using the gross method of accounting for purchase discounts. Assume a perpetual inventory system.

June 2 Purchased goods from Peterson Company on account, $13,600, terms 3/10, n/30.
June 8 Returned merchandise to Peterson Company that was previously purchased on account, $3,400.
June 12 Paid the amount due to Peterson Company.


Click here for the solution: Journalize the following transactions for Wilson Company using the gross method of accounting for purchase discounts

An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price

15-37 (Accounting Estimates) An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price. In addition, the co-op has agreed to pay the farmers interest at 2% for each month delivery is delayed beyond December 31, 2009. Management expects that at least 14,500 tons will be delivered sometime after the balance sheet date.

Required
A. What factors should be considered in making an estimate of the loss accrual?
B. Assuming the amount of the purchase commitment is material, what information should management disclose in the footnotes to the financial statements concerning this purchase commitment?


Click here for the solution: An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price

Sterling Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2012

E10-14 (Purchase of Equipment with Zero-Interest-Bearing Debt) Sterling Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2012, to expand its production capacity to meet customers’ demand for its product. Sterling issues a $900,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $180,000 installments due at the end of each year over the life of the note.

Instructions
(a) Prepare the journal entry(ies) at the date of purchase. (Round to nearest dollar in all computations.)
(b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.
(c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest.
(d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)


Click here for the solution: Sterling Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2012

Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement

Lease versus purchase decision (LO4) Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.

The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.

a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of aftertax costs?

Click here for the solution: Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement

Castle Company is considering the purchase of a new machine

BYP 6-1 Castle Company is considering the purchase of a new machine. The invoice price of the machine is $125,000, freight charges are estimated to be $4,000, and installation costs are expected to be $6,000. Salvage value of the new equipment is expected to be zero after a useful life of 4 years. Existing equipment could be retained and used for an additional 4 years if the new machine is not purchased. At that time, the salvage value of the equipment would be zero. If the new machine is purchased now, the existing machine would have to be scrapped. Castle's accountant, Shaida Fang, has accumulated the following data regarding annual sales and expenses with and without the new machine.

Without the new machine, Castle can sell 12,000 units of product annually at a per unit selling price of $100. If the new machine is purchased, the number of units produced and sold would increase by 20%, and the selling price would remain the same.

The new machine is faster than the old machine, and it is more efficient in its usage of materials. With the old machine the gross profit rate will be 25% of sales, whereas the rate will be 30% of sales with the new machine.

Annual selling expenses are $180,000 with the current equipment. Because the new equipment would produce a greater number of units to be sold, annual selling expenses are expected to increase by 10% if it is purchased.

Annual administrative expenses are expected to be $100,000 with the old machine, and $113,000 with the new machine.

The current book value of the existing machine is $36,000. Castle uses straight-line depreciation.

Click here for the solution: Castle Company is considering the purchase of a new machine

In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase

In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase. The price of the stock increased from $12 a share at the time of purchase to a current level of $45. Notwithstanding the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be over-priced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing and continuing to hold the shares. You reflect on these choices as well as other actions that could be taken. Describe the various actions that you might take and their implications.

Click here for the solution: In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase

In January 2012, the management of Sarah Company concludes that it has sufficient cash to purchase some short-term investments in debt and stock securities

PE-2 In January 2012, the management of Sarah Company concludes that it has sufficient cash to purchase some short-term investments in debt and stock securities. During the year, the following transactions occurred.

Feb. 1 Purchased 1,200 shares of NJF common stock for $50,600 plus brokerage fees of $1,000.
Mar. 1 Purchased 500 shares of SEK common stock for $18,000 plus brokerage fees of $500.
Apr. 1 Purchased 70 $1,000, 8% CRT bonds for $70,000 plus $1,200 brokerage fees. Interest is payable semiannually on April 1 and October 1.
July 1 Received a cash dividend of $0.80 per share on the NJF common stock.
Aug. 1 Sold 200 shares of NJF common stock at $42 per share less brokerage fees of $350.
Sept. 1 Received $2 per share cash dividend on the SEK common stock.
Oct. 1 Received the semiannual interest on the CRT bonds.
Oct. 1 Sold the CRT bonds for $77,000 less $1,300 brokerage fees.
At December 31, the fair values of the NJF and SEK common stocks were $39 and $30 per share, respectively.

Instructions
(a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T account form.)
(b) Prepare the adjusting entry at December 31, 2012, to report the investments at fair value. All securities are considered to be trading securities.
(c) Show the balance sheet presentation of investment securities at December 31, 2012.
(d) Identify the income statement accounts and give the statement classification of each account.

Click here for the solution: In January 2012, the management of Sarah Company concludes that it has sufficient cash to purchase some short-term investments in debt and stock securities

Janes, Inc., is considering the purchase of a machine that would cost $430,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $47,000

(Ignore income taxes in this problem.) Janes, Inc., is considering the purchase of a machine that would cost $430,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $47,000. The machine would reduce labor and other costs by $109,000 per year. Additional working capital of $4,000 would be needed immediately, all of which would be recovered at the end of 6 years. The company requires a minimum pretax return of 17% on all investment projects.

Required: Determine the net present value of the project. Show your work!

Click here for the solution: Janes, Inc., is considering the purchase of a machine that would cost $430,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $47,000