Posted: April 19th, 2016
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A shellfish processing company
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A shellfish processing company is thinking about purchasing a new clam digger for $14,000. The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year, $5,000 in the 3rd year, and $3,000 in the 4th year. Should the company purchase this digger if its cost of capital is 12 percent? In providing your answer, you must present the NPV along with your decision to accept/reject.
What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 = $25,000; Year 4 = $30,000?
A CFO is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. The firm’s WACC is 10%.
Year Cash Flow
Shannon Industries is considering a project which has the following cash flows:
Year Cash Flow
The project has a payback of 2.5 years. The firm’s cost of capital is 12 percent. What is the project’s net present value?
The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent.
What is the NPV for this investment?
Now assume the Federal Reserve takes actions which increases interest rates and therefore impacts the firm’s WACC. If the new WACC for Seattle Corporation becomes 14 percent, by how much did the change in the WACC affect the project’s forecasted NPV? That is, find the �”NPV resulting from the Federal Reserve actions.
Complete the following exercise
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Complete the following exercise. Create an Excel spreadsheet provided via the link below to provide your answers to parts a and b. Then paste the Excel data into a Word document on which you can also write the answer to part c.
Label each exercise or problem clearly.
Jan 1 Investor Corporation purchased 8,000 shares (20%) of Investee Company’s outstanding stock at a cost of $150,000.
May 31 Investee Company declared and paid a cash dividend of $1.50 per share.
Dec 31 Investee Company announced that its net income for the year was $100,000.
Oct 1 Investee Company declared and paid a cash dividend of $1.00 per share.
Dec 31 Investee Company announced that its net income for the year was $80,000.
Jan 1 Investor Corporation sold all of its shares of Investee Company for $178,000 cash.
1a. Prepare journal entries on Investor Corporation’s books using the equity method, which assumes that Investor has significant influence over Investee Company.
2b. Prepare journal entries on Investor Corporation’s books using the cost method, which assumes that even though Investor owns 20% of Investee’s stock, Investor does not have significant influence over Investee (for example, another corporation owns 70% of Investee Company’s stock).
3c. Write a brief report between 200-300 words in length outlining your recommendations to senior management based on the information presented here.
Balance sheet and income statement data
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Using the following balance sheet and income statement data, what is the current ratio?
Current assets $14,000 Net income $24,000
Current liabilities 8,000 Stockholders’ equity 42,000
Average assets 80,000 Total liabilities 18,000
Total assets 60,000
Average common shares outstanding was 10,000.
1.75 : 1
1.6 : 1
0.57 : 1
3.3 : 1
Use the following data to calculate the current ratio.
Eddy Auto Supplies
December 31, 2012
Cash $50,000 Accounts Payable $55,000
Prepaid Insurance 30,000 Salaries Payable 10,000
Accounts Receivable 40,000 Mortgage Payable 90,000
Inventory 70,000 Total Liabilities $155,000
Land held for Investment 80,000
Buildings $110,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (20,000) 90,000 Total Stockholders’ Equity $370,000
Trademarks 70,000 Total Liabilities and
Total Assets $525,000 Stockholders’ Equity $525,000
1.85 : 1.
2.92 : 1.
3.45 : 1.
1.38 : 1.
Winrow Company showed the following balances at the end of its first year: What did Winrow Company show as total credits on its trial balance?
Prepaid insurance 500
Accounts receivable 2,500
Accounts payable 2,000
Notes payable 3,000
Common stock 5,000
Based on the account balances below, what is the total of the debit and credit columns of the adjusted trial balance?
Service revenue $3,300 Equipment $6,400
Cash 1,525 Prepaid insurance 1,225
Unearned revenue 5,320 Depreciation expense 640
Salary expense 1,050 Accum. depreciation 1,280
Common stock 390 Retained earnings 550
The following is selected information from L Corporation for the fiscal year ending October 31, 2011.
Cash received from customers $300,000
Revenue earned 370,000
Cash paid for expenses 170,000
Cash paid for computers on November 1, 2010 that will
be used for 3 years 48,000
Expenses incurred including any depreciation 216,000
Proceeds from a bank loan, part of which was used to
pay for the computers 100,000
Based on the accrual basis of accounting, what is L Corporation’s net income for the year ending October 31, 2011?
Given the following adjusted trial balance: Net income for the year is:
Accounts receivable 2,098
Prepaid rent 86
Property, plant & equipment 300
Accumulated depreciation 52
Accounts payable 82
Unearned revenue 122
Common stock 206
Retained earnings 6,610
Service revenue 268
Interest revenue 56
Salary expense 160
Travel expense 66
Total $7,396 $7,396
Corporation distributes a dividend
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1) When a corporation distributes a dividend the
most common form of distribution is a cash dividend.
Dividends account will be increased with a credit.
Retained Earnings account will be directly increased with a debit.
Dividends account will be decreased with a debit.
2. An accounting record that includes a list of accounts and their balances at a given time is called a
chart of accounts.
3. The purpose of the ledger is to
record chronologically the day’s transactions.
keep a record of documentation to support each transaction.
keep in one place all information about changes in specific account balances.
make sure that all assets, liabilities, etc., have normal balances at all times.
4. In recording accounting transactions, evidence that a transaction has taken place is obtained from
the Internal Revenue Service.
the public relations department.
the Securities and Exchange Commission.
5. If total liabilities increased by $5,000, then
assets must have decreased by $5,000.
stockholders’ equity must have increased by $5,000.
assets must have increased by $5,000, or stockholders’ equity must have decreased by $5,000.
assets and stockholders’ equity each increased by $2,500.
6. Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for the amount of supplies:
either used or remaining.
7. At March 1, I. Repo Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $950 and consumed supplies of $800. If no adjusting entry is made for supplies:
stockholders’ equity will be overstated by $800.
expenses will be understated by $950.
assets will be understated by $350.
net income will be understated by $800.
8. The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is:
9. Unearned revenues are:
received and recorded as liabilities before they are earned.
earned and recorded as liabilities before they are received.
earned but not yet received or recorded.
earned and already received and recorded.
10. Adjusting entries affect at least:
one revenue and one expense account.
one asset and one liability account.
one revenue and one balance sheet account.
one income statement account and one balance sheet account.
11. At March 1, 2011, Candy Inc. had supplies on hand of $1,500. During the month, Candy purchased supplies of $2,900 and used supplies of $1,800. The March 31 balance sheet should report what balance in the supplies account?
12. The following accounts show balances on the adjusted trial balance. Which of these account balances will not appear the same on the balance sheet?
13. American Importers reports net income of $40,000 and cost of goods sold of $360,000. If the company’s gross profit rate was 40%, net sales were:
14. A merchandiser will earn an operating income of exactly $0 when
net sales equals cost of goods sold.
cost of goods sold equals gross margin.
operating expenses equal net sales.
gross profit equals operating expenses.
Use T-accounts to summarize activities and prepare a classified income statement
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Use T-accounts to summarize activities and prepare a classified income statement for April and a classified balance sheet at the end of April.
> Pre-opening (March)
You decide to go into the bicycle business and invest $100,000 of your own money.
You rent a building in a shopping center for $3,000 per month, beginning April 1. Rent is due on the first day of each month.
You pay $18,000 to modify the building and anticipate that you will occupy the building for 6 years.
You also purchase $6,000 of equipment for the repair shop. The equipment should last five years.
You negotiate a line of credit with the bank for up to $250,000 with an annual interest rate of 7%. Interest is payable on the first day of each month for the interest incurred during the previous month.
You hire two sales employees with an agreement to pay them $3,000 per month each plus 5% of the sales that they generate (based on selling price). They will start working on April 1. You hire one bicycle mechanic at $4,000 per month to start on April 1.
You get phone service and utilities hooked up. The fee was $100 and you will pay once its billed to you.
You buy $12,000 of supplies for repairing bicycles from a supply store on credit.
You order 400 bicycles at an average cost of $300 per bicycle and plan to draw down $120,000 of your line of credit to pay for them when they arrive on April 1.
> Open Store on April 1
On April 1, bicycles arrive and are paid for using cash obtained from line of credit.
Sell 200 bicycles in April at an average price of $500 per bicycle.
Pay $2,000 for radio advertising during the month.
Pay supplier $8,000 for supplies ordered in March.
Earn $6,000 from bicycle repairs.
Count supplies at the end of the month and find that you have $10,000 of supplies remaining.
Get phone bill for $200 and utilities bill for $300 but do not pay them before the end of the month.
You pay employees on the last day of the month.
You do not pay down the line of credit during the month.
The land was not used
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I need help for the question below:
A company owned a plot of land that appeared in its fixed assets at its acquisition cost in 1910, which was $10,000. The land was not used. In 2009, the local boys club asked the company to donate the land as the site for a new recreation building. The donation would be a tax deduction of $110,000 which was the current appraised value. The company’s tax rate was 40 percent. Some argued that the company would be better off to donate the land to keep it or to sell it for $110,000. Assume that, other than the land, the company’s taxable income as well as its accounting income before taxes was $10,000,000.
How would the company’s after-tax cash inflow be affected if (a) it donated the land or (b) it sold the land for $110,000? How would its net income be affected?
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Problem 1-2: Users of Accounting Information and Their Needs
Havre Company would like to buy a building and equipment to produce a new product line. Information about Havre is more useful to some people involved in the project than to others.
Complete the following chart by identifying the information listed with the user’s need to know the information. Identify the information as one of the following: a. Need to know, b. Helpful to know, or c. Not necessary to know.
1. Amount of current debt, repayment schedule, and interest rate
2. Fair market value of the building
3. Condition of the roof and heating and cooling, electrical, and plumbing systems
4. Total cost of the building, improvements, and equipment to set up production
5. Expected sales from the new product, variable production costs, and related selling costs.
Problem 1-5: Income Statement, Statement of Retained Earnings, and Balance Sheet
The following list, in alphabetical order, shows the various items that regularly appear on the financial statements of Maple Park Theatres Corp. The amounts shown for balance sheet items are balances as of September 30, 2012 (with the exception of retained earnings, which is the balance on September 1, 2012); and the amounts shown for income statement items are balances for the month ended September 30, 2012.
Accounts payable $17,600
Accounts receivable 6,410
Advertising expense 14,500
Capital stock 50,000
Concessions revenue 60,300
Cost of concessions sold 23,450
Dividends paid during the month 8,400
Furniture and fixtures 34,000
Notes payable 20,000
Projection equipment 25,000
Rent expense�”movies 50,600
Retained earnings 73,780
Salaries and wages expense 46,490
Ticket sales 95,100
Water, gas, and electricity 6,700
1. Prepare an income statement for the month ended September 30, 2012.
2. Prepare a statement of retained earnings for the month ended September 30, 2012.
3. Prepare a balance sheet at September 30, 2012.
4. You have $1,000 to invest. On the basis of the statements you prepared, would you use it to buy stock in Maple Park? Explain. What other information would you want before making a final decision?
Problem 2-4: Financial Statement Ratios
The following items, in alphabetical order, are available from the records of Walker Corporation as of December 31, 2012 and 2011:
Accounts payable 8400 5200
Accounts receivable 27830 35770
Cash 20200 19450
Cleaning supplies 450 700
Interest payable 0 1200
Inventory 24600 26200
Marketable securities 6250 5020
Note payable, due in six months 0 12000
Prepaid rent 3600 4800
Taxes payable 1450 1230
Wages payable 1200 1600
1. Calculate the following as of December 31, 2012 and 2011:
a. Working capital
b. Current ratio
2. On the basis of your answers to (1), comment on the company’s relative liquidity at the beginning and end of the year. Explain the change in the company’s liquidity from the beginning to the end of 2012.
Expert Consulting Services Inc. was organized on March 1, 2012, by two former college roommates. The corporation provides computer consulting services to small businesses. The following transactions occurred during the first month of operations.
March 2: Received contributions of $20,000 from each of the two principal owners of the new business in exchange for shares of stock.
March 7: Signed a two-year promissory note at the bank and received cash of $15,000. Interest, along with the $15,000, will be repaid at the end of the two years.
March 12: Purchased $700 in miscellaneous supplies on account. The company has 30 days to pay for the supplies.
March 19: Billed a client $4,000 for services rendered by Expert in helping to install a new computer system. The client is to pay 25% of the bill upon its receipt and the remaining balance within 30 days.
March 20: Paid $1,300 bill from the local newspaper for advertising for the month of March.
March 22: Received 25% of the amount billed to the client on March 19.
March 26: Received cash of $2,800 for services provided in assisting a client in selecting software for its computer.
March 29: Purchased a computer system for $8,000 in cash.
March 30: Paid $3,300 of salaries and wages for March.
March 31: Received and paid $1,400 in gas, electric, and water bills.
1. Prepare a table to summarize the preceding transactions as they affect the accounting equation. Identify each transaction with the date.
PROBLEM 3-5: Identification of Events With Source Documents
Many events are linked to a source document. Following is a list of events that occurred in an entity.
a. Paid a one-year insurance policy
b. Paid employee payroll
c. Provided services to a customer on account
d. Identified supplies in the storeroom destroyed by fire
e. Received payment of bills from customers
f. Purchased land for future expansion
g. Calculated Taxes Due
h. Entered into a car lease agreement and paid the tax, title, and license.
For each item, indicate if the event should be recorded. Identify one or more source documents generated from the event; which source document would be used to record the event when it produces more than one source document; and identify the information that is most useful in recoding the event in the accounts.
EXERCISE 4-26: Revenue Recognition, Cash and Accrual Basis
Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $366 each. The club expects to sell 100 additional three-year memberships for $900 each over each of the next two years. Membership fees are paid when clients sign-up. The club’s bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3. Cash-basis income statements:
Year 1 Year 2 Year 3
Sales 366000 90000 90000
Equipment* 100000 0 0
Salaries and wages 50000 50000 50000
Advertising 5000 5000 5000
Rent and utilities 36000 36000 36000
Net income (loss) 175000 -1000 -1000
*Equipment was purchased at the beginning of Year 1 for $100,000 and is expected to last for three years and then be worth $1,000.
1. Convert the income statements for each of the three years to the accrual basis.
2. Describe how the revenue recognition principle applies. Do you believe that the cash-basis or the accrual-basis income statements are more useful to management? To investors? Why?
PROBLEM 5-2: Calculation of Gross Profit Ratio for Wal-Mart and Target
The following information was summarized from the consolidated statements of income of Wal-Mart Stores, Inc. and Subsidiaries for the years ended January 31, 2011 and 2010, and the consolidated statements of operations of Target Corporation for the years ended January 29, 2011, and January 30, 2010. (For each company, years are labeled as 2010 and 2009, respectively, although Wal-Mart labels these as the 2011 and 2010 fiscal years.)
[see the attached file for the table]
1. Calculate the gross profit ratios for Wal-Mart and Target for 2010 and 2009.
2. Which company appears to be performing better? What factors might cause the difference in the gross profit ratios of the two companies? What other information should you consider to determine how these companies are performing in this regard?
The following condensed income statements and balance sheets are available for Planter Stores for a two-year period. (All amounts are stated in thousands of dollars.)
Income Statements FY2012 FY2011
Revenues $35,982 $26,890
Cost of goods sold 12,594 9,912
Gross profit $23,388 $16,978
Operating expenses 13,488 10,578
Net income $9,900 $6,400
Balance Sheets December 31, 2012 December 31, 2011
Cash $9,400 $4,100
Inventory 4,500 5,400
Other current assets 1,600 1,250
Long-term assets, net 24,500 24,600
Total assets $40,000 $35,350
Current liabilities 9,380 10,600
Capital stock 18,000 18,000
Retained earnings 12,620 6,750
Total liabilities and stockholders’ equity $40,000 $35,350
Before releasing the 2012 annual report, Planter’s controller learns that the inventory of one of the stores (amounting to $500,000) was counted twice in the December 31, 2011, inventory. The inventory was correctly counted in the December 31, 2012 inventory.
1. Prepare revised income statements and balance sheets for Planter Stores for each of the two years. Ignore the effect of income taxes.
PROBLEM 6-1 Bank Reconciliation
The following information is available to assist you in preparing a bank reconciliation for Calico Corners on May 31, 2012:
a. The balance on the May 31, 2012, bank statement is $8,432.11.
b. Not included on the bank statement is a $1,250 deposit made by Calico Corners late on May 31.
c. A comparison between the canceled checks returned with the bank statement and the company records indicated that the following checks are outstanding at May 31:
No. 123 $23.40
No. 127 145.00
No. 128 210.80
No. 130 67.32
d. The Cash account on the company’s books shows a balance of $9,965.34.
e. The bank acts as a collection agency for interest earned on some municipal bonds held by Calico Corners. The May bank statement indicates interest of $465.00 earned during the month.
f. Interest earned on the checking account and added to Calico Corners’ account during May was $54.60. Miscellaneous bank service charges amounted to $50.00.
g. A customer’s NSF check in the amount of $166.00 was returned with the May bank statement.
h. A comparison between the deposits listed on the bank statement and the company’s books revealed that a customer’s check in the amount of $123.45 was recorded on the books during May but was never added to the company’s account.
The bank erroneously added the check to the account of Calico Closet, which has an account at the same bank.
i. The comparison of deposits per the bank statement with those per the books revealed that another customer’s check in the amount of $101.10 was correctly added to the company’s account.
In recording the check on the company’s books, however, the accountant erroneously increased the Cash account by $1011.00.
1. Prepare a bank reconciliation in good form.
PROBLEM 6-5: Internal Control
At Morris Mart Inc., all sales are on account. Mary Morris-Manning is responsible for mailing invoices to customers, recording the amount billed, opening mail, and recording the payment. Mary is very devoted to the family business and never takes off more than one or two days for a long weekend. The customers know Mary and sometimes send personal notes with their payments. Another clerk handles all aspects of accounts payable. Mary’s brother, who is president of Morris Mart, has hired an accountant to help with expansion.
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