Question

Stahn Inc., an oil production company, purchased a machine on January 1, 2018. The following information applies:

Cost		Estimated useful life		Residual value
$40,000		3 years		$4,000

The year-end of the company is December 31.

Required:

1.

Calculate the depreciation expense and the carrying amount at year-end for the three-year period using the straight-line and double-declining balance methods.

2.

Assume depreciation has been recorded using the double-declining balance method. The machine is obsolete at the end of two years and must be sold, even though the president believes that it could have been used for one more year. He also thinks that too little depreciation expense has been charged against income during the two years and that the company has therefore issued inaccurate financial statements. Do you agree? Why or why not?

Problem 4

Crystal Clear Electronics Inc. was incorporated on January 1, 2018 and was authorized under its charter to issue the following shares — 20,000 non-cumulative, non-voting, preferred shares paying $.50 dividend per share each year, and an unlimited number of no par-value, voting common shares.

Required:

For each of the following events that took place in 2018, indicate the dollar value impact on each component of the accounting equation: an increase +, a decrease -, no effect x

		Assets	Liabilities	Shareholders’ Equity
1.	Preferred shares issued for cash
2.	Declared a cash dividend
3.	Preferred shares issued for land
4.	Calculated book value of common shares
5.	Paid cash dividend related to item 2 above
6.	2 for 1 split on common shares

Problem 5

The comparative statements of financial position for Sors Limited at December 31 are as follows:

Sors Limited

Statement of Financial Position

At December 31, 2019

	2019	2018
Assets
Cash	$ 6,000	$ 7,000
Accounts receivable	3,000	4,500
Merchandise inventory	12,000	11,000
Land	23,000	10,000
Equipment	40,000	30,000
Accumulated depreciation	(9,000)	(8,000)
	$75,000	$54,500
Liabilities and Shareholders’ Equity
Accounts payable	$ 6,000	$ 7,000
Non-current borrowings, due in one year	7,000	6,000
Non-current borrowings	9,000	16,000
Common shares	8,000	3,000
Retained earnings	45,000	22,500
	$75,000	$54,500

The following is additional information for 2019:

a.	Net income for the year was $27,500. There were no income taxes.
b.	No land was sold.
c.	Equipment was purchased for $20,000 in exchange for common shares value at $5,000 + $15,000 cash.
d.	Equipment costing $10,000 was sold for $12,000 cash. A $4,000 gain was reported in net income.
e.	Cash dividends of $5,000 were declared and paid.
f.	Depreciation expense of $3,000 was included in the net income figure.

Required:

Prepare the cash flow from operating activities section.

Problem 6

A corporation began the month with $200,000 of current assets and the following ratios:

Current ratio	2.5 to 1
Acid-test ratio	1.25 to 1

Required:

Review the following transactions and indicate the effect they have on the current ratio by placing an X in the appropriate column. Treat each transaction independently. Do not recalculate the current ratio.

		Increase	Decrease	No Effect
a.	Bought $20,000 of merchandise on account; the company uses a perpetual inventory system.
b.	Sold for $10,000 cash merchandise that cost $5,000.
c.	Collected $2,500 of accounts receivable.
d.	Paid $10,000 of accounts payable.
e.	Wrote off a $1,500 bad debt against the allowance for doubtful accounts.
f.	Declared a $1-per-share cash dividend on the 10,000 common shares that were outstanding.
g.	Paid the dividend declared in part f.
h.	Borrowed $10,000 from a bank assuming a 60-day, 10% loan.
i.	Borrowed $25,000 from a bank by taking out a 10-year mortgage on the plant.
j.	Used the $25,000 proceeds from the mortgage to buy additional machinery.

Problem 7

In Group Project 1, you did a comparative financial analysis for two different companies. Select one of those companies and address the following three requirements:

1.	Describe the company’s overall strategy.
2.	Prepare a Strategy Map for this company that flows from your response to part 1. The Strategy Map must show specific cause-and-effect relationships among the objectives. You should identify at least two objectives for each of the four perspectives.
3.	Prepare a Balanced Scorecard for this company which flows from your responses to parts 1 and 2.   The Balanced Scorecard must contain the objectives from the strategy map, and provide two performance measures for each objective.

Problem 8

Brenda’s Brakes manufactures three different product lines, Models X, Y, and Z. The following per unit data apply:

                                                                                    Model X        Model Y        Model Z

         Selling price                                                         $50                 $60                 $70

         Direct materials                                                        6                      6                      6

         Direct labour ($12 per hour)                                12                    18                    24

         Variable support costs ($4 per machine hour)   4                      6                      8

         Fixed costs                                                             10                    10                    10

Answer 1

Stahn Inc.

1.

Straight line method
Cost of the asset	A	40000
Resudial value	B	4000
Depreciable value (A - B)	C	36000
Useful life	D	3
Depreciation - straight line (C / D)	E	12000
Double declining method
Cost of the asset	A	40000
Useful life	B	3
Depreciation under St.Line method (100 / B)	C	33.33%
Depreciation under double declining method (2 x B)	D	66.67%
Depreciation for the first year    (A x D)	E	26667
Net value at the end of first year (A - E)	F	13333
Depreciation for the second year    (F x D)	G	8889
Net value at the end of second year (F - G)	H	4444
Total depreciation under double declining method(E + G)	I	35556

2. I donot agree. Under the double declining method, the net value of the asset is $4,444 which is almost equal to the estimated residual value after 3 years. Therefore, the company has almost entirely recovered the reliasable value of the asset in the first two years.

Problem 4.

	Event	Asset	Liabilities	Shareholders' Equity
1	Prefered shares issued for cash	+200000		+200000
2	Declare a cash dividend		+10000	-10000
3	Preferred shares issued for land	+200000		+200000
4	Calculated value of common shares	X	X	X
5	Paid cash dividend related to item 2 above	-10000	-10000
6	2 for 1 split of common shares	X	X	X
	Preferred share par value is not provided. We assume it to be $10 per share

Problem 5.

Cash flow from operations
Net income	27500
Adjustments for non-cash items:
Depreciatio expense	3000
Gain on sale of equipment	-4000
Adjustments for changes in current items:
Accounts Receivable	1500
Merchandise Inventory	-1000
Accounts Payable	-1000
Cash flow from operations	26000

Problem 6.

	Event	Increase	Decrease	No effect
a	Bought $20,000 merchandise on acccount. The company uses perpetual inventory system.		X
b	Sold for $10,000 merchandise that cost $5,000	X
c	Collected $2,500 of accounts receivable			X
d	Paid $10,000 of accounts Payable	X
e	Wrote off a $1,500 bad debt against the allowance for doubtful accounts			X
f	Declared a $1 per share cash dividend on the 10,000 common shares that were outstanding		X
g	Paid the dividend declared in part f		X
h	Borrowed $10,000 from a bank assuming 60 day , 10 % loan		X
i	Borrowed $25,000 from a bank by taking out a 10-year mortgage on the palnt.	X
j	Used $25,000 from the mortgage money to buy machinery	X