Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

Wescott is considering an expansion project in the upcoming year that will cost $7.2 million and return $653,000 per year. The project would be implemented by only one of the three divisions.


Required:
1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))

Division A ___??____%

Division B____???__%

Division C____???___%

2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.)
Division A _____??

Division B ______???

Division C______???


3. Rank the divisions according to the ROI and residual income of each.
Division A

Division B

Division C


4-a. Compute the return on investment on the proposed expansion project. (Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))
Return on investment of proposed expansion project ???%

4-b. Is this an acceptable project?

5. Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI.
Division A: increase or decrease
Division B: increase or decrease
Divsion C: increase or decrease
6. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be entered with a minus sign. Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

Division A ??% Residual income? (Loss)

Division B ??% Residual income? (Loss)

Division C ??% Residual Income? (Loss)

Post the journal entries to T accounts

Prepare a post-closing trial balance

Northeast Company

January 1, 2017,

Balance Sheet

Cash 20,000

Accounts receivable 110,000

Less: Allowance for doubtful accounts (2,000)

Inventory (500 units @ $20 each) 10,000

Equipment 9,000

Less: Accumulated depreciation (2,000) -----------------

Total assets 145,000

Accounts payable 20,000

Long-term notes payable (5% interest, due in 2019) 100,000

Capital stock 10,000

Retained earnings 15,000 -------------------

145,000

Transactions or events:

The company collected 98,000 of the accounts receivable in cash.

The company wrote off one $1,000 accounts receivable from J. Jones

On Jan. 1, the company bought a car for $30,000 on notes payable at 6%

The company paid 19,000 of its accounts payable in cash

The company bought 900 units of inventory for $21 each in cash

The company bought a 1 year insurance policy for $2400 on October 1

The company paid rent for the months January through December of $18,000

On July 1, the company bought rights to a patent for $20,000 The patent has ten more years of useful life

On Dec 1, the company paid dividends for $1,000 to it’s shareholders.

On Dec. 1, the company bought another 200 units of inventory for $22 on account

On Dec. 15, the company sold 1,300 units for $30 each. 1000 were sold for cash, and 300 on account. [The company accounts for its inventory on the FIFO basis, so the first items bought are assumed to be the first ones sold.]

The company decided to recorded depreciation on the equipment. The equipment is one year old. It had a cost of $9,000, salvage value of $1,000, and an expected useful life of 4 years. Use straight line to depreciate it

The company recorded depreciation on the car, using the straight line method, assuming it had a five year life, and salvage value of $6,000.

The company made the appropriate adjustment to reflect the fact the insurance policy only had nine more months left of effectiveness.

The company accrued the interest that had been built up on the long-term notes. The money had been borrowed on January 1, 2017. No payments of interest or principal were due until some time in 2018.

The company made the appropriate entry to record amortization on the patent on December 31.

On December 31, the company made an adjustment for the rent for December 2017.

The company recorded bad debt expense of 6% of the accounts receivable.

On November 1, 2017, Splish Brothers Inc. had the following account balances. The company uses the perpetual inventory method.

Max has interest income of $5,000 annually from a trust fund set up per his grandfather Ed’s will.

Will Max’s income be taxed? If so, how? Is there a way to shift income from the parents to the child and would it be a good idea in this case? Why or why not

Case 23.2 – An Ethical Dilemma

Scenario:  Beta Computers is experiencing financial difficulties attributed to declining sales of its mainframe computer systems. Several years ago, the company obtained a large loan from Midland State Bank. The covenants of the loan agreement strictly state that if Beta is unable to maintain a current ratio of 3:1, a quick ratio of 1:1, and a return on assets of 12 percent, the bank will exercise its right to liquidate the company’s assets in settlement of the loan. To monitor Beta’s performance, the bank demands quarterly financial statements that have been reviewed by an independent CPA.

Nick Price, Beta’s CEO, has just reviewed the company’s master budget projections for the first two quarters of the current year. What he has learned is disturbing. If sales trends continue, it appears that Beta will be in violation of its loan covenants by the end of the second quarter. If these projections are correct, the bank might foreclose on the company’s assets. As a consequence, Beta’s 750 employees will join the ranks of the unemployed.

In February of the current year, Rembrant International contacted Beta to inquire about purchasing a custom-configured mainframe computer system. Not only would the sale generate over a million dollars in revenue, it would put Beta back in compliance with its loan covenants. Unfortunately, Rembrant International is an extremely bad credit risk, and the likelihood of collecting on the sale is slim. Nonetheless, Nick Price approved the sale on February 1, which resulted in the recording of a $1.4 million receivable.

On March 31, Edgar Gamm, CPA, arrived at Beta’s headquarters. In Gamm’s opinion, the $1.4 million receivable from Rembrant International should immediately be written off as uncollectible. Of course, if the account is written off, Beta will be in violation of its loan covenants and the bank will soon foreclose. Gamm told Price that it is his professional duty to prevent any material misstatement of the company’s assets.

Price reminded Gamm that if the account is written off, 750 employees will be out of work, and that Gamm’s accounting firm probably could not collect its fee for this engagement. Price then showed Gamm Beta’s master budget for the third and fourth quarters of the current year. The budget indicated a complete turnaround for the company. Gamm suspected, however, that most of the budget’s estimates were overly optimistic.

Initial Post – As an employee, write an internal memo to your manager addressing the following:

Should Gamm insist that the Rembrant International account be classified as uncollectible? Should the optimistic third and fourth quarter master budget projections influence his decision? What would you do if you were in his position? Defend your actions.

If you were the president of Midland State Bank, what would you do if you discovered that the Rembrant International account constituted a large portion of Beta’s reported liquid assets and sales activity for the quarter? How would you react if Edgar Gamm’s accounting firm had permitted Beta to classify the account as collectible?

Roth Contractors Corporation was incorporated on December 1, 2019 and had the following transactions during December: Part A a. Issued common stock for $5,000 cash b. Paid $1,200 cash for three months’ rent: December 2019; January and February 2020 c. Purchased a used truck for $10,000 on credit (recorded as an account payable) d. Purchased $1,000 of supplies on credit. These are expected to be used during the month (recorded as expense) e. Paid $1,800 for a one-year truck insurance policy, effective December 1 f. Billed a customer $4,500 for work completed to date g. Collected $800 for work completed to date h. Paid the following expenses in cash: advertising, $350; interest, $100; telephone, $75; truck operating, $425; wages, $2,500 i. Collected $2,000 of the amount billed in f above j. Billed customers $6,500 for work completed to date k. Signed a $9,000 contract for work to be performed in January 2020 l. Paid the following expenses in cash: advertising, $200; interest, $150; truck operating, $375; wages, $2,500 m. Collected a $2,000 advance on work to be done in January (the policy of the corporation is to record such advances as revenue at the time they are received) n. Received a bill for $100 for electricity used during the month (recorded as utilities expense). Required: 1. Open general ledger T-accounts for the following: Cash, Accounts Receivable, Prepaid Insurance, Prepaid Rent, Truck, Accounts Payable, Common Stock, Repair Revenue, Advertising Expense, Interest Expense, Supplies Expense, Telephone Expense, Truck Operating Expense, Utilities Expense, and Wages Expense. General ledger account numbers are not necessary. 2. Prepare journal entries to record the December transactions. General ledger account numbers and descriptions are not needed. 3. Post the entries to general ledger T-accounts. Part B The following information relates to December 31, 2019: o. One month of the prepaid insurance has expired. p. The December portion of the rent paid on December 1 has expired. q. A physical count indicates that $350 of supplies is still on hand. r. The amount collected in transaction m is unearned at December 31. s. Three days of wages for December 29, 30, and 31 are unpaid, amounting to $1,500. These will be paid in January. t. The truck has an estimated useful life of 4 years. u. Income taxes expense is $500. This amount will be paid in the next fiscal year. Required: 4. Open additional general ledger T-accounts for the following: Unused Supplies, Accumulated Depreciation, Wages Payable, Unearned Revenue, Income Taxes Payable, Depreciation Expense, Insurance Expense, Rent Expense, and Income Taxes Expense. General ledger account numbers are not necessary. 5. Prepare all necessary adjusting entries. General ledger account numbers and descriptions are not necessary. 6. Post the entries to general ledger T-accounts and calculate balances. 7. Prepare an adjusted trial balance at December 31. 8. Assume the fiscal year-end is December 31, 2019. Prepare an income statement, statement of changes in equity, and balance sheet. 9. Prepare closing entries and a post-closing trial balance at December 31, 2019.

On January 1, 2019, the general ledger of a company includes the following account balances:

The company accounts for all inventory transactions using the perpetual FIFO method. Purchases and sales of inventory are recorded using the gross method for cash discounts. The $36,000 beginning balance of inventory consists of 400 units, each costing $90. During January 2019, the company had the following transactions:

During January 2019, the following transactions occur:

The following information is available on January 31, 2019.

1. Of the remaining accounts receivable, the company estimates that 10% will not be collected.
2. Accrued interest income on notes receivable for January.
3. Accrued interest expense on notes payable for January.
4. Accrued income taxes at the end of January for $5,600.
5. Depreciation on the building, $2,600.

Need help with recording transactions

In January 2018, Dunder Mifflin Inc. bought property in downtown Scranton. The property contains land, a warehouse, and some limited equipment. Property values in the area have been increasing rapidly over the past decade. The price paid for the property needs to be allocated to the items purchased and the controller and financial vice president are having that discussion. Dunder Mifflen’s controller wants to allocate the largest proportion of the cost to the warehouse and equipment while the financial VP, David Wallace, argues that the allocation should recognize the steadily increasing value of the land by allocating the highest value to the land. Assume that the same depreciation methods are used for financial and tax return purposes.

1. Under generally accepted accounting principles, how should the total cost of the property be determined?
2. Why is there any question about how much of the purchase cost should be allocated to each of the assets? How should the purchase cost be allocated to each of the assets?
3. What are the pros and cons of a proportionally higher allocation of the purchase cost to the land and a proportionally lower allocation to building and equipment?
4. Assume the equipment and warehouse have the same useful life. The company plans to sell the equipment after it has been fully depreciated and the land will be sold after the warehouse is fully depreciated. Assuming no change in tax rates over the life of the warehouse, how will this allocation decision affect Retained Earnings in the long-run, after the assets have been sold? Explain in depth. *

Central City, Inc. has incurred a $50,000 loss on property due to an earthquake. Earthquakes have occurred in this region. What amount will be reported for this loss on company's income statement, assuming a 30% tax rate?

A) $50,000

B) $35,000

C) $15,000

D) Zero, due to the fact that this event is infrequent in nature.

Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:

The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

11. How many pounds of raw material are needed to make one unit of Alpha and one unit of Beta?

12. What contribution margin per pound of raw material is earned by Alpha and Beta? (Round your answers to 2 decimal places.)

13. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 pounds. How many units of each product should Cane produce to maximize its profits?

14. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 pounds. What is the maximum contribution margin Cane Company can earn given the limited quantity of raw materials?

15. Assume that Cane’s customers would buy a maximum of 87,000 units of Alpha and 67,000 units of Beta. Also assume that the company’s raw material available for production is limited to 168,000 pounds. Up to how much should it be willing to pay per pound for additional raw materials? (Round your answer to 2 decimal places.)

1. On July 1, Darin Company sold inventory costing $4,500 to Dee Company for $6,000, terms 2/10, n/30. Both companies use a perpetual inventory system. What journal entry will be recorded by Dee Company on July 1?

A) Debit Purchases and credit Accounts Payable for $6,000

B) Debit Inventory and credit Accounts Receivable for $6,000

C) Debit Inventory and credit Accounts Payable for $6,000

D) Debit Cost of Goods Sold and credit Inventory for $4,500

1. On June 15, Oakley Inc. sells inventory on account to Sunglass Hut (SH) for $1,000, terms 2/10, n/30. On June 20, SH returns to Oakley inventory that SH had purchased for $300. On June 24, SH completely fulfills its obligation to Oakley by making a cash payment. What is the amount of cash paid by SH to Oakley?

A) $680

B) $686

C) $700

D) $1,000

2. Sales revenue equals $367,810, sales returns & allowances are $10,000, and sales discounts total $14,180. The cost of goods sold is $216,490, operating expenses are $28,500, and the company incurs $31,640 of income tax expense. Which of the following statements is correct?

A) Net sales equal $343,630 and gross profit is $98,640.

B) Net sales equal $67,000 and gross profit is $98,640.

C) Net sales equal $343,630 and gross profit is $127,140.

D) Net sales equal $367,810 and gross profit is $67,000.

3. Tony’s Market recorded the following events involving a recent purchase of inventory:

Received goods for $80,000, terms 2/10, n/30.

Returned $1,600 of the shipment for credit.

Paid $400 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory

a.   increased by $76,832.

b.   increased by $78,800.

c.   increased by $77,224.

d.   increased by $77,232.

Cane Company manufactures two products called Alpha and Beta that sell for $155 and $115, respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to annually produce 110,000 units of each product. Its unit costs for each product at this level of activity are given below:

The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars.

6. Assume that Cane normally produces and sells 97,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

7. Assume that Cane normally produces and sells 47,000 Betas per year. If Cane discontinues the Beta product line, how much will profits increase or decrease?

8. Assume that Cane normally produces and sells 67,000 Betas and 87,000 Alphas per year. If Cane discontinues the Beta product line, its sales representatives could increase sales of Alpha by 11,000 units. If Cane discontinues the Beta product line, how much would profits increase or decrease?

9. Assume that Cane expects to produce and sell 87,000 Alphas during the current year. A supplier has offered to manufacture and deliver 87,000 Alphas to Cane for a price of $108 per unit. If Cane buys 87,000 units from the supplier instead of making those units, how much will profits increase or decrease?

10. Assume that Cane expects to produce and sell 57,000 Alphas during the current year. A supplier has offered to manufacture and deliver 57,000 Alphas to Cane for a price of $108 per unit. If Cane buys 57,000 units from the supplier instead of making those units, how much will profits increase or decrease?

Coolbrook Company has the following information available for the past year:   

   
The company’s hurdle rate is 8.01 percent.

Required:
1. Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))



2. Recalculate ROI and residual income for each division for each independent situation that follows: (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

a. Operating income increases by 8 percent.



b. Operating income decreases by 9 percent.



c. The company invests $245,000 in each division, an amount that generates $118,000 additional income per division.



d. Coolbrook changes its hurdle rate to 6.01 percent.

Packaging Solutions Corporation manufactures and sells a wide variety of packaging products. Performance reports are prepared monthly for each department. The planning budget and flexible budget for the Production Department are based on the following formulas, where q is the number of labor-hours worked in a month:

The Production Department planned to work 4,400 labor-hours in March; however, it actually worked 4,200 labor-hours during the month. Its actual costs incurred in March are listed below:

Required:

1. Prepare the Production Department’s planning budget for the month.

2. Prepare the Production Department’s flexible budget for the month.

3. Prepare the Production Department’s flexible budget performance report for March, including both the spending and activity variances.