Chapter 24-Problems

1. PR.24-02.ALGO
2. PR.24-03.ALGO

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   Profit Center Responsibility Reporting for a Service Company

   Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

   Revenues—N Region	$868,700
   Revenues—S Region	1,063,800
   Revenues—W Region	1,840,300
   Operating Expenses—N Region	550,500
   Operating Expenses—S Region	633,100
   Operating Expenses—W Region	1,112,900
   Corporate Expenses—Dispatching	424,800
   Corporate Expenses—Equipment Management	223,600
   Corporate Expenses—Treasurer’s	132,100
   General Corporate Officers’ Salaries	291,800

   The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Treasurer’s Department and general corporate officers’ salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. It makes sure the right freight cars are at the right place at the right time. The Treasurer’s Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

   	North		South		West
   Number of scheduled trains	4,400		5,300		8,000
   Number of railroad cars in inventory	1,300		2,100		1,800

   Required:

   1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

   Thomas Railroad Company
   Divisional Income Statements
   For the Quarter Ended December 31
   	North	South	West
   Revenues	$	$	$
   Operating expenses
   Income from operations before service department charges	$	$	$
   Less service department charges:
   Dispatching	$	$	$
   Equipment Management
   Total service department charges	$	$	$
   Income from operations	$	$	$

   2. What is the profit margin of each division? Round to one decimal place.

   Region	Profit Margin
   North Region	%
   South Region	%
   West Region	%

   Identify the most successful region according to the profit margin.
   

   3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?

   1. The method used to evaluate the performance of the divisions should be reevaluated.
   2. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
   3. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
   4. None of these choices would be included.
   5. All of these choices (a, b & c) would be included.

RJM Enterprises is a manufacturer of consumer electronics products. The industry is very competitive, and RJM has seen its profits fall in recent years, including an operating loss of $36,159 last year. RJM was able to turn that around this year by aggressively cutting costs. The summarized financial results for RJM are shown below:

Jim Green, the management accountant at RJM, is analyzing the company’s performance for this year in order to explain to management the specific aspects that drove the company to success. Some of the information Jim obtained follows:

Assume that RJM, for efficiency and to reduce cost, maintains little or no direct materials or work-in-process inventory.

Required:

1. Determine the selling price variance for the current year based on sales dollars. Determine the sales volume variance based on contribution margin.

2. Determine the following variable cost variances:

a. The usage and price variances for direct materials.

b. The efficiency and rate variances for direct labor.

Three former college classmates have decided to pool a variety of work experiences by opening a store near campus to sell wireless equipment to students. The business has been incorporated as University Wireless.
Required: Several transactions occurred in March. Each is described separately in this folder. For each transaction, indicate the accounts that are affected, whether they increase or decrease, and the amount of the increase or decrease.
YOU MUST FOLLOW THE INSTRUCTIONS BELOW. IF YOU DON'T, YOU MAY KNOW THE CORRECT ENTRY BUT THE COMPUTER WILL NOT RECOGNIZE IT AND YOU WILL NOT RECEIVE CREDIT.

- After each transaction description, there are several "Account" submission boxes and corresponding "Amount" submission boxes. To indicate the accounts that you think are affected, choose them from the drop-down menu. But you MUST select them in the order that they are listed in the menu. FOR EXAMPLE, if you think that Cash and Inventory are affected by a particular transaction, you must record the Cash impact first and the Inventory impact second because that is the order in which they are listed in the drop-down menu. If you record the Inventory impact first and the Cash impact second, even if they are the correct accounts and even if you have the correct dollar amounts, your answer will be considered incorrect.

- When you record the dollar amounts, be sure to use a minus sign to indicate a decrease in the account. You don't need to use a plus sign to indicate an increase.

- There are always more "Account" and "Amount" submission boxes available than are necessary. When you have indicated all the accounts that are affected by the transaction, you MUST select "Leave Blank" from the drop-down menu for EACH of the remaining "Account" submission boxes (you can leave the "Amount" boxes blank).

- For transactions 3, 4, 5, and 8, you are given additional instructions. Read them carefully.

- You get 5 tries for each transaction (8 tries for transaction #8).

- The entries for each transaction are worth 2 points (4 points for transaction #8).

Transaction 1

On March 1, the three classmates opened a checking account for The Wire at a local bank. They each deposited $22,000 in exchange for shares of stock. A few of their friends also purchased stock totaling $11,000 that was deposited in The Wire account.

Transaction 2
The company quickly acquired $35,000 in inventory, 30% of which was acquired on open accounts that were payable after 30 days. The rest was paid for in cash.

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Transaction 3
A one-year store rental lease was signed on March 1 for $13,200 for the year, and rent for the first 3 months was paid in advance. [Note: Record the complete entry for the March 1 transaction first and the complete adjusting entry on March 31 second.]

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Transaction 4
The owners paid $4,000 for website advertising. They were able to get a good deal because one of the company's owners also owns stock in the website company. The owners also paid $7,000 for some advertising in local newspapers. [Note: Combine both transactions into one entry].

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Transaction 5
Sales were $70,000. Cost of merchandise sold was 60% of its sales price. 65% of the sales were on open account. [Note: Record the complete entry for the sales first and the complete entry for the expenses second]

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Transaction 6
Wages and salaries in March were $11,500, of which $8,200 was actually paid to employees.

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Transaction 7
Miscellaneous expenses were $1,900, all paid for with cash.

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Transaction 8
On March 1, fixtures and equipment were purchased for $4,500 with a downpayment of $2,000 and a $2,500 note, payable in one year. Interest of 6% per year was due when the note was repaid. The estimated life of the fixtures and equipment is 9 years with no expected salvage value. [Note: Record the complete entry for the March 1 equipment purchase first, the March 31 depreciation adjusting entry second, and the March 31 interest adjusting entry third.  Also, round all answers to the nearest cent.]

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Transaction 9
Cash dividends totaling $4,000 were paid to stockholders on March 31.

Account:     Cash Accounts Receivable Inventory Prepaid Rent Fixtures and Equipment Accounts Payable Interest Payable Wages Payable Notes Payable Paid-in Capital Retained Earnings Leave Blank           Dollar amount:   

Foreman company issued $800,000 of 10%, 20-year bonds on January 1, 2011. The market rate at 8%. Interest is payable semiannually on July 1 and January 1.

a) the issuance of the bonds.

b) the payment of interest and the related amortization on July 1, 2011.

c) The accrual of interest and related amortization on December 31, 2011.

1A)) A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%? (Ignore income taxes.)

Multiple Choice

• $7,720 A

• $3,539.82 B

• $3,254.68 C

• $6,440 D

1B)) The management of L Corporation is considering a project that would require an investment of $285,000 and would last for 6 years. The annual net operating income from the project would be $115,000, which includes depreciation of $16,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to (Ignore income taxes.):

Multiple Choice

• 2.2 years A

• 2.3 years B

• 1.9 years C

• 2.5 years D

1C)) J Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

Multiple Choice

• 26.1% A

• 17.9% B

• 12.6% C

• 31.2% D

• Journalize the transactions for the month of July, 2019, beginning on page GJ 1. Be sure and list the Debit Account(s) first; Credit Account(s) next. Be sure and write a brief explanation for each transaction.

You made the following transactions for Floral & Fauna Landscaping   during the month of July:

July   1        You deposited $25,000 in a bank account in the name of the business.

1           You invested your personal gardening equipment, with a fair market value of $1,500, in the business.

6           Bought a used trailer on account from Trailers R Us , $800, Inv. #286.

7           Paid the rent for July, $1485, Ck. # 1000.

8           Bought a used backhoe from Deere Equipment, $8,500, paying $4,000 in cash and placing the balance on account, Inv. #3562,       Ck. # 1001.

          10        Bought liability insurance for one year, $2,400, Ck. #1002.

11       Sold landscaping services on account to Bel-Red Business Park,    $2,225, Inv. #100.  

15       Bought supplies on account from Garden Suppliers, Inc., $1,585,        Inv. #6283.

16       Sold landscaping services on account to Phylla Dendron, $1,850,   Inv. #101.

18       Received and paid the bill from Gas To Go for gas and oil for the equipment, $95, Ck. #1003.

19       Sold landscaping services for cash to A Chinzy Company, $1,978,   Inv. #102.

20       Paid on account to Trailers R Us, $600, Inv. #286, Ck #1004.

21       Received on account from Bel-Red Business Park, $725, Inv. 100.

22       Sold landscaping services on account to Bonsai, Inc.,$1,626,         Inv. #103.

25       Received and paid the utility bill, $184, Ck. #1005.

30       Paid salaries of the employees, $3,000, Ck. #1006.

31       You withdrew cash for your personal use, $1,500, Ck. #1007.

Marigold Corp. was organized on January 1, 2021. During its first year, the corporation issued 1,900 shares of $50 par value preferred stock and 125,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2021, $4,100; 2022, $12,700; and 2023, $29,400.

Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 5% and noncumulative. (Do not leave any answer field blank. Enter 0 for amounts.)

Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 6% and cumulative.

Journalize the declaration of the cash dividend at December 31, 2023, under part (b).

Account Titles and Explanation

Date Debit Credit

Dec. 31   

Sam's Construction had a balance in its allowance for doubtful accounts at the end of 2014 of $44,500. Sam reported credit sales of $5,000,000 in 2014 and wrote off receivables of $43,000 during 2014. At the end of the year, Sam estimates un-collectible accounts receivable based on the year-end aging using the assumptions provided at left.

What should the balance be in Sam's Construction allowance for doubtful accounts as of December 31,2015?

Sam's Construction had a balance in its allowance for doubtful accounts at the end of 2014 of $44,500. Sam reported credit sales of $5,000,000 in 2014 and wrote off receivables of $43,000 during 2014. At the end of the year, Sam estimates un-collectible accounts receivable based on the year-end aging using the assumptions provided at left.

What should Sam report as bad debt expense for 2015?

Joe has common stock and preferred stock outstanding. The preferred stock has a par value of $100, a dividend rate of 4.5%, and is cumulative. During the past 3 years, Joe declared and paid dividends provided at left. Compute the amount of dividends paid to preferred and common shareholders each year.

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $7.50 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $7.50 per share before and after Holtz’s acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Devine’s underlying accounts except that a building with a 5-year future life was undervalued by $46,500 and a fully amortized trademark with an estimated 10-year remaining life had a $76,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $351,500.

Following are the separate financial statements for the year ending December 31, 2018:

At year-end, there were no intra-entity receivables or payables.

1. Prepare a worksheet to consolidate these two companies as of December 31, 2018.

2. Prepare a 2018 consolidated income statement for Holtz and Devine.

3. If instead the noncontrolling interest shares of Devine had traded for $5.74 surrounding Holtz’s acquisition date, what is the impact on goodwill?

How would you define a substantial interest in the workings of the firm?

Describe the differences among the cost center, profit center, and investment center. Discuss at least two different measures that can be used to evaluate the performance of an investment center.

The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:

Units to be produced:

1st Quarter = 5,400
2nd Quarter = 8,400
3rd Quarter = 7,400
4th Quarter = 6,400

In addition, 6400 grams of raw materials inventory is on hand at the start of the 1st Quarter and the beginning accounts payable for the 1st Quarter is 3280. Each unit requires 8.40 grams of raw material that costs $1.40 per gram. Management desires to end each quarter with an inventory of raw materials equal to 30% of the following quarter's production needs. The desired ending inventory for the 4th Quarter is 8400 grams. Management plans to pay for 50% of raw material purchases in the quarter acquired and 50% in the following quarter. Each unit requires 0.30 direct labor-hours and direct laborers are paid $10.70 per hour.

1.Prepare the company's direct materials budget for the upcoming fiscal year (Round "Unit cost of raw materials" answers to 2 decimal places).
2.Prepare a schedule of expected cash disbursements for purchases of materials for the upcoming fiscal year.
3.Prepare the company's direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the forecasted number of units produced. (Round "Direct labor-hours per unit" and "Direct labor cost per hour" answers to 2 decimal places.)

Define the difference between current and long term liabilities. Creditors use several measures to assess a company's creditworthiness, such as working capital, current ratio, payables turnover, and days' payable. Discuss what these measures are and why it's important to carefully measure cash flows related to current liabilities.