Average Rate of Return Method, Net Present Value Method, and Analysis

The capital investment committee of Cross Continent Trucking Inc. is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows:

Each project requires an investment of $400,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.

Required:

1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.

1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.

Develop and use accounting information for daily recording of business financial transactions in a manufacturing environment, and construct and use operational budgets for a manufacturing company

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $120 per unit. Variable expenses are $60.00 per unit, and fixed expenses total $200,000 per year. Its operating results for last year were as follows:

Sales $ 3,360,000

Variable expenses 1,680,000

Contribution margin 1,680,000

Fixed expenses 200,000

Net operating income $ 1,480,000

Required: Answer each question independently based on the original data:

1. What is the product's CM ratio? 2. Use the CM ratio to determine the break-even point in dollar sales. 3. If this year's sales increase by $51,000 and fixed expenses do not change, how much will net operating income increase? 4-a. What is the degree of operating leverage based on last year's sales? 4-b. Assume the president expects this year's sales to increase by 15%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year? 5. The sales manager is convinced that a 11% reduction in the selling price, combined with a $60,000 increase in advertising, would increase this year's unit sales by 25%. a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented? b. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year? 6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.70 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $1,480,000 net operating income as last year?

Below are several transactions for Meyers Corporation for 2021.

1. Issue common stock for cash, $49,000.
2. Purchase building and land with cash, $34,000.
3. Provide services to customers on account, $6,900.
4. Pay utilities on building, $950.
5. Collect $4,900 on account from customers.
6. Pay employee salaries, $8,900.
7. Pay dividends to stockholders, $3,900.

Required:

1. For each transaction, determine the amount of cash flows. If cash is involved in the transaction, indicate whether Meyers should classify it as operating, investing, or financing in a statement of cash flows. (Enter N/A if the question is not applicable to the statement. List cash outflows as negative amounts.)

2. Calculate net cash flows for the year. (List cash outflows as negative amounts.)

3. Assuming the balance of cash on January 1, 2021, equals $4,300, calculate the balance of cash on December 31, 2021.

Prepare journal entries for a local government to record the following transactions, first for fund financial statements and then for government-wide financial statements.

1. The government sells $992,000 in bonds at face value to finance construction of a warehouse.

2. A $1.14 million contract is signed for construction of the warehouse. The commitment is required if allowed.

3. A $164,000 transfer of unrestricted funds was made for the eventual payment of the debt in (a).

4. Equipment for the fire department is received with a cost of $15,240. When it was ordered, an anticipated cost of $14,600 had been recorded.

5. Supplies to be used in the schools are bought for $4,200 cash. The consumption method is used.

6. A state grant of $109,250 is awarded to supplement police salaries. The money will be paid to reimburse the government after the supplement payments have been made to the police officers.

7. Property tax assessments are mailed to citizens of the government. The total assessment is $648,000, although officials anticipate that 4 percent will never be collected. There is an enforceable legal claim for this money and the government can use it immediately.

How to obtain acquisition date book value and fair value in excess of book value

Comprehensive Master (Operating) Budget

Bee Gee Distributors, a wholesale company, is considering whether to open a new distribution center near Bowling Green, Ohio. The center would open January 1, 2020. The economic outlook is reasonable, but extensive advance planning is required if such a commitment is to be made. As a part of the planning process, The Board of Directors requires a Master (i.e. Operating) Budgetfor the center’s first quarter of operations(i.e. January, February & March of 2020).  In order to prepare anybudget, management must make reasonable assumptions about expected sales, inventory levels and cash flows.  

Required:  Your help is needed to construct the entire first quarter Master Budget based upon the following two pages of management assumptions:

SALES BUDGET: “What is the Profit Plan?”

        ** It all starts with a sales forecast **

a.     January sales are estimated to be $400,000 of which $100,000 (25%) will be cash and $300,000 will be on credit.  Management expects the above sales pattern to continue with an overall grow rate of 10% per month.  Prepare a sales budget.

b.     The company expects to collect 100% of the accounts receivable in the month following the month of the sale.  Prepare a schedule of expected cash receipts.

c.     Use the information developed above in requirements a and bto determine the amount of accounts receivable on the March 31 pro forma balance sheet and the amount of sales on the first quarter pro forma income statement.

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PURCHASES BUDGET: “What are our total needs, less what do we have”?

d.     Cost of goods sold will be 60% of sales.  Company policy is to budget an ending inventory balance equal to 25% of the next month’s projected cost of goods sold.  Prepare an inventory purchases budget.

Note: For March analysis needs, Aprilcost of goods sold is expected to be $314,000.

Vertical Analysis of Income Statement

The following comparative income statement (in thousands of dollars) for the two recent fiscal years was adapted from the annual report of Motor Speedways Inc., owner and operator of several major motor speedways.

a. Prepare a comparative income statement for these two years in vertical form, stating each item as a percent of revenues. Enter all amounts as positive numbers. (Note: Due to rounding, amounts may not total 100%).

Round your percentages to one decimal place. Due to rounding differences, you will need to:

1. Calculate total expenses and other percentage by adding the expense percentages
2. Calculate the income from continuing operations percentage by deducting total expenses and other percentage from total revenue percentage.

b. While overall revenue   some between the two years, the overall mix of revenue sources did change somewhat. The NASCAR broadcasting revenue   as a percent of total revenue by 3 percentage points, while the percent of admissions revenue to total revenue   by 2 percentage points. Overall, it appears that income from continuing operations has significantly improved because of  .

In Shavertown, Pennsylvania, the owner of Wilkes-Barre Bookkeeping LLC was indicted for embezzling over $375,000 of his clients’ payroll tax remittances between 2010 and 2016 and for lying to clients about his actions. Additionally, he embezzled nearly $70,000 from a nonprofit for which he was the treasurer. He was sentenced to 38 months in prison and ordered to pay restitution totaling nearly $500,000.

• Do you think this was a fair sentence? Why or why not?

Problem 20-4A Manufacturing: Preparation of a complete master budget LO P1, P2, P3

The management of Zigby Manufacturing prepared the following estimated balance sheet for March 2017:

To prepare a master budget for April, May, and June of 2017, management gathers the following information:

1. Sales for March total 20,000 units. Forecasted sales in units are as follows: April, 20,000; May, 19,000; June, 19,500; and July, 20,000. Sales of 245,000 units are forecasted for the entire year. The product’s selling price is $26.00 per unit and its total product cost is $22.80 per unit.
2. Company policy calls for a given month’s ending raw materials inventory to equal 50% of the next month’s materials requirements. The March 31 raw materials inventory is 4,800 units, which complies with the policy. The expected June 30 ending raw materials inventory is 4,500 units. Raw materials cost $20 per unit. Each finished unit requires 0.50 units of raw materials.
3. Company policy calls for a given month’s ending finished goods inventory to equal 80% of the next month’s expected unit sales. The March 31 finished goods inventory is 16,000 units, which complies with the policy.
4. Each finished unit requires 0.50 hours of direct labor at a rate of $20 per hour.
5. Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $3.20 per direct labor hour. Depreciation of $23,400 per month is treated as fixed factory overhead.
6. Sales representatives’ commissions are 6% of sales and are paid in the month of the sales. The sales manager’s monthly salary is $3,500.
7. Monthly general and administrative expenses include $17,000 administrative salaries and 0.9% monthly interest on the long-term note payable.
8. The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none are collected in the month of the sale).
9. All raw materials purchases are on credit, and no payables arise from any other transactions. One month’s raw materials purchases are fully paid in the next month.
10. The minimum ending cash balance for all months is $45,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.
11. Dividends of $15,000 are to be declared and paid in May.
12. No cash payments for income taxes are to be made during the second calendar quarter. Income tax will be assessed at 35% in the quarter and paid in the third calendar quarter.
13. Equipment purchases of $135,000 are budgeted for the last day of June.

Required:
Prepare the following budgets and other financial information as required. All budgets and other financial information should be prepared for the second calendar quarter, except as otherwise noted below. (Round calculations up to the nearest whole dollar, except for the amount of cash sales, which should be rounded down to the nearest whole dollar.):

1. Sales budget.
2. Production budget.
3. Raw materials budget.
4. Direct labor budget.
5. Factory overhead budget.
6. Selling expense budget.
7. General and administrative expense budget.
8. Cash budget.
9. Budgeted income statement for the entire second quarter (not for each month separately).
10. Budgeted balance sheet.

Determination of whether a legal entity is a variable interest entity Assume a Legal Entity's capital structure consists of the following accounts: Short-term note payable $60,000 Long-term note payable 21,000 Mandatorily redeemable preferred stock 85,000 Common stock 30,000 Additional paid-in capital 60,000 Retained earnings 20,000 Total liabilities and equity $276,000 Note that FASB ASC 480 ("Distinguishing Liabilities from Equity") requires mandatorily redeemable preferred stock to be classified as a liability for financial reporting purposes. Unless otherwise indicated, each of the following parts of this question is independent: a. What is the maximum amount of expected losses that the Legal Entity can expect to sustain without being considered a variable interest entity (VIE)? $276,000 $131,000 $195,000 $110,000 b. What is the maximum amount of expected losses that the Legal Entity can expect to sustain if the lender of the long term note payable is the sole shareholder of the Legal Entity? $131,000 $276,000 $110,000 $195,000 c. What is the maximum amount of expected losses that the Legal Entity can expect to sustain if the long term note payable is convertible to common equity at the option of the holder of the note? Why? (Note that FASB ASC 470-20 ("Debt with Conversion and Other Features") requires convertible debt to be classified as a liability for financial reporting purposes.) $110,000 $195,000 $131,000 $276,000

[The following information applies to the questions displayed below.]

The following summary data for the payroll period ended December 27, 2015, are available for Cayman Coating Co.:

Additional information:

• For employees, FICA tax rates for 2015 were 7.65% on the first $118,500 of each employee’s annual earnings. However, no employees had accumulated earnings for the year in excess of the $118,500 limit.
• For employers, FICA tax rates for 2015 were also 7.65% on the first $118,500 of each employee’s annual earnings.
• The federal and state unemployment compensation tax rates are 0.6% and 5.4%, respectively. These rates are levied against the employer for the first $7,000 of each employee’s annual earnings. Only $18,000 of the gross pay amount for the December 27, 2015, pay period was owed to employees who were still under the annual limit.

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Required:

1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales.

2. The president believes that a $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $81,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income?

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $32,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by 0.50 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,400?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55,000 each month.

a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales.

b. Assume that the company expects to sell 20,800 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.)

c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,800)?

Please provide an example of computing and use manufacturing overhead allocations using hierarchical and activity-based costing methods.

1. Sales and A budget of estimated unit production.Production Budgets

   Sonic Inc. manufactures two models of speakers, Rumble and Thunder. Based on the following production and sales data for June, prepare (a) a sales budget and (b) a production budget.

   	Rumble		Thunder
   Estimated inventory (units), June 1	278		69
   Desired inventory (units), June 30	320		60
   Expected sales volume (units):
   East Region	3,900		3,450
   West Region	5,250		4,550
   Unit sales price	$110		$225

   a. Prepare a sales budget.

   Sonic Inc.
   Sales Budget
   For the Month Ending June 30
   Product and Area	Unit Sales Volume	Unit Selling Price	Total Sales
   Model Rumble:
   East Region		$	$
   West Region
   Total			$
   Model Thunder:
   East Region		$	$
   West Region
   Total			$
   Total revenue from sales			$

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   b. Prepare a production budget.

   Sonic Inc.
   Production Budget
   For the Month Ending June 30
   	Units Model Rumble	Units Model Thunder
   Expected units to be sold
   Less estimated inventory, June 1 Plus desired inventory, June 30
   Total units required
   Less estimated inventory, June 1 Plus desired inventory, June 30
   Total units to be produced