Measures of liquidity, Solvency, and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $ 68 on December 31, 20Y2.

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations: Variable costs per unit: Manufacturing: Direct materials $ 28 Direct labor $ 14 Variable manufacturing overhead $ 2 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 320,000 Fixed selling and administrative expenses $ 50,000 During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $84 per unit. Required: 1. Assume the company uses variable costing: a. Compute the unit product cost for Year 1 and Year 2. b. Prepare an income statement for Year 1 and Year 2. 2. Assume the company uses absorption costing: a. Compute the unit product cost for Year 1 and Year 2. b. Prepare an income statement for Year 1 and Year 2. 3. Reconcile the difference between variable costing and absorption costing net operating income in Year 1.

Burnaby Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would cost $1,850,000. Installation and testing costs would be $35,000 and $25,000 respectively. Once operational, the equipment will cause an increase in working capital of $120,000. The new equipment is expected to generate increased annual sales of $720,000. Variable costs to operate the machine are estimated at 42% of sales and annual fixed costs would be lowered by $75,000. The equipment has an estimate 6 year life and a salvage value of $90,000. The company requires an 11% return on its investments. Ignore income taxes.

Required: a.   Compute the net present value.

b. How do you compare NPV to Payback method? Which method is likely to be more reliable?

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Cary and Elle Bronson had been married for 15 years when trouble arose in their marriage. Cary’s long hours of working had taken a toll on it; he was rarely around even for family functions. The last straw came when Elle found lipstick on the collar of Cary’s shirt and the unmistakable scent of a very expensive woman’s perfume; this wasn’t the first time she had noticed the telltale signs of what appeared to be a clandes¬tine affair. The next day, Elle visited an attorney to begin divorce proceedings. After some small talk, the attorney, Mark Smithson, asked Elle about the major assets accu¬mulated during the marriage. “Oh, there are the cars—a Jeep Cherokee, a Chevy Suburban, and a Bentley,” she answered. “A Bentley?” he queried, somewhat surprised. “Yes,” said Elle. “Our restaurant, The Roasted Duck, has done very well over the years. We began the business with almost nothing and both worked there until Karen, our second child, was born. At that point, I became a stay-at-home mom and left every¬thing to Cary.” “I’ve eaten at The Roasted Duck—the food is excellent,” Mark said. “Thank you,” replied Elle. “Is this the only source of income for you and your husband, Mrs. Bronson?” he asked. “Yes, other than some interest and dividends,” she answered. She and the lawyer discussed other matters pertaining to the divorce. He told Elle that he would obtain information from Cary’s attorney so that an equitable division of assets could occur and the issue of the custody of their children would be settled. Two weeks later, Elle received a call from Mark. Through the discovery process, Cary’s attorney had submitted a valuation of the restaurant that seemed unusually low and had not listed any other assets that could account for the house and vehicles that the Bron¬sons had acquired and the private education that they had provided for their children. “That can’t be right!” Elle exclaimed. “Well, it certainly doesn’t look right,” Mark said, “I’ll look into this some more and let you know what I find.” After he hung up the phone, Mark called Cary’s attorney. “This value placed on the restaurant doesn’t make any sense. What’s your take on this?” After a short pause, the attorney replied, “Cary told me that the restaurant business is not doing well and, thus, the value has declined.” After Mark hung up the phone, he pondered the situation: There must be an answer to this mystery. One thing’s for sure; if Cary isn’t telling the truth, he might as well change the name of his restaurant to The Cooked Goose.

What evidence (i.e., physical, documentary, and observational) could be collected to determine whether the valuation is correct?

How could you go about collecting this evidence?

Assume for a moment that the valuation is correct.

What other sources of money could Cary have to maintain his family’s lifestyle?

How would you test your theories?

USA - Federal Taxation | Filling Requirements

Determine whether each of the following taxpayers must file a return for 2018:

Jamie is a dependent who has wages of $4,150

Joel is a dependent who has interest income of $1,200

Martin is self-employed. His gross business receipts are $24,000, and business expenses are $24,300. His only other income is $2,600 in dividends from stock he owns.

Valerie is 68 and unmarried. Her income consists of $6,500 in Social Security benefits and $15,000 from a qualified employer-provided pension plan.

Raul and Yvonne are married and have two dependent children. Their only income is Yvonne’s $26,000 salary.

PROBLEM 7–18 Relevant Cost Analysis in a Variety of Situations [LO 7–2, LO 7–3, LO 7–4]Andretti Company has a single product called a Dak. The company normally produces and sells 60,000 Daks each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below:Direct materials................................$10.00Direct labor ...................................4.50Variable manufacturing overhead................2.30Fixed manufacturing overhead ..................5.00($300,000 total)Variable selling expenses.......................1.20Fixed selling expenses ......................... 3.50($210,000 total)Total cost per unit..............................$26.50A number of questions relating to the production and sale of Daks follow. Each question is independent.Required: 1. Assume that Andretti Company has sufficient capacity to produce 90,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increased fixed selling expenses be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 90,000 Daks each year. A customer in a foreign market wants to purchase 20,000 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. Compute the per unit break-even price on this order. 3. The company has 1,000 Daks on hand that have some irregularities and are therefore consid-ered to be “seconds.” Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for set-ting a minimum selling price? Explain. 4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company 318Chapter 7nor78542_ch07_280-332.indd 318 11/19/15 11:02 AMhas enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? 5. An outside manufacturer has offered to produce Daks and ship them directly to Andretti’s cus-tomers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.PROBLEM 7–19 Dropping or Retaining a Segment [LO 7–2]Jackson County Senior Services is a nonprofit organization devoted to providing essential ser-vices to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:TotalHomeNursingMeals OnWheelsHouse-keepingRevenues..........................$900,000$260,000$400,000$240,000Variable expenses .................. 490,000 120,000 210,000 60,000Contribution margin................. 410,000 140,000 190,000 80,000Fixed expenses: Depreciation .....................68,0008,00040,00020,000 Liability insurance.................42,00020,0007,00015,000 Program administrators’ salaries . . . .115,00040,00038,00037,000 General administrative overhead*... 180,000 52,000 80,000 48,000Total fixed expenses ................ 405,000 120,000 165,000 120,000Net operating income (loss) ..........$ 5,000$ 20,000$ 25,000$ (40,000)*Allocated on the basis of program revenues.The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year’s results were very similar to the results for previous years and are represen-tative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program.The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.Required: 1. Should the Housekeeping program be discontinued? Explain. Show computations to support your answer. 2. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services.PROBLEM 7–20 Sell or Process Further [LO 7–7](Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as they are initially cut or to process them further into filet mignon and the New York cut. has enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? 5. An outside manufacturer has offered to produce Daks and ship them directly to Andretti’s cus-tomers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.

If a discount is not available for a payment based on the discount date, can you still enter the discount? If so, how?

The increases to Work in Process—Roasting Department for Highlands Coffee Company for May as well as information concerning production are as follows:

Prepare a cost of production report, using the average cost method. If required, round cost per equivalent unit answers to the nearest cent.

1. Cherry hill Inc.’s balance sheet is shown below:

Cherry hill wishes to acquire equipment worth US$20,000. It can either buy
it by borrowing the required amount at a 10% rate of interest or it can
take it on lease for a period of 5 years. If it leases it, the lease rental would
be US$5276 per year. Assume taxes are absent.
Show the balance sheet of Cherry hill Inc. if:
(a) It finances the equipment with debt
(b) It leases the equipment as an operating lease
(c) It leases the equipment as a financial lease (hint: find the present
value of lease rentals at a discount rate of 10%)

Prepare a report for management, stating the advantages and disadvantages of each depreciation method. Include in the report your recommendations on the choice of method consistent with the requirements of IAS 16/AASB 116. Support your recommendations with schedules showing the total annual cost of operating the machinery, and the profit after depreciation.

The transactions of Spade Company appear below. Kacy Spade, owner, invested $11,250 cash in the company in exchange for common stock. The company purchased office supplies for $326 cash. The company purchased $6,221 of office equipment on credit. The company received $1,328 cash as fees for services provided to a customer. The company paid $6,221 cash to settle the payable for the office equipment purchased in transaction c. The company billed a customer $2,385 as fees for services provided. The company paid $530 cash for the monthly rent. The company collected $1,002 cash as partial payment for the account receivable created in transaction f. The company paid $1,200 cash in dividends to the owner (sole shareholder). Required: 1. Prepare general journal entries to record the transactions above for Spade Company by using the following accounts: Cash; Accounts Receivable; Office Supplies; Office Equipment; Accounts. Payable; Common Stock; Dividends; Fees Earned; and Rent Expense. Use the letters beside each transaction to identify entries. 2. Post the above journal entries to T-accounts, which serve as the general ledger for this assignment.

In 2014, MusicLand has credit sales of $400,000. MusicLand also has $50,000 in accounts receivable on December 31, 2014. MusicLand has a $200 credit balance in allowance for uncollectible accounts before adjusting entries.

Assume that MusicLand uses B/S approach to estimate bad debt expense and allowance for uncollectible accounts. MusicLand estimates that 5% of accounts receivable are uncollectible. Find bad debt expense for 2014 and allowance for uncollectible accounts at the end of 2014.

SmartAuto Manufacturing is engaged in the production of replacement parts for automobiles. One plant specializes in the production of two parts: Part #127 and Part #234. Part #127 produced the highest volume of activity, and for many years it was the only part produced by the plant. Five years ago, Part #234 was added. Part #234 was more difficult to manufacture and required special tooling and setups. Profits increased for the first three years after the addition of the new product. In the last two years, however, the plant faced intense competition, and its sales of Part #127 dropped. In fact, the plant showed a small loss in the most recent reporting period.

Much of the competition was from foreign sources, and the plant manager was convinced that the foreign producers were guilty of selling the part below the cost of producing it. The following conversation between Patricia Wang, plant manager, and James Tin, divisional marketing manager, reflects the concerns of the division about the future of the plant and its products.

JAMES:           You know, Patricia, the divisional manager is real concerned about the plant's trend. He indicated that in this budgetary environment, we can't afford to carry plants that don't show a profit. We shut one down just last month because it couldn't handle the competition.

PATRICIA:      James, you and I both know that Part #127 has a reputation for quality and value. It has been a mainstay for years. I don't understand what's happening.

JAMES:           I just received a call from one of our major customers concerning Part #127. He said that a sales representative from another firm offered the part at $20 per unit – $11 less than what we charge. It's hard to compete with a price like that. Perhaps the plant is simply obsolete.

PATRICIA:      No. I don't buy that. From my sources, I know we have good technology. We are efficient.

And it's costing a little more than $21 to produce that part. I don't see how these companies can afford to sell it so cheaply. I'm not convinced that we should meet the price. Perhaps a better strategy is to emphasize producing and selling more of Part #234. Our margin is high on this product, and we have virtually no competition for it.

JAMES:           You may be right. I think we can increase the price significantly and not lose business. I called a few customers to see how they would react to a 25 percent increase in price, and they all said that they would still purchase the same quantity as before.

PATRICIA:      It sounds promising. However, before we make a major commitment to Part #234, I think we had better explore other possible explanations. I want to know how our production costs compare to those of our competitors. Perhaps we could be more efficient and find a way to earn our normal return on Part #127. The market is so much bigger for this part. I'm not sure we can survive with only Part #234. Besides, my production people hate that part. It's very difficult to produce.

After her meeting with James, Patricia requested an investigation of the production costs and comparative efficiency. She received approval to hire a consulting group to make an independent investigation. After a three-month assessment, the consulting group provided the following information on the plant's production activities and costs associated with the two products:

* Calculated using a plantwide rate based on direct labor hours. This is the current way of assigning the plant's overhead to its products.

The consulting group recommended switching the overhead assignment to an activity-based approach. It maintained that activity-based cost assignment is more accurate and will provide better information for decision making. To facilitate this recommendation, it grouped the plant's activities into homogeneous sets with the following costs:

Financial reporting by general-purpose governments includes presentation of management’s discussion and analysis as

a. Required supplementary information after the notes to the financial statements.

b. A description of currently known facts, decisions, or conditions expected to have significant effects on financial activities.

c. Part of the basic financial statements.

d. Information that may be limited to highlighting the amounts and percentages of change from the prior to the current year.

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. Calculate the spending variances for all expense items.