Kipmar Company produces a molded briefcase that is distributed to luggage stores. The following operating data for the current year has been accumulated for planning purposes.

Kipmar can produce 1,500,000 cases a year. The projected net income for the coming year is expected to be $1,800,000. Kipmar is subject to a 40% income tax rate.

During the planning sessions, Kipmar’s managers have been reviewing costs and expenses. They estimate that the company’s variable cost of goods sold will increase 15% in the coming year and that fixed administrative expenses will increase by $150,000. All other costs and expenses are expected to remain the same.

What price would Kipmar need to charge for the briefcase in the coming year to maintain the current year’s contribution margin ratio?

The following transactions relate to Sunlight Mountain Inc. Prepare journal entries for each transaction. Prepare the equity section of the balance sheet at each year-end, December 31. Assume 2015 was Sunlight’s first year of operations.

1. Sunlight issued 1,000 shares of $1 par value common stock for $70 per share on January 1, 2015.

2. Sunlight issued 500 shares of no par value, $5, non-cumulative preferred stock for $50 per share on January 1, 2015.

3. Sunlight reported net income of $2,000 during 2015 and paid no dividends. Prepare the company’s equity section of the December 31, 2015, balance sheet.

Stockholders’ Equity:

Interim Quality Performance Reports

Good quality cost management requires that quality costs be reported and controlled (control having a cost reduction emphasis). Control enables managers to compare actual outcomes with standard outcomes to gauge performance and take any necessary corrective actions. The total quality management standard is the robust zero-defects standard. This standard requires that goods and services be produced that meet the targeted value of specified quality characteristics. Achieving zero defects typically requires years and so a variety of quality performance reports are used to measure the progress of a company’s quality improvement program. One such report is the interim standard report. This report measures progress by comparing this year’s quality costs to the budgeted quality costs for the year. The budgeted quality costs are a reduction in the prior year’s quality costs resulting from planned quality improvements.

Apply the Concepts

The actual quality costs are provided for Wilson Company for the years ended June 30, Year 1 and June 30, Year 2:

At the end of Year 1, management decided to increase its investment in control costs by 25 percent for each category’s items with the expectation that failure costs would decrease by 20 percent for each item of the failure categories. Sales were $12,800,000 for both Year 1 and Year 2.

1. Prepare the budgeted costs for Year 2, and prepare an interim quality performance report by completing the following table (round all budgeted amounts to the nearest dollar and percentages to two decimal places):

Simon Company's year-end balance sheets follow.

1. Express the balance sheets in common-size percents. (Do not round intermediate calculations and round your final percentage answers to 1 decimal place.)
2. Assuming annual sales have not changed in the last three years, is the change in accounts receivable as a percentage of total assets favorable or unfavorable?
3. Assuming annual sales have not changed in the last three years, is the change in merchandise inventory as a percentage of total assets favorable or unfavorable?

Beech Corporation is a merchandising company that is preparing a master budget for the third quarter of the calendar year. The company’s balance sheet as of June 30th is shown below:

Beech’s managers have made the following additional assumptions and estimates:

1. Estimated sales for July, August, September, and October will be $230,000, $250,000, $240,000, and $260,000, respectively.

2. All sales are on credit and all credit sales are collected. Each month’s credit sales are collected 45% in the month of sale and 55% in the month following the sale. All of the accounts receivable at June 30 will be collected in July.

3. Each month’s ending inventory must equal 20% of the cost of next month’s sales. The cost of goods sold is 70% of sales. The company pays for 30% of its merchandise purchases in the month of the purchase and the remaining 70% in the month following the purchase. All of the accounts payable at June 30 will be paid in July.

4. Monthly selling and administrative expenses are always $42,000. Each month $7,000 of this total amount is depreciation expense and the remaining $35,000 relates to expenses that are paid in the month they are incurred.

5. The company does not plan to borrow money or pay or declare dividends during the quarter ended September 30. The company does not plan to issue any common stock or repurchase its own stock during the quarter ended September 30.

Required:

1. Prepare a schedule of expected cash collections for July, August, and September. Also compute total cash collections for the quarter ended September 30.

2-a. Prepare a merchandise purchases budget for July, August, and September. Also compute total merchandise purchases for the quarter ended September 30.

2-b. Prepare a schedule of expected cash disbursements for merchandise purchases for July, August, and September. Also compute total cash disbursements for merchandise purchases for the quarter ended September 30.

3. Prepare an income statement for the quarter ended September 30.

4. Prepare a balance sheet as of September 30.

In the preparation of fund financial statements, why the notes to financial statements are interesting?

Blackburn Inc. uses Otavalo Manufacturing and Piura Company to buy two precision machined parts used in the manufacture of its permanent-magnet motors: Part #625 and Part #827. Consider two activities: testing parts and reordering parts. After the two parts are inserted, testing is done to ensure that the two parts work as intended. Reordering occurs because one or both of the parts have failed the test and it is necessary to replenish part inventories. Activity cost information and other data needed for supplier costing are as follows:

I. Activity Costs Caused by Suppliers (testing failures and reordering as a result)

II. Supplier Data

Required:

Determine the cost of each supplier by using ABC. Round unit costs to two decimal places.

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

* $3 per unit variable; $251,000 fixed each year.

The company’s $39 unit product cost is computed as follows:

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operations are:

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Stoll Co.’s long-term available-for-sale portfolio at December 31, 2016, consists of the following. Available-for-Sale Securities Cost Fair Value 70,000 shares of Company A common stock $ 1,046,600 $ 915,000 42,000 shares of Company B common stock 352,750 342,000 41,000 shares of Company C common stock 1,385,000 1,332,875 Stoll enters into the following long-term investment transactions during year 2017. Jan. 29 Sold 21,000 shares of Company B common stock for $175,375 less a brokerage fee of $3,200. Apr. 17 Purchased 22,000 shares of Company W common stock for $480,000 plus a brokerage fee of $3,800. The shares represent a 30% ownership in Company W. July 6 Purchased 15,000 shares of Company X common stock for $261,625 plus a brokerage fee of $3,800. The shares represent a 10% ownership in Company X. Aug. 22 Purchased 100,000 shares of Company Y common stock for $660,000 plus a brokerage fee of $8,600. The shares represent a 51% ownership in Company Y. Nov. 13 Purchased 19,000 shares of Company Z common stock for $525,300 plus a brokerage fee of $6,600. The shares represent a 5% ownership in Company Z. Dec. 9 Sold 70,000 shares of Company A common stock for $1,031,000 less a brokerage fee of $4,100. The fair values of its investments at December 31, 2017, are: B, $171,250; C, $1,229,125; W, $391,000; X, $244,750; Y, $1,071,000; and Z, 566,100. Required: 1. Determine the amount Stoll should report on its December 31, 2017, balance sheet for its long-term investments in available-for-sale securities. 2. Prepare any necessary December 31, 2017, adjusting entry to record the fair value adjustment for the long-term investments in available-for-sale securities.

Listed below are the transactions of Kenneth Clark, D.D.S., for the month of September.

Record depreciation using a 5-year life on the equipment, the straight-line method, and no salvage value.

1. Enter the transactions shown above in appropriate general ledger accounts (use T-accounts).

2. Prepare a trial balance.

3. Prepare an income statement.

4. Prepare a retained earnings statement.

5. Prepare an unclassified balance sheet.

6. Close the ledger.

7. Prepare a post-closing trial balance.

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 $6,900 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 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 $33,000 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 $4,300?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $52,000 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 20,200 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 20,200)?

A farm purchased a new tractor for $30,000. They estimated the tractor would have a useful life of 5 years and would have a salvage value of $5,000. The farm uses the straight-line method and the half-year convention. The farm sold the tractor during year 3 for $19,000.

1. Compute the amount of depreciation expense to be taken in years 1, 2 and 3

Year 1

Year 2

Year 3

2. Prepare a journal entry to record the sale of the tractor in year 3.

1. The following accounts appear in the ledger of Sheldon Company on January 31, the end of this fiscal year.

   Cash	$16,400
   Accounts Receivable	15,100
   Merchandise Inventory	55,500
   Store Supplies	1,603
   Prepaid Insurance	3,080
   Store Equipment	24,900
   Accumulated Depreciation, Store Equipment	3,860
   Accounts Payable	14,400
   M. E. Sheldon, Capital	126,484
   M. E. Sheldon, Drawing	36,000
   Sales	227,000
   Sales Returns and Allowances	2,000
   Purchases	172,000
   Purchases Returns and Allowances	2,375
   Purchases Discounts	3,567
   Freight In	7,491
   Wages Expense	24,800
   Advertising Expense	5,912
   Rent Expense	12,900

   The data needed for adjustments on January 31 are as follows:

   a-b. Merchandise inventory, January 31, $55,750.

      c. Insurance expired for the year, $1,285.

      d. Depreciation for the year, $5,482.

      e. Accrued wages on January 31, $1,556.

      f. Supplies used during the year $1,503.

   Required:

   Prepare a work sheet for the fiscal year ended January 31. If an amount box does not require an entry, leave it blank. Enter all numbers as positive values.

   Sheldon Company
   Work Sheet
   For Year Ended January 31, 20--
   		TRIAL BALANCE		ADJUSTMENTS		INCOME STATEMENT		BALANCE SHEET
   	ACCOUNT NAME	DEBIT	CREDIT	DEBIT	CREDIT	DEBIT	CREDIT	DEBIT	CREDIT
   1	Cash									1
   2	Accounts Receivable									2
   3	Merchandise Inventory									3
   4	Store Supplies									4
   5	Prepaid Insurance									5
   6	Store Equipment									6
   7	Accumulated Depreciation, Store Equipment									7
   8	Accounts Payable									8
   9	M. E. Sheldon, Capital									9
   10	M. E. Sheldon, Drawing									10
   11	Sales									11
   12	Sales Returns and Allowances									12
   13	Purchases									13
   14	Purchases Returns and Allowances									14
   15	Purchases Discounts									15
   16	Freight In									16
   17	Wages Expense									17
   18	Advertising Expense									18
   19	Rent Expense									19
   20										20
   21	Income Summary									21
   22	Insurance Expense									22
   23	Depreciation Expense, Store Equipment									23
   24	Wages Payable									24
   25	Store Supplies Expense									25
   26										26
   27	Net Income (Loss)									27
   28										28
   29										29

   Prepare an income statement.

   Sheldon Company
   Income Statement
   For Year Ended January 31, 20--
   Revenue from Sales:
   			$
   Net Sales				$
   Cost of Goods Sold:
   		$
   	$
   Net Purchases		$
   			$
   				$
   Operating Expenses:
   			$
   Total Operating Expenses
   Net Loss

   Prepare a statement of owner's equity. No additional investments were made during the year.

   Sheldon Company
   Statement of Owner's Equity
   For Year Ended January 31, 20--
   		$
   	$
   		$

   Prepare a balance sheet.

   Sheldon Company
   Balance Sheet
   January 31, 20--
   Assets
   Current Assets:
   	$
   Total Current Assets		$
   Property and Equipment:
   	$
   Total Assets		$
   Liabilities
   Current Liabilities:
   	$
   Total Liabilities		$
   Owner's Equity
   Total Liabilities and Owner's Equity		$

E14-17B (L03) (Imputation of Interest) Presented below are two independent situations:

(a) On January 1, 2017, Excess Inc. purchased undeveloped land that had an assessed value of $261,000 at the time of purchase. A $500,000, zero-interest-bearing note due January 1, 2022, was given in exchange. There was no established exchange price for the land, nor a ready market value for the note. The interest rate charged on a note of this type is 15%. Determine at what amount the land should be recorded at January 1, 2017, and the interest expense to be reported in 2017 related to this transaction.

(b) On January 1, 2017, DonnAll Diamond borrowed $1,000,000 (face value) from Allstar Co., a major customer, through a zero-interest-bearing note due in 3 years. Because the note was zero-interest-bearing, DonnAll agreed to sell diamonds to this customer at lower than market price. A 12% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2017.