1. Internal control procedures are important in every business. At what stage in the development of a business do they become especially critical? Is there one area of the business (cash, receivables, inventory) where the procedures are the most critical, and why do you think that area is the most important?

2. You are investing in a company. Would you rather invest in common stock, convertible preferred stock, non-cumulative preferred stock, or cumulative preferred stock? Please explain your choice.

3. A company can finance their company in many ways - short-term debt, long-term borrowing, selling bonds, issuing stock. What do you think is a good mix for the company to have, and why? What might influence the mix for a company?

McCullough Hospital uses a job-order costing system to assign costs to its patients. Its direct materials include a variety of items such as pharmaceutical drugs, heart valves, artificial hips, and pacemakers. Its direct labor costs (e.g., surgeons, anesthesiologists, radiologists, and nurses) associated with specific surgical procedures and tests are traced to individual patients. All other costs, such as depreciation of medical equipment, insurance, utilities, incidental medical supplies, and the labor costs associated with around-the-clock monitoring of patients are treated as overhead costs. Historically, McCullough has used one predetermined overhead rate based on the number of patient-days (each night that a patient spends in the hospital counts as one patient-day) to allocate overhead costs to patients. Recently a member of the hospital’s accounting staff has suggested using two predetermined overhead rates (allocated based on the number of patient-days) to improve the accuracy of the costs allocated to patients. The first overhead rate would include all overhead costs within the Intensive Care Unit (ICU) and the second overhead rate would include all Other overhead costs. Information pertaining to the hospital’s estimated number of patient-days, its estimated overhead costs, and two of its patients—Patient A and Patient B—is provided below: ICU Other Total Estimated number of patient-days 2,500 22,500 25,000 Estimated fixed overhead cost $ 4,122,500 $ 22,005,000 $ 26,127,500 Estimated variable overhead cost per patient-day $ 286 $ 117 Patient A Patient B Direct materials $ 5,000 $ 6,700 Direct labor $ 26,250 $ 37,000 Total number of patient-days (including ICU) 14 19 Number of patient-days spent in ICU 0 7 Required: 1. Assuming McCullough uses only one predetermined overhead rate, calculate: a. The predetermined overhead rate. b. The total cost, including direct materials, direct labor and applied overhead, assigned to Patient A and Patient B. 2. Assuming McCullough calculates two overhead rates as recommended by the staff accountant, calculate: a. The ICU and Other overhead rates. b. The total cost, including direct materials, direct labor and applied overhead, assigned to Patient A and Patient B.

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 128,000 $ 128,000 Accounts receivable 333,000 490,000 Inventory 579,000 475,000 Plant and equipment, net 870,000 857,000 Investment in Buisson, S.A. 410,000 432,000 Land (undeveloped) 249,000 246,000 Total assets $ 2,569,000 $ 2,628,000 Liabilities and Stockholders' Equity Accounts payable $ 371,000 $ 337,000 Long-term debt 981,000 981,000 Stockholders' equity 1,217,000 1,310,000 Total liabilities and stockholders' equity $ 2,569,000 $ 2,628,000

Joel de Paris, Inc. Income Statement Sales $ 5,211,000 Operating expenses 4,481,460 Net operating income 729,540 Interest and taxes: Interest expense $ 115,000 Tax expense 201,000 316,000 Net income $ 413,540

The company paid dividends of $320,540 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%. Required: 1. Compute the company's average operating assets for last year. 2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.) 3. What was the company’s residual income last year?

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 $6,400 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $88,000 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 0.80 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 $53,000 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 20,900 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 20,900)?

Dividends

Keener Company has had 800 shares of 8%, $100 par preferred stock and 44,000 shares of $5 stated value common stock outstanding for the last 3 years. During that period, dividends paid totaled $5,400, $31,000, and $35,400 for each year, respectively.

Required:

Compute the amount of dividends that Keener must have paid to preferred shareholders and common shareholders in each of the 3 years, given the following 3 independent assumptions:
If an amount is zero, enter "0".

1. Preferred stock is nonparticipating and noncumulative.

2. Preferred stock is nonparticipating and cumulative.

3. Preferred stock is fully participating and cumulative.

Oxford Company has two divisions. Thames Division, which has an investment base of $81,000,000, produces and sells 910,000 units of a product at a market price of $149 per unit. Its variable costs total $40 per unit. The division also charges each unit $71 of fixed costs based on a capacity of 1,000,000 units.

Lakes Division wants to purchase 260,000 units from Thames. However, it is willing to pay only $82 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Lakes can acquire Thames’ output at a reduced price.

Division managers are evaluated using residual income using a 12 percent cost of capital

Required:

a. What is the residual income for Thames without the transfer to Lakes?

residual income

b. What is Thames’s residual income if it transfers 260,000 units to Lakes at $82 each?

residual income

c. What is the minimum transfer price for the 260,000-unit order that Thames would accept if it were willing to maintain the same residual income with the transfer as it would accept by selling its 910,000 units to the outside market? (Round your answer to 2 decimal places.)

minimum transfer price

Toy Story Factory hires six workers to produce toys in the three divisions: “Toddle Toy”, “Girl Toy” and “Boy Toy”. The major decision is the allocation of the workers among the three divisions, so as to maximize the amount of toy produced. The following table shows the amount (unit) of toys that will be produced in a division as a function of the number of workers deployed in the corresponding division. For instance, when 2 workers are sent to the Boy Toy division, a total of 66 units of toy will be produced there.

If the factory wants to maximize the amount of toy produced, the maximum output will be [Answer] units of toys in total. (Integer, please.)

Answer T or F

1. The ending merchandise inventory for 2005 is the as the beginning merchandise inventory or 2006.
2. In a multi-step income statement the dollar amount for income from operations is always the same as net income.
3. Net sales are equal to sales minus cost of merchandise sold.
4. Gross profit minus selling expenses equals net income.
5. The form on the balance sheet in which asserts, liabilities, and owner’s equity are presented in a downward sequence is called the report form.
6. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.
7. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are nor readily available.
8. Income that cannot be associated definitely with operations, such as gains from the sale of a fixed asset, is listed as Other Income on the multi-step income statement.
9. Under the perpetual inventory system, when a sale is made, both the retail and cost values are recorded.
10. Under perpetual inventory system, the cost of merchandise sold is recorded when sales are made.
11. If payment is due by the end of the month in which sale is made, the invoice terms are expressed as n/30.
12. When merchandise that was sold is returned, a credit to sales returns and allowances is made.
13. In perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is one to the accounts debited to record the transaction.
14. Sales return is a contra-revenue account.
15. Sales Discounts is a revenue account with a credit balance.
16. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as credit sales.

Isaac Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Isaac Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

The estimated direct labor rate is $20 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Isaac Engines is $235,200.

If required, round all per unit answers to the nearest cent.

a. Determine the plantwide factory overhead rate.
$ per dlh

b. Determine the factory overhead and direct labor cost per unit for each product.

c. Use the information provided to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place.

d. What does the report in (c) indicate to you?

Valves have the   gross profit as a percent of sales. Valves may require a   price or   cost to manufacture in order to achieve a higher profitability similar to the other two products.

Trevorrow Corporation manufactures and sells a single product. The company uses units as the measure of activity in its budgets and performance reports. During June, the company budgeted for 5,600 units, but its actual level of activity was 5,560 units. The company has provided the following data concerning the formulas used in its budgeting and its actual results for June:

Data used in budgeting:

Actual results for June:

The overall revenue and spending variance (i.e., the variance for net operating income in the revenue and spending variance column on the flexible budget performance report) for June would be closest to:

Multiple Choice

A $6,442 F

B $6,442 U

C $7,002 F

D $7,002 U

PLEASE SHOW STEPS

Post Delivery Service acquired at book value 80 percent of the voting shares of Script Real Estate Company. On that date, the fair value of the noncontrolling interest was equal to 20 percent of Script’s book value. Script Real Estate reported common stock of $300,000 and retained earnings of $105,000. During 20X3, Post Delivery provided courier services for Script Real Estate in the amount of $23,000. Also during 20X3, Script Real Estate purchased land for $5,000. It sold the land to Post Delivery Service for $26,000 so that Post Delivery could build a new transportation center. Post Delivery reported $59,000 of operating income from its delivery operations in 20X3. Script Real Estate reported net income of $69,000 and paid dividends of $10,500 in 20X3.

Required:
a. Compute consolidated net income for 20X3.

b. Prepare all journal entries recorded by Post Delivery Service related to its investment in Script Real Estate assuming Post uses the fully adjusted equity method in accounting for the investment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

c. Prepare all consolidation entries required in preparing a consolidation worksheet as of December 31, 20X3. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

A company has a targeted capital structure of 50% debt and 50% equity. Bond (debt) with face value (or principal amount) of $1200.00 paid 12% coupon annually, mature in 20 years and sell for $950.90. The company’s stock beta is 1.4, the risk free rate is 9% and market risk premium is 6%. The company has a constant growth rate of 6% and a just paid dividend of $3 and sells at $32 per share. If the company’s marginal, tax rate is 35% calculate:

1. What is the WACC using DDM?

2. If the flotation cost of new equity is 10%. What will be the company’s cost new equity capital?  

3. What would be the company’s WACC using the new capital?

On January 1, Year 6, Magnus Co. leased a machine to Fisher Co. The machine was acquired by Magnus on January 1, Year 1, for $200,000. The useful life of the machine was 20 years with no salvage value, and it was depreciated by Magnus using the straight-line method. The lease term is 10 years, and the present value of the lease payments to be made over the lease term was $90,000. Annual equal lease payments of $14,647 are payable at the end of each year starting December 31, Year 1. The discount rate for the lease is 10%. Fisher depreciates all of its assets using the straight-line method. Assume that both the remaining economic life of the machine and the salvage value did not change as a result of the lease.

For each of the following independent situations, enter in the designated cells below the appropriate amounts for the carrying amount of the right-of-use asset that should be reported in Fisher’s December 31, Year 6, balance sheet. Enter all amounts as positive values. Round all amounts to the nearest whole number. If no entry is necessary, enter a zero (0) or leave the cell blank.

Before approving credit the office manager calls the bank reference provided by Nocturnal, and learns that the company currently has a cash balance of $200. When she asks Nocturnal about the $11,800 discrepancy Nocturnal explains that the financial information includes the anticipated (but as yet unrealized) profit of $11,800 on a job under bid. Nocturnal`s accountant explains that the company keeps its books according to Contingent Reality Accounting Principles.

The office manager reviews financial statements for the company and adjusts them to GAAP:

Cash 200                          Short-term Liabilities   2,000

Total Assets 3,700             Total Liabilities     5,000

1) What is Nocturnal’s ratio of cash to short-term liabilities?

2) What is its Debt to Assets ratio?

3) What is Nocturnal’s stockholders’ equity?

4) Do lenders or owners appear to have a great interest in the assets of Nocturnal? Explain.

Osage, Inc., manufactures and sells lamps. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:

Required:

Prepare a profit variance analysis for Osage, Inc., (Do not round intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)