Exercise 21-05

Morgan Leasing Company signs an agreement on January 1, 2020, to lease equipment to Cole Company. The following information relates to this agreement.

1.) Assuming the lessor desires a 8% rate of return on its investment, calculate the amount of the annual rental payment required

2.)

3.) Prepare all of the journal entries for the lessor for 2020 and 2021 to record the lease agreement, the receipt of lease payments, and the recognition of revenue. Assume the lessor’s annual accounting period ends on December 31, and it does not use reversing entries

Problem 5-27 Sales Mix; Break-Even Analysis; Margin of Safety [LO5-7, LO5-9]

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows:

Fixed expenses total $565,500 per year.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.

2. The company has developed a new product called Samoan Delight that sells for $50 each and that has variable expenses of $35 per unit. If the company can sell 20,000 units of Samoan Delight without incurring any additional fixed expenses:

a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.

b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

On January 1, 2016, Kittson Company had a retained earnings balance of $218,600. It is subject to a 30% corporate income tax rate. During 2016, Kittson earned net income of $67,000, and the following events occurred:

Required:

Richard, Barry and Andrew decided to enter into a partnership agreement as from 1^st July 2018, some of the provisions of which were as follows.

1.       Richard to contribute $24000 cash, inventory the fair value of which was $51000, plant and machinery $94320, accounts receivable totalling $15240

2.       Barry to contribute $45000 cash and act as manager for the business at an annual salary of $38400 to be allocated to him at the end of each year.

3.       Andrew to contribute $19800 cash, land $144000, premises $288000, furniture and fittings $48600, and motor vehicles $37800. A mortgage of $216000 secured over the premises was outstanding and the partnership agreed to assume the mortgage.

4.       Profits or losses of the firm to be divided between or borne by Richard, barry and Andrew in the proportion of 2:1:3 respectively.

5.       Interest to be allowed at 8% p.a. on the capital contribution by the partners. Interest at 10% p.a. to be charged on partners’ drawings.

6.       During the year ended 30 June 2019, the income of the partnership totaled $144960, and the expenses (excluding interest on capital and drawings and Barry’s salary) amounted to $51600.

7.       Richard withdrew $14400 on 1 October 2018 and $9600 on 1 January 2019; Barrie withdrew $4800 only on 1 April 2019; Andrew withdrew $12000 on 30 June 2019.

Required

A) Prepare general journal entries necessary to open the records of the partnership.

B) Prepare the balance sheet of the partnership immediately after formation.

C) Prepare a Profit Distribution account for the year ended 30 June 2019.

The following income statement items appeared on the adjusted trial balance of Foxworthy Corporation for the year ended December 31, 2018 ($ in 000s): sales revenue, $21,600; cost of goods sold, $14,150; selling expenses, $2,230; general and administrative expenses, $1,130; dividend revenue from investments, $130; interest expense, $230. Income taxes have not yet been accrued. The company’s income tax rate is 40% on all items of income or loss. These revenue and expense items appear in the company’s income statement every year. The company’s controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2018 ($ in 000s). All transactions are material in amount.

1. Investments were sold during the year at a loss of $230. Foxworthy also had unrealized holding losses of $130 for the year on investments.
2. One of the company’s factories was closed during the year. Restructuring costs incurred were $1,300.
3. During the year, Foxworthy completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP regarding discontinued operations. The division had incurred operating income of $730 in 2018 prior to the sale, and its assets were sold at a loss of $1,940.
4. A positive foreign currency translation adjustment for the year totaled $670.

Required:

Prepare Foxworthy’s single, continuous statement of comprehensive income for 2018, including earnings per share disclosures. Use a multiple-step income statement format. Two million shares of common stock were outstanding throughout the year. (Enter your answers in thousands of dollars, except earnings per share. Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)

The following transactions occurred at the Daisy King Ice Cream Company.

1. Started business by issuing 10,000 shares of common stock for $37,000.
2. Signed a franchise agreement to pay royalties of 5% of sales.
3. Leased a building for three years at $670 per month and paid six months' rent in advance.
4. Purchased equipment for $7,100, paying $4,000 down and signing a two-year, 8% note for the balance.
5. Purchased $3,500 of supplies on account.
6. Recorded cash sales of $2,500 for the first week.
7. Paid weekly salaries and wages, $1,170.
8. Paid for supplies purchased in item (5).
9. Paid royalties due on first week's sales.
10. Recorded depreciation on equipment, $100.

Required:
Prepare journal entries to record each of the transactions listed above.

• 1

  Started business by issuing 10,000 shares of common stock for $37,000.

• 2

  Signed a franchise agreement to pay royalties of 5% of sales.

• 3

  Leased a building for three years at $670 per month and paid six months' rent in advance.

• 4

  Purchased equipment for $7,100, paying $4,000 down and signing a two-year, 8% note for the balance.

• 5

  Purchased $3,500 of supplies on account.

• 6

  Recorded cash sales of $2,500 for the first week.

• 7

  Paid weekly salaries and wages, $1,170.

• 8

  Paid for supplies purchased in item (5).

• 9

  Paid royalties due on first week's sales.

• 10

  Recorded depreciation on equipment, $100.

Part C: Master Budget with Supporting Schedules

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

1. a. A sales budget, by month and in total.

    b. A schedule of expected cash collections, by month and in total.

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

    d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.

Mountain Dental Services is a specialized dental practice whose only service is filling cavities. Mountain has recorded the following for the past nine months:

Required:
1. Use the high-low method to estimate total fixed cost and variable cost per cavity filled. (Round your answers to 2 decimal places.)

2. Using these estimates, calculate Mountain’s total cost for filling 450 cavities.

The following is the ending balances of accounts at June 30, 2018 for Excell Company.

Additional information:

1. The short-term investments account includes $37,000 in U.S. treasury bills purchased in May. The bills mature in July.
2. The accounts receivable account consists of the following:

3. The notes payable account consists of two notes of $69,000 each. One note is due on September 30, 2018, and the other is due on November 30, 2019.
4. The mortgage payable is payable in semiannual installments of $6,400 each plus interest. The next payment is due on October 31, 2018. Interest has been properly accrued and is included in accrued expenses.
5. Nine hundred thousand shares of no par common stock are authorized, of which 580,000 shares have been issued and are outstanding.
6. The land account includes $69,000 representing the cost of the land on which the company's office building resides. The remaining $44,000 is the cost of land that the company is holding for investment purposes.

Required:
Prepare a classified balance sheet for the Excell Company at June 30, 2018. (Amounts to be deducted should be indicated by a minus sign.)

What are the key considerations when formulating a definition of professional skepticism?

Company manufactures one product that goes through one processing department called Mixing. All raw materials are introduced at the start of work in the Mixing Department. The company uses the weighted-average method of process costing. Its Work in Process T-account for the Mixing Department for June follows (all forthcoming questions pertain to June):

The June 1 work in process inventory consisted of 4,000 units with $13,020 in materials cost and $11,980 in conversion cost. The June 1 work in process inventory was 100% complete with respect to materials and 60% complete with respect to conversion. During June, 36,500 units were started into production. The June 30 work in process inventory consisted of 9,600 units that were 100% complete with respect to materials and 50% complete with respect to conversion.

1. What is the cost per equivalent unit for conversion? (Round your answer to 2 decimal places.)

2. What is the cost of ending work in process inventory for materials? (Round your intermediate calculations to 2 places.)

3. What is the cost of ending work in process inventory for conversion? (Round your intermediate calculations to 2 places.)

Choi Company manufactures two skin care lotions, Smooth Skin and Silken Skin, from a joint process. The joint costs incurred are $310,000 for a standard production run that generates 180,000 pints of Smooth Skin and 280,000 pints of Silken Skin. Smooth Skin sells for $3.60 per pint, while Silken Skin sells for $5.10 per pint. (Do not round intermediate calculations. Round final answers to nearest whole dollar amounts.)

  
Required:
1. Assuming that both products are sold at the split-off point, how much of the joint cost of each production run is allocated to Smooth Skin using the relative sales value method?
2. If no separable costs are incurred after the split-off point, how much of the joint cost of each production run is allocated to Silken Skin using the physical measure method?
3. If separable processing costs beyond the split-off point are $1.30 per pint for Smooth Skin and $1.80 per pint for Silken Skin, how much of the joint cost of each production run is allocated to Silken Skin using a net realizable value method?
4. If separable processing costs beyond the split-off point are $1.30 per pint for Smooth Skin and $1.80 per pint for Silken Skin, how much of the joint cost of each production run is allocated to Smooth Skin using a physical measure method?

1. Relative sales value method - Smooth Skin:

2. Physical measure method - Silken Skin:

3. Net realizable value method - Silken Skin:

4. Physical measure method - Smooth Skin:

Alva Community Hospital has five laboratory technicians who are responsible for doing a series of standard blood tests. Each technician is paid a salary of $30,000. The lab facility represents a recent addition to the hospital and cost $350,000. It is expected to last 20 years. Equipment used for the testing cost $10,000 and has a life expectancy of 5 years. In addition to the salaries, facility, and equipment, Alva expects to spend $200,000 for chemicals, forms, power, and other supplies. This $200,000 is enough for 200,000 blood tests.

Assuming that the driver (measure of output) for each type of cost is the number of blood tests run, classify each cost as a variable cost, discretionary fixed cost, or committed fixed cost.

) Genosis Metals provided the following information for last month:

            Sales                              $20,000

            Variable costs                    8,000

            Fixed costs                        4,000

            Operating income            $8,000

If sales reduce to half the amount in the next month, what is the projected operating income?

A) $0

B) $4,000

C) $2,000

D) $6,000

Answer the following questions using the information below:

Buildz Manufacturing currently produces 1,000 tables per month. The following per unit data for 1,000 tables apply for sales to regular customers:

            Direct materials                               $50

            Direct manufacturing labor                10

            Variable manufacturing overhead      15

            Fixed manufacturing overhead          30

                  Total manufacturing costs         $105

2) The plant has capacity for 3,000 tables and is considering expanding production to 3,000 tables. What is the total cost of producing 3,000 tables?

A) $255,000

B) $225,000

C) $175,000

D) $235,000

3) What is the per unit cost when producing 3,000 tables?

A) $58.33

B) $175.00

C) $85.00

D) $125.45

Answer the following questions using the information below:

Pederson Company reported the following:

            Manufacturing costs            $150,000

            Units manufactured            5,000

            Units sold                           4,700 units sold for $75 per unit

            Beginning inventory          100 units

4) What is the average manufacturing cost per unit?

A) $40.00

B) $42.00

C) $30.00

D) $32.00

5) What is the manufacturing cost for the ending finished goods inventory?

A) $12,000

B) $8,000

C) $11,000

D) $5,000

Answer the following questions using the information below:

Northern Star sells several products. Information of average revenue and costs is as follows:

            Selling price per unit                      $20.00

            Variable costs per unit:

                  Direct material                           $4.00

                  Direct manufacturing labor         $1.60

                  Manufacturing overhead             $0.40

                  Selling costs                                $2.00

            Annual fixed costs                         $96,000

The company sells 12,000 units at the end of the year.

6) The contribution margin per unit is ________.

A) $11.00

B) $12.00

C) $4.00

D) $14.00