Required information

E7-6 through E7-10.

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

Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

E7-6 (Algo) Analyzing Special-Order Decision [LO 7-2, 7-3]

MSI has been approached by a fourth-grade teacher from Portland about the possibility of creating a specially designed game that would be customized for her classroom and environment. The teacher would like an educational game to correspond to her classroom coverage of the history of the Pacific Northwest, and the state of Oregon in particular. MSI has not sold its products directly to teachers or school systems in the past, but its Marketing Department identified that possibility during a recent meeting.

The teacher has offered to buy 2,300 copies of the CD at a price of $5.00 each. MSI could easily modify one of its existing educational programs about U.S. history to accommodate the request. The modifications would cost approximately $480. A summary of the information related to production of MSI’s current history program follows:

Required:
1. Compute the incremental profit (or loss) from accepting the special order.

2. Should MSI accept the special order?

3. Suppose that the special order had been to purchase 2,300 copies of the program for $1.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario.

4. Suppose that MSI is operating at full capacity. To accept the special order, it would have to reduce production of the history program. Compute the special order price at which MSI would be indifferent between accepting or rejecting the special order.

Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $27,000 on the purchase date and the balance in eight annual installments of $4,000 on each June 30 beginning June 30, 2019. Assuming that an interest rate of 10% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment?
2. Johnstone needs to accumulate sufficient funds to pay a $570,000 debt that comes due on December 31, 2023. The company will accumulate the funds by making five equal annual deposits to an account paying 7% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2018.
3. On January 1, 2018, Johnstone leased an office building. Terms of the lease require Johnstone to make 20 annual lease payments of $137,000 beginning on January 1, 2018. A 10% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2018, before any lease payments are made?

One topic covered in this chapter is: "methods of paying wages and salaries." Using the knowledge you gained in this chapter, examine the following real life situation and answer both questions (remembering the requirements above): You are a payroll accountant in a small accounting firm. One of your clients, a small business owner, has told you that he wants to pay some employees in cash instead of check, direct deposit, or pay cards. His reason for wanting to pay some employees in cash is that some of his employees do not have a checking account. While this practice is technically not illegal, what advice would you give the small business owner? What is your reason behind offering this advice?

Novak Inc. charges an initial franchise fee of $66,000. Upon the signing of the agreement (which covers 3 years), a payment of $26,400 is due. Thereafter, 3 annual payments of $13,200 are required. The credit rating of the franchisee is such that it would have to pay interest at 9% to borrow money. The franchise agreement is signed on May 1, 2020, and the franchise commences operation on July 1, 2020.

Click here to view factor table.
Prepare the journal entries in 2020 for the franchisor under the following assumptions.

Capital Budgeting Risk Analysis Project Instruction Create the pro forma income statement and estimate the cash flows for the following project. Decide whether to accept this project based on analysis of the NPV, Profitability Index, and IRR. Project Assumptions (Base Case) Equipment Life 6 Years Initial Equipment Cost $2,500,000 in year 0 Depreciation Straight Line Method Initial Revenue $1,000,000 in year 1 Revenue growth rate year 2 10% Revenue growth rate year 3 15% Revenue growth rate year 4 10% Revenue growth rate year 5 5% Variable Costs 60% of this year's revenue Fixed Costs $75,000 in year 1 Fixed Costs Inflation Rate 3% per year Long-term growth rate 2% per year Net Working Capital 4% of next year's revenue Tax Rate 35% Discount Rate 18% Model Structure Since this project does not have an end date we need to decide how many years of detailed analysis we will conduct. For this assignment, we will estimate detailed cash flows for 5 years and estimate the terminal value at the end of year 5. The Income Statement is the building block for cash flow estimation. Your income statement should contain the following items. You may include additional items if you find them useful in your model. Revenue Variable Cost Gross Profit Cash Fixed Cost Depreciation EBIT (Earnings Before Interest and Tax) Tax Net Income Cash Flows: • Operating Cash Flow = EBIT + Depreciation – Taxes • Other cash flow items o initial investment o change in Net Working Capital o Terminal value   Analyses 1. Scenario Analysis: prepare a scenario summary report. Use the values in the original assumption as the base case and add the following two cases. Case 1 (worst case) Variable Costs 65% of this year's revenue Fixed Costs $80,000 in year 1 Fixed Costs Inflation Rate 5% per year Long-term growth rate 1% per year Case 2 (best case) Variable Costs 55% of this year's revenue Fixed Costs $70,000 in year 1 Fixed Costs Inflation Rate 3% per year Long-term growth rate 3% per year 2. Sensitivity Analysis: prepare a one-way data table. Make sure to use the base case values. Allow the long-term growth rate to vary from -3.0% to +3.0% in increments of 0.5%. Show the impact on NPV and IRR. 3. Breakeven Analysis: identify the initial revenue level that will result in $0 NPV. Things to turn in: 1. A one-page memo explaining the results of your analysis and your recommendation. The memo should include important results of your analysis such as a summary table or graph. The memo is limited to one page so be very selective on what information to include. 2. An Excel spreadsheet showing the following: • Entire model for the base case • Scenario Analysis (Scenario Summary Report) • Sensitivity Analysis (Data Table) • Breakeven Analysis (Goal Seek result) Check Figures (Base case): Model Year 0 1 5 6 Pro Forma Incremental Income Statement Revenue 1,000,000 1,461,075 1,490,297 Net Income (59,583) 54,178 Pro Forma Incremental Balance Sheet Net Working Capital 40,000 44,000 59,612 Pro Forma Incremental Cash Flows Total Net AT CF (2,540,000) 353,083 3,463,856

SUBJECT : Accounting and Finance

Question 1 Financial accounting and management accounting have different uses to the stakeholders. Differentiate the broad types of accounting information between both disciplines.

Question 2 The global COVID-19 pandemic have resulted in many companies contemplating to shut down or close permanently their operations. Discuss the decisions that must be considered by management before taking such a move.

Hermosa, Inc., produces one model of mountain bike. Partial information for the company follows:

     
Required:
1. Complete the table. (Round your "Cost per Unit" answers to 2 decimal places.)


  
2. Calculate Hermosa’s contribution margin ratio and its total contribution margin at each sales level indicated in the table assuming the company sells each bike for $660. (Round your percentage answers to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))



4. Calculate Hermosa’s break-even point in units and sales revenue. (Round your answers to the nearest whole number.)

Income Tax Credits (LO. 6)

Brendan and Theresa are married and have three children in college. Their twin daughters, Christine and Katlyn, are freshmen and attend the same university. Their son, Kevin, is a graduate student. In 2020, Brendan and Theresa pay $12,100 in tuition and fees ($6,050 each) and $2,920 in textbooks ($1,430 and $1,490, respectively) for their daughters and $4,230 in tuition and fees for Kevin and $350 in textbooks. The twins' room and board is $2,590, while Kevin's room and board is $1,310. Brendan and Theresa have an adjusted gross income of $72,100.

a. Brendan and Theresa can claim ______ as a tax credit for the higher education expenses.

Round intermediate computations and final answer to the nearest dollar.

b. Assume that their adjusted gross income is $124,400, then they can claim _______ as a tax credit for the higher education expenses.

c. Assume the same facts as in part a, except that Kevin is a freshman and the twins are graduate students. Brendan and Theresa can claim ________ as a tax credit for the higher education expenses.

Net income $2,350,000, Preferred stock: 52,000 shares outstanding, $100 par, 9% cumulative, not convertible 5,200,000

Common stock: Shares outstanding 1/1 686,400  

Issued for cash, 5/1 270,000   

Acquired treasury stock for cash, 8/1 148,800   

2-for-1 stock split, 10/1

Compute earnings per share:

Morton Company’s contribution format income statement for last month is given below: Sales (46,000 units × $22 per unit) $ 1,012,000 Variable expenses 708,400 Contribution margin 303,600 Fixed expenses 242,880 Net operating income $ 60,720 The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

Required: 1. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $6.60 per unit. However, fixed expenses would increase to a total of $546,480 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased.

2. Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage.

3. Refer again to the data in (1). As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that enough funds are available to make the purchase.)

4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company’s new monthly fixed expenses would be $387,596; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.

Moranda and Sill, LLP, has served for over 10 years as the auditor of the financial statements of Highland Bank and Trust. The firm is conducting its audit planning for the current fiscal year and is in the process of performing risk assesment procedures. Based on inquiries ond other information obtained, the auditors learned that the bank is finalizing an aquisation of a smaller community bank located in another region of the state. Management anticipates that transaction will close in the third quarter, and, while there will be some challenges in integrating the IT systems of the aquired bank with Highland sytems, the bank should realize a number of operational cost savings over the long-term. During the past year, tha bank has expanded its online service options for customers, who can now remotely deposit funds into and withdraw funds from checkings and savings accounts. The systems has been well received by customers and the bank hopes to continue expanding those services. The challenge for Highland is that they are strugglingto retain IT personell given strong job market for individuals with those skills. Credit risk management continues to be a challenge for all banks, including Highland, and regulators continue to spend a lot of time on credit evaluation issues. The bankhas a dedicated underwriting staff that continually evaluates the collectibility of loans outstanding. Unfortunately , some of the credit review staff recently left the bank to work for a competitor. Competition in the community banking space is tough, especiallygiven the slowloan demand in the marketplace. The bank has expanded its investment portfolio into a number of new types of instruments subject to fair value accounting. Management has engaged an outside valuation expert to ensure that the valuation are properly measured and reported. Fortunately, the bank's capital position is strong and it far exceeds regulatory minimums. Capital is available to support growth goals in the bank's three-year strategic plan. 1. Describe any risks of material misstatement at the financial statement level. 2. Describe any risks of material misstatement at the assertion level. 3. Which, if any, risks would be considered a significant risk?

On January 1, 2019, Monica Company acquired 70 percent of Young Company’s outstanding common stock for $700,000. The fair value of the noncontrolling interest at the acquisition date was $300,000.

Young reported stockholders’ equity accounts on that date as follows:

In establishing the acquisition value, Monica appraised Young's assets and ascertained that the accounting records undervalued a building (with a five-year remaining life) by $40,000. Any remaining excess acquisition-date fair value was allocated to a franchise agreement to be amortized over 10 years.

During the subsequent years, Young sold Monica inventory at a 30 percent gross profit rate. Monica consistently resold this merchandise in the year of acquisition or in the period immediately following. Transfers for the three years after this business combination was created amounted to the following:

In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2020, for $47,000. The equipment had originally cost Monica $72,000. Young plans to depreciate these assets over a five-year period.

In 2021, Young earns a net income of $250,000 and declares and pays $80,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $850,000 balance at the end of 2021. During this same year, Monica reported dividend income of $56,000 and an investment account containing the initial value balance of $700,000. No changes in Young's common stock accounts have occurred since Monica's acquisition.

1. Prepare the 2021 consolidation worksheet entries for Monica and Young.

2. Compute the net income attributable to the noncontrolling interest for 2021

.

Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. On June 30, 2018, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $27,000 on the purchase date and the balance in eight annual installments of $4,000 on each June 30 beginning June 30, 2019. Assuming that an interest rate of 10% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment? 2. Johnstone needs to accumulate sufficient funds to pay a $570,000 debt that comes due on December 31, 2023. The company will accumulate the funds by making five equal annual deposits to an account paying 7% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2018. 3. On January 1, 2018, Johnstone leased an office building. Terms of the lease require Johnstone to make 20 annual lease payments of $137,000 beginning on January 1, 2018. A 10% interest rate is implicit in the lease agreement. At what amount should Johnstone record the lease liability on January 1, 2018, before any lease payments are made?

The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. Compute the number of units that must be sold in order to achieve a target pretax income of $218,000.

Sales (58,000 units) $ 986,000

Costs:
Direct materials $ 160,800
Direct labor 240,800
Fixed factory overhead 104,000
Variable factory overhead 150,800
Fixed marketing costs 110,800
Variable marketing costs 50,800 / 818,000
Pretax income $ 168,000

• 32,545.

• 134,970.

• 65,576.

• 50,800.

• 172,394.