Capital Rationing Decision for a Service Company Involving Four Proposals

Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows:

The company's capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals.

Required:

1. Compute the cash payback period for each of the four proposals.

2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. If required, round your answers to one decimal place.

3. Using the following format, summarize the results of your computations in parts (1) and (2) by placing the calculated amounts in the first two columns on the left and indicate which proposals should be accepted for further analysis and which should be rejected. If required, round your answers to one decimal place.

4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 15% and the present value of $1 table above. Round to the nearest dollar.

5. Compute the present value index for each of the proposals in part (4). If required, round your answers to two decimal places.

6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4).

7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5).

8. The present value indexes indicate that although Proposal   has the larger net present value, it is not as attractive as Proposal  in terms of the amount of present value per dollar invested. Proposal   requires the larger investment. Thus, management should use investment resources for Proposal   before investing in Proposal  , absent any other qualitative considerations that may impact the decision.

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

* $3 per unit variable; $249,000 fixed each year.

The company’s $38 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.

Chapter 4 End-of-Chapter (EOC) Quiz The partial work sheet for Camelback Consulting at June 30, 20xx, is as follows. Adjusted Trial Balance Debit Credit Cash 131,000 Accounts Receivable 119,000 Supplies 1,000 Prepaid Rent 18,000 Land 45,000 Building 425,000 Accum Depreciation, Bld 167,000 Accounts Payable 159,000 Salaries Payable 1,000 Unearned Service Revenue 10,000 Long-Term Note Payable 125,000 Owner Capital 102,000 Owner Withdrawals 7,000 Services Revenue 495,000 Salaries Expense 256,000 Supplies Expense 3,000 Rent Expense 34,000 Depreciation Expense, Bld 12,000 Miscellaneous Expense 8,000 _________ Totals 1,059,000 1,059,000 Using good form and proper format, prepare the following financial statements: Income Statement Statement of Owner’s Equity balance sheet Using good form and proper format, prepare Post Closing Trial Balance. Show your work on how temporary accounts were closed.

Rexon Company leases equipment to Ten-Care Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

Warren and Erika paid $9,300 in qualified expenses for their son, Cash, to attend the University of Washington. Cash is in his first year of college and attended full-time. How much is Warren and Erik's American opportunity tax credit, without regard to any AGI limitation?

On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc. for $622,000 cash. The acquisition-date fair value of the noncontrolling interest was $69,000. At January 1, 2016, Star’s net assets had a total carrying amount of $483,000. Equipment (eight-year remaining life) was undervalued on Star’s financial records by $52,000. Any remaining excess fair value over book value was attributed to a customer list developed by Star (four-year remaining life), but not recorded on its books. Star recorded net income of $45,500 in 2016 and $52,000 in 2017. Each year since the acquisition, Star has declared a $13,000 dividend. At January 1, 2018, Pride’s retained earnings show a $162,500 balance.

Selected account balances for the two companies from their separate operations were as follows:

1) What is consolidated net income for 2018?

Multiple choice:

• $123,000.

• $109,000.

• $125,900.

• $154,500.

2. Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what amount of retained earnings would Pride report on its January 1, 2018 consolidated balance sheet?

Multiple Choice

• $273,000.

• $162,500.

• $414,000.

• $186,400.

Mo Meek, Lu Ling, and Barb Beck formed the MLB Partnership by making capital contributions of $83,700, $325,500, and $520,800, respectively. They predict annual partnership net income of $544,500 and are considering the following alternative plans of sharing income and loss: (a) equally; (b) in the ratio of their initial capital investments; or (c) salary allowances of $87,200 to Mo, $65,400 to Lu, and $99,000 to Barb; interest allowances of 10% on their initial capital investments; and the balance shared as follows: 20% to Mo, 40% to Lu, and 40% to Barb.

Required:
1. Use the table to show how to distribute net income of $450,000 for the calendar year under each of the alternative plans being considered

2. Prepare a statement of partners’ equity showing the allocation of income to the partners assuming they agree to use plan (c), that income earned is $209,000, and that Mo, Lu, and Barb withdraw $34,000, $48,000, and $64,000, respectively, at year-end

3. Prepare the December 31 journal entry to close Income Summary assuming they agree to use plan (c) and that net income is $209,000. Mo, Lu, and Barb withdraw $34,000, $48,000, and $64,000, respectively, at year-end. Also close the withdrawals accounts.

You are an eager and ambitious young graduate of the Reginal F. Lewis College of Business at Virginia State University with a new Accounting degree and a great life ahead of you. One of your closest friends is an inventor and an entrepreneur who wants to start a business selling a break-through new drywall screw that he has invented and that he believes works much better than the drywall screws currently on the market. He wants to start the business by opening a factory to produce the screws which can then be sold to either wholesalers or retailers who will then sell them to the general public. After searching all over creation for the right sized building in the perfect location to properly meet the needs of his target customers, he found that the ideal building in which to put up his factory was right here in Petersburg all along.To begin, he was able to purchase the building he needed outright for $500,000. Useful life of the building is 40 years and it is depreciated on a straight-line basis. Estimated salvage value is $25,000. Property taxes on the building each year are $3,000.There is a new machine that another fellow VSU grad has invented that takes the metal for the screws and molds them into their proper size and shape, and takes the plastic for the anchors and molds them into their proper size and shape; an assembly line is attached to the machine where workers put the screws and anchors into boxes. The finished product is a box of 32 drywall screws and their plastic anchors that work unlike any that have come before them. He purchased this machine outright for $150,000. The machine has a useful life of 20 years with no residual value and is depreciated on a straight-line basis. The machine can produce 17,500 boxes of screws and anchors per year. He is sure that he can sell every unit produced.It is determined that to produce the 32 screws in each box will require 128 ounces of metal which is the only material used to make the screws and to produce the 32 anchors in each box will take 32 ounces of plastic which is the only material used to make the anchors. The metal you need is produced by multiple suppliers and you've found one so far that will allow you to buy it at $1.50 per pound. The plastic used is also produced by multiple suppliers and you've found one so far that will allow you to buy it at $.15 per pound. It takes 15 minutes for the workers on the assembly line to box the screws and anchors because they are put in there in a way that prevents them from becoming disorderly. This is part of the quality aspect of the product. Assembly line workers are paid at a rate of $20.00 per hour. Your friend hired a Vice President (VP) who has a degree in Marketing from VSU. She did some market research and determined that in order to be competitive with your new product you are going to charge $25.00 per box of screws and anchors. The Vice President is paid $57,500 per year. He also hired a Chief Operating Officer who will be paid $57,500 per year. Your friend has also asked you to serve as a consultant to his company to make sure that the business gets off to a good start. Your fee has not yet been determined and is not part of this problem.Prepare a variable costing format income statement assuming that the company makes and sells the maximum possible number of units. If the income is negative, what is the reason?Your friend asks you for advice on how to increase the company income. Give him at least two possible solutions to the problem. Which solution did you recommend to your friend? Why did you choose this particular solution?Prepare a memo addressed to your friend/client explaining your options and your recommendation. This memo should be no more than one page long. What is the new break-even point after implementing your solution? What is the maximum income the company can make after implementing your solution? Is this enough profit to justify going into business? Why or why not?Prepare both an absorption costing income statement and a variable costing income statement to reflect your solution. State your assumptions about the number of units produced and the number sold.    

Tiny Biggs Company operates two factories. The company applies factory overhead to jobs on the basis of machine hours in Factory 1 and on the basis of direct labor hours in Factory 2. Estimated factory overhead costs, direct labor hours, and machine hours are as follows:

Required:

A. Determine the factory overhead rate for Factory 1.

$____________ per machine hour

B. Determine the factory overhead rate for Factory 2.

$_____________ per direct labor hour

C. Journalize the Sep. 30 entry to apply factory overhead to production in Factory 1 for September. Refer to the Chart of Accounts for exact wording of account titles. Scroll down to record the entry for Factory 2.

Now journalize the second Sep. 30 entry to apply factory overhead to production in Factory 2 for September. Refer to the Chart of Accounts for exact wording of account titles.

D. Determine the balances of the factory overhead accounts for each factory as of September 30, and indicate whether the amounts represent overapplied factory overhead or underapplied factory overhead.

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

Adams Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:

Required

1. October sales are estimated to be $200,000, of which 40 percent will be cash and 60 percent will be credit. The company expects sales to increase at the rate of 25 percent per month. Prepare a sales budget.

2. The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.

3. The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $12,000. Assume that all purchases are made on account. Prepare an inventory purchases budget.

4. The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the following month. Prepare a cash payments budget for inventory purchases.

5. Budgeted selling and administrative expenses per month follow:

1. *The capital expenditures budget indicates that Adams will spend $164,000 on October 1 for store fixtures, which are expected to have a $20,000 salvage value and a three-year (36-month) useful life.

Use this information to prepare a selling and administrative expenses budget.

6. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses.

7. Adams borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $12,000 cash cushion. Prepare a cash budget.

Jasper Fruits Corporation wholesales peaches and oranges. Barbara Jasper is working with the company’s accountant to prepare next year’s budget. Ms. Jasper estimates that sales will increase 6 percent for peaches and 11 percent for oranges. The current year’s sales revenue data follow:

Based on the company’s past experience, cost of goods sold is usually 60 percent of sales revenue. Company policy is to keep 10 percent of the next period’s estimated cost of goods sold as the current period’s ending inventory. (Hint: Use the cost of goods sold for the first quarter to determine the beginning inventory for the first quarter.)

Required

1. Prepare the company’s sales budget for the next year for each quarter by individual product.

2. If the selling and administrative expenses are estimated to be $650,000, prepare the company’s budgeted annual income statement.

3. Ms.Jasper estimates next year’s ending inventory will be $35,500 for peaches and $56,700 for oranges. Prepare the company’s inventory purchases budgets for the next year, showing quarterly figures by product.

What are the benefits of using a judgment framework? What are the different steps in the judgment framework and specific items that should be considered. Why is it important to be aware of biases, both of yourself and others involved in the process? Why is it important to properly state the issue?

23. Hurko, LP was formed in 2006 and adopted a calendar year. Here is a schedule of Hurko’s net Section 1231 gains and (losses) reported on its tax returns through 2011. 2006 2078 2008 2009 2010 2011 -0- (3,800) 9,040 (15,900) -0- -0- In 2012, Hurko recognized a $25,000 gain on the sale of business land. How is this gain characterized on Hurko's 2012 tax return? A. $25,000 Section 1231 gain. B. $9,100 ordinary gain and $15,900 Section 1231 gain. C. $15,900 ordinary gain and $9,100 Section 1231 gain. D. $25,000 ordinary gain. E. None of the above.