Essay
27. Discuss the business judgment rule.

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $60 per unit) $ 1,080,000 $ 1,680,000 Cost of goods sold (@ $35 per unit) 630,000 980,000 Gross margin 450,000 700,000 Selling and administrative expenses* 301,000 331,000 Net operating income $ \149,000\ $ 369,000 * $3 per unit variable; $247,000 fixed each year. The company’s $35 unit product cost is computed as follows: Direct materials $ 7 Direct labor 11 Variable manufacturing overhead 1 Fixed manufacturing overhead ($368,000 ÷ 23,000 units) 16 Absorption costing unit product cost $ 35 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: Year 1 Year 2 Units produced 23,000 23,000 Units sold 18,000 28,000 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.

I.   Gross Profit Method

ABC Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of December.

1. Compute the estimated inventory at cost on December 31^st, assuming that the gross profit is 20% of sales.

b. How does the answer differ if the gross profit is 25% of cost instead?

Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement: Sales $ 1,550,000 Variable expenses 603,500 Contribution margin 946,500 Fixed expenses 1,041,000 Net operating income (loss) $ (94,500) In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information: Division East Central West Sales $ 390,000 $ 640,000 $ 520,000 Variable expenses as a percentage of sales 45 % 36 % 38 % Traceable fixed expenses $ 284,000 $ 322,000 $ 207,000 Required: 1. Prepare a contribution format income statement segmented by divisions. 2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $25,000 based on the belief that it would increase that division's sales by 15%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented? 2-b. Would you recommend the increased advertising? Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement: Sales $ 1,550,000 Variable expenses 603,500 Contribution margin 946,500 Fixed expenses 1,041,000 Net operating income (loss) $ (94,500) In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information: Division East Central West Sales $ 390,000 $ 640,000 $ 520,000 Variable expenses as a percentage of sales 45 % 36 % 38 % Traceable fixed expenses $ 284,000 $ 322,000 $ 207,000 Required: 1. Prepare a contribution format income statement segmented by divisions. 2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $25,000 based on the belief that it would increase that division's sales by 15%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented? 2-b. Would you recommend the increased advertising?

Exercise 19-8 Contribution margin format income statement LO P2

Polarix is a retailer of ATVs (all-terrain vehicles) and accessories. An income statement for its Consumer ATV Department for the current year follows. ATVs sell for $3,800 each. Variable selling expenses are $250 per ATV. The remaining selling expenses are fixed. Administrative expenses are 50% variable and 50% fixed. The company does not manufacture its own ATVs; it purchases them from a supplier for $1,890 each.

Required:

1. Prepare an income statement for this current year using the contribution margin format. (Round contribution margin per ATV to the nearest dollar amount.)

Question 2 – Mergers and Acquisitions

ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation which has 1 million shares outstanding and a price per share of $2.50. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms.

Required:

1. Assume ABC made a cash offer to purchase XYZ for $3 million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this offer represent?
2. Assume ABC makes a stock offer with an exchange ratio of 0.15. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent?
3. At current market prices, both offers are offers to purchase XYZ for $3 million. Does that mean that your answers to requirements (1) and (2) must be identical? Explain.

The following calendar year-end information is taken from the December 31, 2017, adjusted trial balance and other records of Leone Company.

Advertising expense $ 34,000

Depreciation expense—Office equipment 10,000

Depreciation expense—Selling equipment 9,300 Depreciation expense—Factory equipment

35,550 Factory supervision 105,360

Factory supplies used 7,850

Factory utilities 39,000

Direct labor 750,000

Indirect labor 67,800

Miscellaneous production costs 9,775

Office salaries expense 67,400

Raw materials purchases* 952,500

Rent expense—Office space 28,400

Rent expense—Selling space 26,100

Rent expense—Factory building 78,800

Maintenance expense—Factory equipment 42,600

Sales 4,762,500 Sales salaries expense 406,160

*Assume that the raw materials inventory account is used only for direct materials. Indirect materials are recorded in a factory supplies account. Required: Classify each of the costs as either a product or period cost. Then, classify each of the product costs as either direct materials, direct labor, or factory overhead and each of the period costs as either selling or general and administrative expenses. (Leave no cell blank.)

Required information

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

Delph Company uses a job-order costing system and has two manufacturing departments—Molding and Fabrication. The company provided the following estimates at the beginning of the year:

During the year, the company had no beginning or ending inventories and it started, completed, and sold only two jobs—Job D-70 and Job C-200. It provided the following information related to those two jobs:

Delph had no underapplied or overapplied manufacturing overhead during the year.

rev: 07_28_2020_QC_CS-217627

Required:

1. Assume Delph uses a plantwide predetermined overhead rate based on machine-hours.

a. Compute the plantwide predetermined overhead rate.

b. Compute the total manufacturing cost assigned to Job D-70 and Job C-200.

c. If Delph establishes bid prices that are 150% of total manufacturing cost, what bid prices would it have established for Job D-70 and Job C-200?

d. What is Delph’s cost of goods sold for the year?

Chapter 05 Problem 11

Input Area:

Output area

At December 31, 2016, Belmont Company had a net deferred tax
liability of $375,000. An explanation of the items that compose this balance is as follows.
Resulting Balances

2. Accrual, for book purposes, of estimated loss contingency from pending
lawsuit that is expected to be settled in 2017. The loss will be deducted on

In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2017, and
$120,000 of the temporary difference due to the installment sale will reverse in 2017. The tax rate for all years is 40%.
Instructions
Indicate the manner in which deferred taxes should be presented on Belmont Company’s December 31, 2016, balance sheet

Dividing LLC Income

Martin Farley and Ashley Clark formed a limited liability company with an operating agreement that provided a salary allowance of $65,000 and $52,000 to each member, respectively. In addition, the operating agreement specified an income-sharing ratio of 3:2. The two members withdrew amounts equal to their salary allowances. Revenues were $668,000 and expenses were $520,000, for a net income of $148,000.

a. Determine the division of $148,000 net income for the year.

b. Provide journal entries to close the (1) revenues and expenses and (2) drawing accounts for the two members. For a compound transaction, if an amount box does not require an entry, leave it blank.

c. If the net income were less than the sum of the salary allowances, how would income be divided between the two members of the LLC?

If the net income of the LLC were less than the sum of the salary allowances,   members would still be credited with their salary allowances. The difference between the net income and total salary allowances would be allocated to each partner as  , according to the   ratio.

In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years. Although there are not many individuals in the accounting department, there is a reasonable separation of duties in the organization. There is a separate purchasing agent who is responsible for ordering goods and a separate receiving department that counts the goods when they are received and prepares receiving reports. There is a separation of duties between recording acquisitions and cash disbursements, and all information is recorded in the two journals independently. The controller reviews all supporting documents before signing the checks, and he immediately mails the checks to the vendors. Check copies are used for subsequent recording. All aspects of internal control seem satisfactory to you, and you perform minimum tests of 25 transactions as a means of assessing control risk. In your tests, you discover the following exceptions:

1. One invoice was paid twice. The second payment was supported by a duplicate copy of the invoice. Both copies of the invoice were marked “paid.”

2. Two items in the acquisitions journal were misclassified.

3. Three invoices were not initialed by the controller, but there were no dollar misstatements evident in the transactions.

4. Five receiving reports were recorded in the acquisitions journal at least 2 weeks later than their date on the receiving report.

5. Two receiving reports for vendors’ invoices were missing from the transaction packets. One vendor’s invoice had an extension error, and the invoice was initialed that the amount had been checked.

6. One check amount in the cash disbursements journal was for $100 less than the amount stated on the vendor’s invoice.

7. One voided check was missing.

a. Identify whether each of 1 through 7 is a control test deviation, a monetary misstatement, or both.

b. For each exception, identify which transaction-related audit objective was not met.

c. What is the audit importance of each of these exceptions?

d. What follow-up procedures would you use to determine more about the nature of each exception?

e. How would each of these exceptions affect rest of the your audit? Be specific. f. Identify internal controls that should have prevented each misstatement.

George Young Industries (GYI) acquired industrial robots at the beginning of 2015 and added them to the company’s assembly process. During 2018, management became aware that the $2.0 million cost of the machinery was inadvertently recorded as repair expense on GYI’s books and on its income tax return. The industrial robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method for financial reporting purposes and for tax purposes it is considered to be MACRS 7-year property. Cost deducted over 7 years by the modified accelerated recovery system as follows:

The tax rate is 40% for all years involved.

Required:
1. & 3. Prepare any journal entry necessary as a direct result of the error described and the adjusting entry for 2018 depreciation. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Quilcene Oysteria farms and sells oysters in the Pacific Northwest. The company harvested and sold 7,300 pounds of oysters in August. The company’s flexible budget for August appears below:

The actual results for August appear below:

Required:

Calculate the company’s revenue and spending variances for August. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)