Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows:

Total cash paid $2,990,000

Assets acquired:

Land $600,000

Building $600,000

Machinery $500,000

Patents $600,000

The building is depreciated using the double-declining balance method. Other information is:

Salvage value $60,000

Estimated useful life in years 30

The machinery is depreciated using the units-of-production method. Other information is:

Salvage value, percentage of cost 10%

Estimated total production output in units 400,000

Actual production in units was as follows: 2019: 40,000

2020: 80,000

2021: 120,000

The patents are amortized on a straight-line basis. They have no salvage value.

Estimated useful life of patents in years 20

On December 31, 2020, the value of the patents was estimated to be $900,000

Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31.

The machinery was traded on December 2, 2021 for new machinery. Other information is:

Fair value of old machinery $240,000

Trade-in allowance $336,000

List price for new machinery $504,000

Estimated useful life of new machinery in years 20

Estimated salvage value of new machinery $15,120

The new machinery if depreciated using the stright-line method and ½ year rule.

On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows:

Amount of addition, paid in cash $100,000

Number of years of useful life from 2023 (original machinery and addition): 20

Salvage value, percentage of addition 10%

Required: Prepare journal entries to record:

1 The purchase of the assets of Coffee.

2 Depreciation and amortization expense on the purchased assets for 2019.

3 The decline (if any) in value of the patents at December 31, 2020.

4 The trade-in of the old machinery and purchase of the new machinery.

5 Depreciation on the new machinery for 2021.

6 Cost of the addition to the machinery on August 14, 2023.

7 Depreciation on the new machinery for 2023.

Question 4   (30 minutes)

Easy Company bought a piece of equipment four years ago. At December 31, 2020, the company revalued the equipment to its fair value. The following information relates to the equipment

Original cost: $1,200; Residual value: $ 200; Estimated useful life from purchase date: 10 years; Years used to December 31, 2020: 4 years; Fair value at December 31, 2020: $966; Depreciation method is straight-line.

Required:

1. Determine the depreciation expense for 2020.
2. Record the journal entry adjustment for the revaluation, using the ‘asset adjustment’method.
3. Determine the depreciation expense for 2021.
4. Assume that the fair value at the end of 2022 is $468. Record the journal entry for depreciation first for 2022, and then the entry related to this new fair value for 2022.

Question 5   (25 minutes)

Buzz Bee Yard Company’ Apiary began operations on January 1, 2020, with the purchase of 100 bee hives for $500 total. Buzz follows IFRS and its standard on agricultural products. It has completed the first year of operations and has the following information for its bee hives at December 31, 2020:

1. Bee Hives – purchase of hives as per above                                                                 $   500
2. Honey harvested during 2020 (at net realizable value)                                         1,900                  
3. Honey sold during 2020 (at net realizable value)                                                    1,600
4. Hive maintenance costs directly traceable to hive activity in year                      $60        
5. Company general administration costs                                                                           $40
6. Fair value on Dec. 31, 2020 of hives                                                                              $1,300    

Required:

1. Prepare all the journal entries for Buzz’s bee hives activities for 2020, as per the information in (a) to (f).

Question 6   (25 minutes)

The following events occurred in 2020:

1. June 30, 2020    A building that Big Company had purchased on January 1, 2016, for $ 10,000 was exchanged for another building owned by Other Company. Big Company exchanged its building and $1,000 cash for Other Company’s building. Big’s building had a fair value of $ 9,500 at the time of the exchange. Straight-line depreciation on the building with a 40-year useful life and no R.V. has been properly charged from Jan. 1, 2016 through Dec. 31, 2019. Both parcels of land on which the warehouses were located were equal in value, and had a fair value equal to book value. Big Company’s building contained a manufacturing operation. Other Company’s building was an office building.

2. Dec. 30, 2020      Machinery with a cost of $ 120 and accumulated depreciation through December 31, 2019, of $ 90 was exchanged, along with $ 15 cash, for a parcel of land with a fair market value of $ 44. Straight-line depreciation had been used for the machine. The machine had a 12-year useful life, and was 9 years-old as at Dec. 31, 2019.

3. Big Company replaced a roof on a building that it purchased in 2008. (12 years old as at Dec. 31, 2020.) The building cost $400,000 in 2008, and had an estimated life of 40 years, with no residual value. The new roof costs $25,020 to install. Big Company estimated that prices for goods and services have increased by 80% since 2008 . The roof component was not separately identified in the company accounts, but, of course, was included in the building asset at that time.

Required: Prepare ALL journal entries for 2020 related to the three situations above. Each situation may require more than one entry.

A U.S. company needs to borrow $100 million for a period of seven years. It can issue dollar debt or yen debt.

a. Suppose the company is an MNC with sales in the U.S. and inputs purchased in Japan. How should this affect its financing choice?

b. Suppose the company is a multinational firm with sales in Japan and inputs that are primarily determined in dollars. How should this affect its financing choice?

You have recently been hired by Corporation X. Their finance person just up and quit and they need the annual report finished up. Knowing that you just finished your MBA and you were a Finance whiz, they have you step in to clean things up.

1. Utilizing the following data you will create an income statement and balance sheet for Corporation X.

2. You will then generate a common size balance sheet and a common size income statement for Corp. X.

Data (all U.S. $s):

Cash: 74,000

Inventories: 870,000

Accounts Receivable: 450,000

Fixed Assets: 420,000

Cost of Goods Sold: 3,560,000

Selling, general, and admin expenses: 360,000

Accounts Payable: 320,000

Notes Payable: 110,000

Accruals: 160,000

Long-term Debt: 420,000

Common Stock: 565,000

Retained Earnings: ?

Sales: 4,250,000

Depreciation and Amortization: 146,000

Taxes (35%): ?

Per Share Data:

EPS: $4.71

Cash dividends per share: $0.95

P/E ratio: 5.0

Market Price (average): $23.57

Number of shares outstanding: 23,000

Suppose that the shareholders can hire a board of directors to monitor the CEO. The board of directors cannot perfectly monitor the effort level of the CEO, but hiring the board of directors increases the chance that they observe the true effort level of the CEO. The cost of hiring the board of directors to the shareholders is z. If hired, the board of directors will observe the effort level of the CEO with probability ½. Assume that the CEO can choose from two effort levels: high (e=1) and low (e=0). The cost of each unit of effort is c. Assume that the shareholders will pay a wage of w to the shareholder. However, if the board of directors observes low effort by the agent, then the shareholders will pay a wage of zero to the CEO. If the CEO chooses high effort the shareholders receive a payoff of Y and if the CEO chooses low effort the shareholders receive a payoff of zero. The shareholders first choose to hire the board of directors or not, then the CEO chooses the effort level.

a) Draw the game tree (Hint: only the shareholders and CEO should be in the game tree. The board of directors only influences the payoffs at the end of the tree).

b) If the shareholders hire the board of directors, then what condition must hold for the CEO to choose high effort? (Hint: The payoff for high must be greater than choosing low.)

c) If the shareholders do not hire the board of directors, then what condition must hold for the CEO to choose high effort? (Hint: The payoff for high must be greater than choosing low.)

d) Suppose that the CEO will choose low effort if the shareholders do not hire a board of directors, but will choose high effort if the shareholders do hire a board of directors. What condition must hold for the shareholders to hire a board of directors? (Hint: The payoff for hire given what the CEO will do must be greater than the payoff of not hiring given what the CEO will do).

The CEO of Tom and Sue’s wants the company to earn a net income of $2.800 million in 2022. Cost of goods sold is expected to be 60 percent of net sales, depreciation and other operating expenses are not expected to change, interest expense is expected to increase to $1.266 million, and the firm’s tax rate will be 21 percent. Calculate the net sales needed to produce net income of $2.800 million.

The CEO of a computer hardware company notices that its sales are concentrated at the beginning of each quarter and at the end of each quarter, with few sales in the middle. Sales at the beginning of the quarter and at the end of the quarter have much lower prices, about 10% lower than earlier sales. Why?

In the midst of labor negotiations, the CEO of a company argues that the company’s blue-collar workers, who are paid an average of $30,000 a year, are well paid because the mean annual income of all blue-collar workers in the country is less than $30,000. That figure is disputed by the union, which does not believe that the national mean blue-collar income is less than $30,000. An arbitrator draws a random sample of 150 blue-collar workers from across the country and asks each to report his or her annual income. She calculates the sample mean income x = $29,120 and the sample standard deviation s = $8,000. If the population mean annual income of blue-collar workers is less than $30,000 she will order the CEO to make bargaining concessions. a. Test whether the population mean annual income of blue-collar workers is less than $30,000 with a 95% confidence level. The z-critical value for this test is 645 1. z  z0.05  . Show all your steps clearly. b. Explain what is meant by the term “statistically significant”. Is the result you obtained in part a statistically significant?