2. Case Background Introduction:
The project company is ValueVehicle (VV), which is a hypothetical electrical vehicle manufacturer. VV is a public listed company and is required to comply with all regulations from SEC and GAAP. Your group is the accounting department, and you are responsible for disclosing financial information to the SEC and the public.
(1) Company necessary financial information
VV (formerly ValueVehicle, Inc.) is an American electric vehicle and clean energy company based in Fayetteville, North Carolina. VV's current products include electric cars (the Model 100, Model 101, and Model 102). VV was founded in July 2008. After 12 years in the market, VV earned its fame as the electric passenger car manufacturer, with a market share of 14% of the plug-in segment and 21% of the battery-electric part.
VV started its IPO in 2012 and became a public company, and it has 2 million outstanding shares. The stock market price is $100 per share on December 1, 2020. The primary financial statues (on December 1, 2020) are illustrated as follows:
Total assets: $2 billion. Current assets: $50 million (including finished products inventory $30 million). Long-term liability: $50 million. Current liability: $10 million. Common stock: $10 million (VV has no dilutive shares, bonds, or preferred shares).
The profit goal in 2020 is to earn $10 million net income, which also means that the targeted EPS is $5 per share. By November 30, 2020, VV has achieved $8 million net income (after tax and interest). To achieve the targeted goal, VV needs to have $2 million net income (after tax and interest, the income tax rate is 21%) in December 2020. The transactions of this month are illustrated as follows. Your team is required to record these transactions based on your professional judgment.
(2) Please recognize the following detailed transactions and complete the journal entries. You need to make the necessary argument if the journal entries have several options.
A. From December 1 through December 20, VV has had 1.2 million dollars transactions with a gross margin of 40%.
B. Dealer X planned to sign a $1 million sales contract with VV in February 2021 (the gross margin is projected as 40% based on the current product information). Recently, dealer X discussed an alternative that they can sign the contract before December 31, 2020. The condition is that VV can offer a 20% discount on the sales price. VV can choose to provide the discount in December 2020, reject this contract, and wait for the deal in February 2021.
C. Dealer Y proposed to sign a $1 million sales contract with VV before December 31, 2020, with two conditions: (1) Dealer Y can return the cars unconditionally if they cannot sell the cars before June 2021. (2) VV needs to offer a 10% discount on the sales price. The gross margin is projected as 40% based on the current product price (without the 10% discount). There is no publicly available information about how many cars Dealer Y can sell by June 2021. The representative of dealer Y predicts 10% of the cars cannot be sold by June 2021. VV can choose to offer the contract or reject this deal.
D. On December 1, 2020, the accounting department receives the latest report from the Pilot Automation System department. The report claims that a new wireless operating system had achieved technological feasibility. VV has spent $800,000 on this system in 2020. The technological feasibility judgment is based on the company's own engineer expert group. There is no official technical criterion currently available for technological feasibility. The original goal for this Pilot Automation System is a patent, but the management now considering this system as internally developed software. VV spends $300,000 this month after passing the technological feasibility. Based on this condition, you are required to judge whether this system is a patent or software and decide to capitalize the $300,000 (the capitalization can be amortized within ten years) or record as an R&D expense.
E. On December 10, you checked and found that VV had four debt investments in the market. The category and the fair value are listed as follows:
Company Amount MarketingValue (12/10/20) Category MaturityDate
AA $1 million $1.2 million Held-to-maturity June 2022
BB $1 million $1.3 million Held-to-maturity June 2022
CC $1 million $0.8 million Trading security July 2022
DD $1 million $0.9 million Available-for-sale security May 2022
The CEO suggests re-categorize these investments and recognize some of the gains and losses. Please claim your decisions and explain the reasons for your argument.
F. VV bought $20 million in equity securities from JJ Company. The investment is 19% of the voting common stock of JJ Company, but the CFO is selected from VV. VV has some impacts on JJ Company’s decision-making. VV uses an equity approach to record this investment. The balance of the JJ investment in December 2020 is $20 million. Some managers argue that the impact is not significant and want to change the accounting approach to use fair value and recognize the investment gains. JJ Company has zero net income in 2020, but JJ’s stock price has increased to $21.4 million. Do you agree with the change and recognize the $1.4 million gains? Please clarify your reasons for your judgment.
G. On December 22, the accounting team is required to make a financing decision for the 2021 annual budget. VV has a $5 million budget shortage that needs financing. You have three options available for the demanding $5 million. First, VV can borrow the money from a local bank with a 12% annual interest. Second, sell $5 million treasury stocks. Third, initiate $5 million non-participatory preferred stocks with a 12% dividend ratio. Please select one option and clarify your reasons.
H. VV decides to initiate a one million dollars stock-based compensatory plan for the C-level managers. Your team is required to make a selection from two alternatives: the first is to use compensatory stock options; the second is to use a restricted stock plan. What is your preference, and explain why you choose your selection?
I. The administrative and selling expense in December 2020 is $300,000. Please include the eight businesses above and compute your net income and EPS. Remember to pay income tax for December income (tax rate is 21%).
J. If your net income from the computation above is less than $2 million, you cannot meet the market expectation. You are required to explore possible solutions to help achieve this goal. Please propose one potential accounting-related business activity to meet your goal. The proposed solution needs to comply with the official regulations from GAAP, SEC, etc. Please explain your proposed transaction and present the journal entry for your transaction.
Here is a hinted example. One financial consultant advises you to sell one building to your business partners. Then you can lease back to use the following three years. The building's original value is $3 million, and the current value is $2 million (the depreciation is $1 million). The fair value of the fixed assets is $2.9 million. The lease can be operating lease for three years, and each year from 2021 is $0.3 million. The sale can add $0.9 million gains for 2020 annual net income. The journal entry is:
Dr: Sales 2.9 m
Accumulated depreciation 1 m
Cr: Fixed asset-building 3 m
Gains of fixed asset sales 0.9m
In: Accounting
|
Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 9%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies. |
|
For years, Worley believed that the 9% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Worley decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below: |
| Activity Cost Pool (Activity Measure) | Total Cost | Total Activity | |||
| Customer deliveries (Number of deliveries) | $ | 435,000 | 5,000 | deliveries | |
| Manual order processing (Number of manual orders) | 312,000 | 4,000 | orders | ||
| Electronic order processing (Number of electronic orders) | 338,000 | 13,000 | orders | ||
| Line item picking (Number of line items picked) | 967,500 | 430,000 | line items | ||
| Other organization-sustaining costs (None) | 650,000 | ||||
| Total selling and administrative expenses | $ | 2,702,500 | |||
|
Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $36,000 to buy from its manufacturers): |
|
Activity |
||
| Activity Measure | University | Memorial |
| Number of deliveries | 11 | 29 |
| Number of manual orders | 0 | 46 |
| Number of electronic orders | 12 | 0 |
| Number of line items picked | 140 | 260 |
| Required: | |
| 1. |
Compute the total revenue that Worley would receive from University and Memorial. |
| 2. |
Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) |
| 3. |
Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.) |
| 4. |
Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $36,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) |
In: Accounting
|
Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 8%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $108 to purchase these supplies. |
|
For years, Worley believed that the 8% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Worley decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below: |
| Activity Cost Pool (Activity Measure) | Total Cost | Total Activity | |||
| Customer deliveries (Number of deliveries) | $ | 574,000 | 7,000 | deliveries | |
| Manual order processing (Number of manual orders) | 490,000 | 7,000 | orders | ||
| Electronic order processing (Number of electronic orders) | 308,000 | 14,000 | orders | ||
| Line item picking (Number of line items picked) | 1,057,500 | 470,000 | line items | ||
| Other organization-sustaining costs (None) | 610,000 | ||||
| Total selling and administrative expenses | $ | 3,039,500 | |||
|
Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $37,000 to buy from its manufacturers): |
|
Activity |
||
| Activity Measure | University | Memorial |
| Number of deliveries | 12 | 27 |
| Number of manual orders | 0 | 42 |
| Number of electronic orders | 12 | 0 |
| Number of line items picked | 160 | 300 |
| Required: | |
| 1. |
Compute the total revenue that Worley would receive from University and Memorial. |
| 2. |
Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) |
| 3. |
Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.) |
| 4. |
Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $37,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) |
In: Accounting
Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 9%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies. For years, Worley believed that the 9% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Worley decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 356,000 4,000 deliveries Manual order processing (Number of manual orders) 450,000 6,000 orders Electronic order processing (Number of electronic orders) 252,000 14,000 orders Line item picking (Number of line items picked) 799,000 470,000 line items Other organization-sustaining costs (None) 630,000 Total selling and administrative expenses $ 2,487,000 Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $38,000 to buy from its manufacturers): Activity Activity Measure University Memorial Number of deliveries 14 20 Number of manual orders 0 46 Number of electronic orders 18 0 Number of line items picked 180 200 Required: 1. Compute the total revenue that Worley would receive from University and Memorial. 2. Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) 3. Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.) 4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $38,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)
In: Accounting
|
Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 9%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $109 to purchase these supplies. |
|
For years, Worley believed that the 9% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Worley decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below: |
| Activity Cost Pool (Activity Measure) | Total Cost | Total Activity | |||
| Customer deliveries (Number of deliveries) | $ | 360,000 | 4,000 | deliveries | |
| Manual order processing (Number of manual orders) | 648,000 | 9,000 | orders | ||
| Electronic order processing (Number of electronic orders) | 338,000 | 13,000 | orders | ||
| Line item picking (Number of line items picked) | 594,000 | 440,000 | line items | ||
| Other organization-sustaining costs (None) | 650,000 | ||||
| Total selling and administrative expenses | $ | 2,590,000 | |||
|
Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $30,000 to buy from its manufacturers): |
|
Activity |
||
| Activity Measure | University | Memorial |
| Number of deliveries | 13 | 25 |
| Number of manual orders | 0 | 45 |
| Number of electronic orders | 18 | 0 |
| Number of line items picked | 130 | 290 |
| Required: | |
| 1. |
Compute the total revenue that Worley would receive from University and Memorial. |
| 2. |
Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) |
| 3. |
Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.) |
| 4. |
Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $30,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) |
In: Accounting
Worley Company buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to hundreds of hospitals. Worley sets its prices for all hospitals by marking up its cost of goods sold to those hospitals by 6%. For example, if a hospital buys supplies from Worley that had cost Worley $100 to buy from manufacturers, Worley would charge the hospital $106 to purchase these supplies. For years, Worley believed that the 6% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits Worley decided to implement an activity-based costing system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities as shown below: Activity Cost Pool (Activity Measure) Total Cost Total Activity Customer deliveries (Number of deliveries) $ 348,000 4,000 deliveries Manual order processing (Number of manual orders) 380,000 5,000 orders Electronic order processing (Number of electronic orders) 252,000 14,000 orders Line item picking (Number of line items picked) 742,500 450,000 line items Other organization-sustaining costs (None) 630,000 Total selling and administrative expenses $ 2,352,500 Worley gathered the data below for two of the many hospitals that it serves—University and Memorial (both hospitals purchased a total quantity of medical supplies that had cost Worley $35,000 to buy from its manufacturers): Activity Activity Measure University Memorial Number of deliveries 19 29 Number of manual orders 0 41 Number of electronic orders 16 0 Number of line items picked 180 230 Required: 1. Compute the total revenue that Worley would receive from University and Memorial. 2. Compute the activity rate for each activity cost pool. (Round your answers to 2 decimal places.) 3. Compute the total activity costs that would be assigned to University and Memorial. (Round your intermediate calculations and final answers to 2 decimal places.) 4. Compute Worley’s customer margin for University and Memorial. (Hint: Do not overlook the $35,000 cost of goods sold that Worley incurred serving each hospital.) (Loss amount should be indicated with a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)
In: Accounting
Sheridan Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2020, and May 31, 2021. The income from operations for the fiscal year ended May 31, 2020, was $1,889,000 and income from continuing operations for the fiscal year ended May 31, 2021, was $2,530,000. In both years, the company incurred a 9% interest expense on $2,449,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss from discontinued operations of $606,000 on February 2021. The company uses a 20% effective tax rate for income taxes.
The capital structure of Sheridan Corporation on June 1, 2019, consisted of 962,000 shares of common stock outstanding and 20,500 shares of $50 par value, 6%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants.
On October 1, 2019, Sheridan sold an additional 511,000 shares of the common stock at $20 per share. Sheridan distributed a 20% stock dividend on the common shares outstanding on January 1, 2020. On December 1, 2020, Sheridan was able to sell an additional 760,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years.
Part a. Identify whether the capital structure at Sheridan Corporation is a simple or complex capital structure.
Part b. Determine the weighted-average number of shares that Sheridan Corporation would use in calculating earnings per share for the fiscal year ended:
Part c.Prepare, in good form, a comparative income statement, beginning with income from operations, for Sheridan Corporation for the fiscal years ended May 31, 2020, and May 31, 2021. This statement will be included in Sheridan’s annual report and should display the appropriate earnings per share presentations. (Round earnings per share to 2 decimal places, e.g. $1.55.)
In: Finance
Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averse to debt financing. As a result, the company is entirely equity financed, with 11 million shares of common stock outstanding. The stock currently trades at $48.50 per share.
Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $45 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $10 million in perpetuity. Kim Weyand, the company’s new CFO, has been put in charge of the project. Kim has determined that the company’s current cost of capital is 10.5 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a coupon rate of 7 percent. Based on her analysis, she also believes that a capital structure in the range of 70 percent equity⁄30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 40 percent corporate tax rate (state and federal).
In: Finance
Stock Valuation
Rue Company is a great corporation going through some good times. It has never paid a dividend in the past and is not planning on ever doing so. The CFO, Dr. Rue, expects that the inflation in Europe will be higher than the one in Asia due to the recovery. The main product of Rue Co is a mechanical pencil which is made in the US and sold in South America, Europe and Asia
Recently he (Dr. Rue) was interviewed by the Partition Street Journal. When asked about the free cash flows for the current year (FCF0), Dr. Ruesaid: “The company expects that the after-tax operating income, EBIT(1-T) will be $300 million next year. The depreciation will be $45 million and given the growth prospects, capital expenditures will reach $25million. Net operating working capital will increase by $5million”. In the same interview, he said that investors should expect this FCF0 to grow by and astonishing 50% for the next 2 years, then at 25% for years 3, 4 and 5, after which FCFs are expected to grow at a boring but constant rate of 3% forever.
You searched on Bloomberg and discovered that similar companies have a WACC of 12% and you plan to use it as the discount rate in your calculations. You found out that Rue Co has $5,000 million (5 billion) in debt and $200 million in non-operating assets. The company has 500 million shares outstanding.
You want to invest in this company but you are very concerned about the results of the US election next week. Depending on who wins, you expect EBIT to fluctuate between $275m to $325m and the WACC to fluctuate between 10% to 14%. For this reason, you to have to answer the following questions before investing
2. Complete the table below with the changes to EBIT and WACC:
Price of Rue Co under different assumptions
|
Price |
WACC |
||
|
10% |
14% |
||
|
EBIT(1-T) |
$275 |
||
|
$325 |
|||
3. Explain how EBIT(1-T) and WACC effect stock prices?
In: Finance
Windsor Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2020. The purchase price was $1,205,000 for 48,200 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2021. Kulikowski reported net income of $692,000 for 2021. The fair value of Kulikowski’s stock was $28 per share at December 31, 2021. Assume that the security is a trading security.
Prepare the journal entries for Windsor Inc. for 2020 and 2021, assuming that Windsor cannot exercise significant influence over Kulikowski. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
In: Accounting