Advanced Technologies (AT) produces two compression machines that are popular with manufacturers of plastics: no. 165 and no. 172. Machine no. 165 has an average selling price of $31,400, whereas no. 172 typically sells for approximately $28,200. The company is very concerned about the quality and has provided the following information:

Required:
1. Classify the preceding costs as prevention, appraisal, internal failure, or external failure.
2-a. Using the classifications in requirement 1, compute AT's quality costs for machine no. 165 in dollars and as a percentage of sales revenues.
2-b. Using the classifications in requirement 1, compute AT's prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs.
3-a. Using the classifications in requirement 1, compute AT's quality costs for machine no. 172 in dollars and as a percentage of sales revenues.
3-b. Using the classifications in requirement 1, compute AT's prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs.
4. Is the company "investing” its quality expenditures differently for the two machines?

TeeBee manufactures springs and related components for a variety of industrial and consumer end products.  TB is evaluating a new business opportunity.  In response to the growing health consciousness of the affluent aging baby boomer generation, a new concept in traction-associated exercise equipment is being developed.  TB feels confident it can be a supplier of choice of the high quality springs needed for this new generation of equipment. TB has determined that its existing manufacturing facilities are not suitable for the manufacture of the type of spring needed.  In order to evaluate whether to enter this market, TB needs to consider the return on investment in a new manufacturing facility.  TB has identified two options for its potential new manufacturing site:

            Option A:  Renovation of an existing warehouse (economic life of 10 years)

            Option B:  Construction of a completely new facility (economic life of 20 years)

TB projects it will be able to sell 9,000 spring sets per year for the foreseeable future.  Price per spring set is $699 (in year end 1 dollars).  TB has employed a nominal discount rate of 9 percent on similar construction projects in the past.  The following additional data have been collected.  Assume all cash flows occur at the end of the year.  Inflation is 3 percent per year.  

*Assume all construction costs are incurred in period 0.

**Assume all these operating costs are incremental and represent cash flows. These operating cost projections apply to the first year of operations.  Cash costs (as well as revenues) are expected to increase with inflation.  Inflation applies initially in year 2.

Required:  Prepare a financial analysis of the two options and make a recommendation.  Use the income statement to net cash flow format, reflecting EBITDA, EBIT, EBIAT, and  NCF.  To see some of the implications of the changes to the tax code enacted in 2017, do your analysis under both the old and the new tax code regimes, as outlined below.

*Straight line depreciation of construction costs over life of asset (term of project), no salvage value.

**Immediate expensing of construction costs.  This change can most easily be accommodated by showing depreciation of 100% of the capital expenditure in year 1 of the project. Then, depreciation expense for the remaining years of the project is $0.  

Windsor Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Company uses net method to record discount. (Please leave spaces blank if there is no answer. Do not enter zeros in those spaces.)

2. Government investment in internal improvements represented about 5% of the costs of clearing the Western river system, then rose to about 73% of canal construction costs but then fell to about 23% of railroad construction costs. What factors explain this variable public investment philosophy?

Please refer to the article titled as “Sustainable Construction Excellence for a Better Future in Malaysia, published in The Ingenieur, Vol. 69 January – March 2017 by the Board of Engineers Malaysia. Identify the key challenges in sustainable construction and what should be undertaken to achieve sustainable cities?

Accounting

Read the case ‘April Company’ and answer the questions below:

April Company (‘April’) is a well-known diversified corporation with many different businesses in Hong Kong.

In order to meet the long term growth and diversification strategy under the direction of the new Chairman; the company has purchased assets and constructed a new building as its new head office in Hong Kong as follows:

i 1 Jan 2017: truck and equipment: These assets were purchased as a lump sum for $150,000 cash. The following information was gathered.

ii 1 Feb 2017: A new piece of machinery was acquired by trading in a used piece of machinery. (The exchange was with commercial substance.) Facts concerning the trade-in are as follows.

iii 1 Jan 2017: A building was constructed as the new head office of the company. Construction began on 1 January 2017 and would be completed in 15 months. The payments to the contractor in the first year (2017) were as follows.

On 1 January 2017, April Company secured a specific construction loan ($400,000) with an 8% interest rate to finance the construction of the new building. The building expenditures are qualifying assets of the construction in capitalization of interest costs and the capitalized interest costs should be included in the building. April drew down on the construction loan and other outstanding debt (if required) to meet the payment schedule shown above.

The other outstanding debt in the company during 2017:

* $1,000,000 bonds (due in year 2025), with 6% effective annual interest rate

* $500,000 long term note (due in 2030), with 7.5% interest rate per annum.

The company, according to the accounting standards in Hong Kong, will capitalize the maximum allowable interest costs for this construction.

The CFO of April estimated that the truck and the new machinery would be used for ten years, with an estimated residual value of $20,000 and $40,000 respectively. He also estimated that the equipment would have a useful life of five years and a residual value of $5,000. April’s depreciation policy specifies the 200% double-declining balance method for equipment and the straight-line method for the truck and machinery. (The building was not yet ready for use in 2017.)

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Required:

a     For each of the above assets purchased, traded or constructed, determine the amount of each of them clearly and record the transactions by journal entries in the books of April Company for the year ended 31 December 2017. Interest expense for the year has been recorded.

b     For each of the assets above (except the building), calculate April Company’s 2017 depreciation expense, for book purposes. Assume monthly depreciation had not been provided before the end of the year.

c     Discuss the arguments for and against the capitalization of interest costs.

6–C. Part 2. Enterprise Fund Transactions

The City of Monroe maintains a Water and Sewer Fund to provide utility services to its citizens. As of January 1, 2017, the City of Monroe Water and Sewer Fund had the following account balances:

Required:

a. Open a general journal for the City of Monroe Water and Sewer Utility Fund and record the following transactions.

(1) During the year, sales of water to non-government customers amounted to $1,018,000 and sales of water to the General Fund amounted to $37,000.

(2) Collections from non-government customers amounted to $976,000.

(3) The Stores and Services Fund repaid $15,000 of the long-term advance to the Water and Sewer Fund.

(4) Materials and supplies in the amount of $261,000 were received. A liability in that amount was recorded.

(5) Materials and supplies were issued and were charged to the following accounts: cost of sales and services, $169,500; selling, $15,000; administration, $18,000; construction work in progress, $50,000.

(6) Payroll costs for the year totaled $416,200 plus $34,200 for the employer’s share of payroll taxes. Of that amount, $351,900 was paid in cash, and the remainder was withheld for taxes. The $450,400 (416,200 + 34,200) was distributed as follows: cost of sales and services, $265,800; sales, $43,900; administration, $91,400; construction work in progress, $49,300.

(7) Bond interest (6½%) in the amount of $162,500 was paid.

(8) Interest in the amount of $17,000 (included in 7 above) was reclassified to Construction Work in Progress.

(9) Construction projects at the water treatment plant (reflected in the beginning balance of construction in process) were completed in the amount of $203,000, and the assets were placed in service. Payments for these amounts were made in the previous year (no effect on 2017 Statement of Cash Flows).

(10) Collection efforts were discontinued on bills totaling $2,890. The unpaid receivables were written off.

(11) An analysis of customer receivable balances indicated the Estimated Uncollectible Accounts needed to be increased by $5,500.

(12) Payment of accounts payable amounted to $302,000. Payments of payroll taxes totaled $95,200.

(13) Supplies transferred from the Stores and Services Fund amounted to $58,000. Cash in the amount of $50,000 was paid to the Stores and Services Fund for supplies.

(14) Depreciation expense for the year was computed to be $282,000.

(15) In accord with the revenue bond indenture, $25,000 cash was transferred from operating cash to restricted assets.

b. Post the entries to the Water and Sewer Fund ledger (t-accounts).

c. Prepare and post an entry closing all nominal accounts to Net position. Compute the balance in the net position accounts, assuming the only restricted assets are those identified with the bond indenture and the outstanding bonds are associated with the purchase of capital assets.

In 2016, Makkah Corporation bought land for as a site for its new factory facility that was planned to be built in 2016. The following information related to the land and the factory building:

1. Purchase cost of the land                                                        $400,000
2. Closing cost                                                                                30,000
3. Assumption of lien on the land                                                 100,000
4. Cleaning and draining cost for the land                                     60,000
5. Demolition and removal of an old building on the land             70,000
6. Sale of salvaged material from the old building                         18,000
7. Land permanent improvements                                                  60,000
8. Costs of walkways, fences, and parking lots                             80,000
9. Building permit fees                                                                  24,000
10. Architectural design costs                                                           58,000
11. Excavation costs                                                                         72,000
12. Construction costs of the new building                                    570,000

Requirements:

1. What was the cost of the land that should be recognized on Makkah’s balance sheet on Dec 31, 2016?
2. If the new building was completed in 2016, what was the cost of the building that should be recognized on Makkah’s book at the end of 2016 (ignore any depreciation)?

At 2018 ABI Construction has a face debt value of 27.14M trading at 86% with a pre-tax weigthed cost of 4.12%. ABI common equity for the year was valued at 94.15M and preferred equity for 11.11M. The Preferred equity rate was calculated to be 7.52%. However, the common equity was to be calculated using CAPM approach, with a 3% risk free rate and a 7% market risk premium rate, assuming a 1.32 Beta. If the tax rate is 38%, What is this firm’s WACC?