Exercise 23-15

Presented below are data taken from the records of Oriole Company.

Additional information:

Prepare a statement of cash flows for the year 2020 using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

The demand curve for T-shirts in the US is given by Q = 100 – 2*P. Suppose that there are no T-shirts produced in the US, but they can be imported either from Mexico or from the rest of the world. The price of T-shirts in Mexico is $20, and the price from the lowest-cost supplier in the rest of the world is $15. The US charges a tariff of $10 per unit imported.

a) Consider the case where there is no PTA, so that every country must pay the same tariff. Compute the US consumer surplus in this case.

b) Now, suppose that the US and Mexico sign a PTA that eliminates the tariff on T-shirts from Mexico, but leaves the tariff on T-shirts from the rest of the world unchanged. Compute the US consumer surplus in this case.

c) Compute trade creation and trade diversion due to the PTA.

Use the following information to answer question 1) A-F. Assume today is 12/27/2016. An assistant portfolio manager reviewed the prospectus of a General Electric Corporate (US) bond that will be issued on January 15 of 2017. The Offering Price is 104.50. The call schedule for this $200 million, 5.75% coupon 20-year issue specifies the following:

The Bonds will be redeemable at the option of the Company at any time in whole or in part, upon not fewer than 30 nor more than 60 days’ notice, at the following redemption prices (which are expressed in percentages of principal amount) in each case together with accrued interest to the date fixed for redemption:

If redeemed January 15,

Sinking Fund: The prospectus further specifies that:

The Company will provide for the retirement by redemption of $40 million of the principal amount of the Bonds each January 15th of the years 2032 to and including 2036 at the principal amount thereof (100%), together with accrued interest to the date of redemption.

Your comment on this statement:

Answer the following as of issue date: 1/15/2017.

1. What is the bond’s current yield?
2. What is the bond’s yield to maturity?
3. What is bond’s yield to first call?
4. What is bond’s yield to first sink?
5. What is yield to the 2031 call?

On January 1, 2014, Stark Company purchased equipment for a total cost of $155,000. The equipment had an estimated useful life of 7 years and an estimated residual value of $43,000. Straight-line depreciation was used. On September 1, 2020, Stark Company disposes of the equipment. Required: Prepare the journal entry to record the disposition on September 1, 2020 assuming the equipment was sold for $39,000 cash. Prepare the journal entry to record the disposition on September 1, 2020 assuming the equipment was exchanged for $30,000 cash and a machine valued at $30,000

Appropriate Transfer Prices: Opportunity Costs Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 4,000,000 pounds and that sold 2,900,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 1,500,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanut-processing company are as follows:

Direct materials $0.50

Direct labor 0.25

Variable overhead 0.11

Fixed overhead at normal capacity 0.18

Total $1.04

Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.04 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 2,900,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound.

(a) Compute the annual gross profit for the Peanut Division using a transfer price of $2.00. $Answer 0

(b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.04. $Answer 0

1. On 5 September 2018, Norris Corporation purchased a computer equipment for $100,000, paid $20,000 cash and signed a 6% two-year notes payable for the remaining balance. The equipment was expected to be used for 4 years with a residual value of $10,000. Straight-line depreciation method is used. Depreciation for fractional years is recorded to the nearest full month. The financial year-end date is 31 December.

On 25 February 2020, the company spent $25,000 to completely overhaul the equipment. The management believes the estimated useful life of the equipment will be extended for 3 years more with residual value of $6,000, with effect on 25 February 2020.

Required:

Calculate the depreciation expense of the computer equipment for the year of 2020. Show your workings. (Round ALL answers to 2 decimal places.)

2. Marvel Company purchased motor vehicle costing $1,200,000 on 15 September 2017. The motor vehicle has an estimated useful life of 5 years and residual value of $200,000. Straight-line depreciation method is used. Half-year convention is adopted. On 5 March 2020, the company sold the motor vehicle for $400,000 cash. The company adjusts its accounts annually with the year-end at 31 December.

Required:

1. (a) Prepare the journal entries to update the depreciation before disposal in 2020;

2. (b) Prepare the journal entries on 5 March 2020 regarding to the disposal.

Question 5 of 8 The Wechsler Adult Intelligence Scale (IQ test) is constructed so that Full Scale IQ scores follow a normal distribution, with a mean of 100, and a standard deviation of 15. Dr.Smartyskirt is a University professor and believes that university professors are smarter than the national average and wants to use it (the intelligence of the professors) as a marketing tool to bring new students to the University. A researcher is hired to conduct a study to determine whether University professors, on average, have higher Full Scale IQs than the population. A random sample of 100 professors from various Universities were given the IQ test and were found to have an average Full Scale IQ of 140. Which hypothesis test should be used to determine whether the mean Full Scale IQ score of the professors is higher than the national average? z-test for the population mean, t-test for the population mean, z-test for the population proportion, t-test for the population proportion

Question 6 of 8 What are the null and alternative hypotheses? H0: μ = 100 Ha: μ > 100 H0: μ = 100 Ha: μ ≠ 100 H0: μ = 140 Ha: μ > 140 H0: μ = 140 Ha: μ ≠ 140

Question 7 of 8 What is the value of the test statistic used to determine whether the mean Full Scale IQ score of the University professors is higher than the national average? 26.67 -26.67 2.67 -2.67

Question 8 of 8 After analyzing the data to determine whether the mean Full Scale IQ score of the University professors is higher than the national average, the P-value of < .00001 was obtained. Using a .05 significance level, what conclusion can be drawn from the data?

Reject the null hypothesis. The average Full Scale IQ of the University professors is higher than the population average. Do not reject the null hypothesis. The average Full Scale IQ of the University professors is not higher than the population average.

Do not reject the null hypothesis. The average Full Scale IQ of the University professors is higher than the population average.

Reject the null hypothesis. The average Full Scale IQ of the University professors is not higher than the population average.

If a US listed company announces a big issuance of new common stock, will the demand curve be downward-sloping? Will the demand curve shift down? Explain in details. Hint: Does a typical US company use a general cash offer or a rights offering to issue new shares? (This question carries 12%)

1. Here is a selection from an abstract of a recent study entitled “The effect of health insurance coverage on the use of medical services” by Michael Anderson, Carlos Dobkin, and Tal Gross (2010). NBER Working paper No. 15823.

Substantial uncertainty exists regarding the causal effect of health insurance on the utilization of care. Most studies cannot determine whether the large differences in healthcare utilization between the insured and the uninsured are due to insurance status or to other unobserved differences between the two groups. In this paper, we exploit a sharp change in insurance coverage rates that results from young adults “aging out” of their parents’ insurance plans to estimate the effect of insurance coverage on the utilization of emergency department (ED) and inpatient services. [In the US, children are eligible for insurance coverage through their parents’ insurance only up to their 23rd birthday, at which point they lose eligibility.] Using the National Health Interview Survey (NHIS) and a census of emergency department records and hospital discharge records from seven states, we find that aging out results in an abrupt 5 to 8 percentage point reduction in the probability of having health insurance. We find that not having insurance leads to a 40 percent reduction in ED visits and a 61 percent reduction in inpatient hospital admissions.

1. What two groups are being compared in this study?
2. Identify at least one important methodological difference between the design of this study and the RAND HIE. Give a hypothetical reason why this difference would bias the results.
3. Are the findings of this study generally consistent with the findings from the Oregon Medicaid Experiment?