Exercise 17-25 Postretirement benefits; determine APBO, service cost, interest cost; prepare journal entry [LO17-10, 17-11]

The following data are available pertaining to Household Appliance Company's retiree health care plan for 2018:

Required:
1. What is the accumulated postretirement benefit obligation at the beginning of 2018?
2. What is interest cost to be included in 2018 postretirement benefit expense?
3. What is service cost to be included in 2018 postretirement benefit expense?
4. Prepare the journal entry to record the postretirement benefit expense for 2018.

Whispering Company offers an MP3 download (seven-single medley) as a premium for every 5 candy bar wrappers presented by customers together with $3.10. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each download code to the company is $2.85. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2017 and 2018 are as follows. (cash purchases)

2017                  2018

MP3 codes purchased.                                                  320,000            422,400

Candy bars sold.                                                         2,664,700.        2,554,300

Wrappers redeemed.                                                   1,536,000.       1,920,000

2017 wrappers expected to be redeemed in 2018           371,200

2018 wrappers expected to be redeemed in 2019                                 448,000

Indicate the amount for each account, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2017 and 2018.

Inventory of premiums:      2017?                     2018?

Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2018. Sonny recognized a total of $340,000 net income during 2018, paid $24,000 of dividends to Fredo during 2018, and at December 31, 2018, the market value of the Sonny investment increased to $1,034,000. Required: Prepare the journal entries necessary to account for the Sonny investment, assuming that Fredo (1) lacks significant influence or (2) has significant influence over the operating and financial policies of the investee.

Required 1

Record the entry for investment in Sonny Enterprises.

Record the entry for cash dividend received.

Record the net unrealized holding gain or loss for an available-for-sale investment.

Required 2:

Record the entry for investment in Sonny Enterprises.

Record the revenue from Sonny Enterprise during 2018.

Record the receipt of dividend during 2018.

QUESTION 1

Why is non-GMO (negative control) necessary for this experiment? Choose all that apply:

1.) Does the use of Non-GAAP reports impair the ability to compare prior periods and competitors reports?

2.) Does the Non-GAAP numbers provide a reasonable source of reliable information?

3,) Should corporations be REQUIRED to report ALL numbers in accordance with GAAP...even during the quarterly, non-audited venue?

4.) Is there a need to translate complex GAAP based information into more useful financial data?

Question #4: Crystal Lake Memory Care in Winona, Texas has 250 residents. The administrator, Ken Stone, is concerned about balancing the ratio of its private pay to non-private pay patients. Non-private pay sources reimburse an average of $155 per day versus private pay residents who pay 90% of full daily charges. Stone estimates that the variable cost per resident per day is $80 for supplies, food, and contracted services, and annual fixed costs total $10 million.

What is the daily contribution margin of each non-private pay resident?

If 25% of the residents are non-private pay, what will Crystal Lake charge the private-pay patients to break even?

What if non-private pay payors cover 50% of the residents? What will Crystal Lake need to charge the private-pay patients to break even?

The investors insist that the facility earn $1 million in annual profits. How much must Stone raise the per day charge for the private pay residents in 25% of the residents are non-private pay?

Many companies incurred costs related to Covid-19 in the second quarter of 2020. In their 2nd quarter earnings announcements, many of them reported non-GAAP earnings that exclude costs related to Covid-19. Which of the following is more likely to be true?

a). Firms can disclose non-GAAP earnings that exclude costs related to Covid-19 from GAAP-based earnings as long as they provide reconciliation between non-GAAP earnings and GAAP earnings

b). The SEC does not allow firms to disclose non-GAAP earnings that exclude costs related to Covid-19 from GAAP-based earnings

c). Non-GAAP earnings that excludes costs related to Covid-19 from GAAP-based earnings always unfaithfully represent the true economic performance of a firm because costs related to Covid-19 are most likely recurring

d). Non-GAAP earnings that excludes costs related to Covid-19 from GAAP-based earnings always provide relevant information to financial statement users because costs related to Covid-19 are most likely one-time

Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an innovative muscle toning device (Muleza) that will be used in the treatment of sporting injuries. It is expected that the commercial life of the Muleza will be four years after which technological advances will bring more sophisticated devices to the market and the sales will fall to virtually zero. K8, 000,000 has been spent in developing and testing the device over the past year. Initial market research has been conducted at a cost of K2, 500,000 and is due to be paid shortly. The market research indicates the following demand and selling price per unit: Year (from now) 2 3 4 5 Units demand 2,000 70,000 125,000 20,000 Selling Price K2, 000 K2,200 K1,600 K1,400 A factory will be built for the production of the Muleza for K30, 000,000 and will take a year to complete. Payment will be made in two instalments; the first instalment of K18, 000,000 is payable immediately and the remainder in a year’s time. The factory building is expected to be sold for K25, 000,000 when the production and sales cease. Machinery costing K16, 000,000 will be installed at the end of the first year. The machinery will be depreciated on a straight-line basis over the next four years and is expected to have a nil value at the end of the four years. At present the materials cost of making one Muleza unit is K700. Njenge has enough materials in stock to make 1,500 units, which it had purchased a year ago for K450 per Muleza unit. If the project does not go ahead then these materials will be sold for an equivalent of K120 per Muleza unit. Labour that will be used to make the Muleza is to be made redundant immediately at a cost of K2,000,000 if the project does not go ahead. Labour costs per unit are K250. It is expected that once the project is completed, the labour will be made redundant at a cost of K3, 500,000. Fixed production overheads relating specifically to the production of the Muleza are expected to be K13,000,000 per annum and variable production overheads are expected to be K150 per Muleza unit produced and sold. Administrative costs are expected to be K17, 000,000 per annum of which K5,500,000 is allocated from the head office and the remainder relates directly to the production of the Muleza. Working capital of K10,000,000 will be required at the beginning of the second year once the production and sales have commenced. This will be released when the production and sales cease. The relevant cost of capital for the project is 9%. Assume that all cash flows occur at the year- end unless stated otherwise. All workings should be in K’000s to the nearest K’000. Ignore tax and inflation. Required: (a) Calculate the net present value and internal rate of return of the project and recommend whether the Muleza should be produced. Provide a brief justification of the cash flows included and excluded in the calculations.

Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an innovative muscle toning

device (Muleza) that will be used in the treatment of sporting injuries. It is expected that the commercial life of the Muleza will be four years after which technological advances will bring more sophisticated devices to the market and the sales will fall to virtually zero. K8, 000,000 has been spent in developing and testing the device over the past year. Initial market research has been conducted at a cost of K2, 500,000 and is due to be paid shortly. The market research indicates the following demand and selling price per unit:

Year (from now)                        2                     3                      4                      5

Units demand                            2,000                70,000              125,000             20,000

Selling Price                              K2, 000             K2,200              K1,600              K1,400

A factory will be built for the production of the Muleza for K30, 000,000 and will take a year to complete. Payment will be made in two installments; the first installment of K18, 000,000 is payable immediately and the remainder in a year’s time. The factory building is expected to be sold for K25, 000,000 when the production and sales cease.

Machinery costing K16, 000,000 will be installed at the end of the first year. The machinery will be depreciated on a straight-line basis over the next four years and is expected to have a nil value at the end of the four years.

At present the materials cost of making one Muleza unit is K700. Njenge has enough materials in stock to make 1,500 units, which it had purchased a year ago for K450 per Muleza unit. If the project does not go ahead then these materials will be sold for an equivalent of K120 per Muleza unit.

Labour that will be used to make the Muleza is to be made redundant immediately at a cost of K2,000,000 if the project does not go ahead. Labour costs per unit are K250. It is expected that once the project is completed, the labour will be made redundant at a cost of K3, 500,000.

Fixed production overheads relating specifically to the production of the Muleza are expected to be K13,000,000 per annum and variable production overheads are expected to be K150 per Muleza unit produced and sold. Administrative costs are expected to be K17, 000,000 per annum of which K5,500,000 is allocated from the head office and the remainder relates directly to the production of the Muleza.

Working capital of K10,000,000 will be required at the beginning of the second year once the production and sales have commenced. This will be released when the production and sales cease.

The relevant cost of capital for the project is 9%.

Assume that all cash flows occur at the year- end unless stated otherwise. All workings should be in K’000s to the nearest K’000. Ignore tax and inflation.

Required:

(a) Calculate the net present value and internal rate of return of the project and recommend whether the Muleza should be produced. Provide a brief justification of the cash flows included and excluded in the calculations.