Smith Inc. is a public company but is tightly controlled by Joe Smith. Mr. Smith is quite confident about his ability to evaluate investments in all aspects of the business. The situation at Smith Inc. is quite different from that at Jones Inc., although they share a similar line of business. Jones Inc. has a much less powerful CEO, Fred Jones, who delegates much more control to the firm’s divisional heads. Mr. Fred meets with the divisional heads to make a capital allocation choices as a group.

1. Discuss how and why Smith Inc. and Jones Inc. might have different approaches for determining the discount rates used to evaluate their projects.

2. Discuss three sources of difference between “Cash provided by operations” and “Free Cash Flows.”

TM company is considering replacing its machine with a new model that sells for $40,000, the cost of installation is $6,000. Net working capital needed would be $5500. The old machine has been fully depreciated and has a $2500 salvage value. The new machine will be depreciated as a 5-year MACRS asset. Revenues are expected to increase $18,000 per year over the 5-year life of the new machine. At the end of 5 years the new machine is expected to have a $1500 salvage value. What are the NPV, IRR for this project if TM has a required rate of return of 14% and a marginal tax rate of 35%? Operating costs are not expected to increase from the current level of $8,000 per year. Discuss your recommendations to the company’s CEO about the replacement.

TM company is considering replacing its machine with a new model that sells for $40,000, the cost of installation is $6,000. Net Working Capital needed would be $5,500. The old machine has been fully depreciated and has a $2500 salvage value. The new machine will be depreciated as a 5-year MACRS asset. Revenues are expected to increase $18,000 per year over the 5-year life of the new machine. At the end of 5 years, the new machine is expected to have a $1500 salvage value.

What are the NPV and IRR for this project if TM has a required rate of return of 14% and a marginal tax rate of 35%? Operating costs are not expected to increase from the current level of $8,000 per year. Discuss your recommendations to the company's CEO about the replacement.

TM company is considering replacing its machine with a new model that sells for $40,000, the cost of installation is $6,000. Net working capital needed would be $5500. The old machine has been fully depreciated and has a $2500 salvage value. The new machine will be depreciated as a 5-year MACRS asset. Revenues are expected to increase $18,000 per year over the 5-year life of the new machine. At the end of 5 years the new machine is expected to have a $1500 salvage value. What are the NPV, IRR for this project if TM has a required rate of return of 14% and a marginal tax rate of 35%? Operating costs are not expected to increase from the current level of $8,000 per year. Discuss your recommendations to the company’s CEO about the replacement.

The Wong family incorporated Alberta Wholesale Limited (AWL) on January 1, 20X1 when the company issued common shares to several family members for cash. After obtaining mortgage financing, the company constructed a warehouse and began a food wholesale business.
The company has a small accounting staff that recorded transactions throughout the year. The company’s CEO knows that cash is correct because she has reviewed the bank reconciliation. However, she was unable to hire a professionally trained CFO and is concerned that the draft financial statements prepared by her staff (Exhibit I), which are prepared using IFRS, may have errors including the final calculation of income tax expense based on a 30% income tax rate.
The CEO has hired you to correct any accounting errors made by her staff by:
1. Providing a memo listing any adjusting entries that the company needs to make along with comments explaining why the company recorded items incorrectly and how and why the company should have recorded the transaction along with supporting calculations relating to adjustments. You should have at least one adjusting journal entry (you may need several entries for some issues) for each of the following issues. If an issue deals with more than one transaction, try to have an adjusting entry for each transaction within the issue.

Issue 1
On January 1, 20X1, the company received an operating line of credit from the bank for $6,000,000. The interest rate on this line was at 5% throughout 20X1. On that same day, AWL bought land costing $2,000,000 and on that day, construction on a warehouse commenced. The company paid the building contractor $4,000,000 on each of the following three dates for a total amount spent of $12,000,000: February 1, March 1 and April 1, 20X1. The contractor completed construction of the building by April 30, 20X1. AWL also received a $10,000,000 mortgage at 4% was received from the bank on February 28, 20X1 to pay for the warehouse. The mortgage required monthly payments of $101,246 on the last day of each month commencing March 31, 20X1. Interest on the line of credit is due on the first day of each month commencing February 1, 20X1. AWL paid no portion of the principal of the line of credit during 20X1 and there are no fixed terms of repayment on the line of credit although the bank can demand repayment at any time by giving 90 days notice and requires the company to maintain a current ratio greater than 3:1. Furthermore, the debt to equity ratio cannot exceed 1.5 so the company does not want to record any more liabilities if possible.

Issue 2
The company received a government grant of $1,000,000 cash on April 30 to make the warehouse more energy efficient. When received, we recorded it in grant revenue.

On January 1, 2020, Lawrence Co. began construction of a building to be used as its office headquarters. The building is expected to be completed on December 31, 2020. Expenditures on this project during 2020 were as follows:
                January 1st          $ 160,000
March 1st               420,000
June 1st                  270,000
October 31st           165,000
On Jan. 1, 2020, the company obtained a $600,000 specific construction loan with a 7% interest rate. The loan was outstanding during the entire construction period. The company’s other interest-bearing debts included two long-term notes of $480,000 and $900,000 with interest rates of 10% and 11%, respectively. Both notes were outstanding during the entire construction period.

Instruction:
(a) Determine the amount of interest capitalized for 2020. Please show your work (i.e. the weighted average accumulated expenditure, the actual interest, the weighted average interest rate, and the avoidable interest) to support your final answer. Please round the WA interest rate to four decimal places when necessary.      

    Answer: The amount of interest capitalized for 2020 is                                                            .
(b) Regardless your answer in (a), determine the amount of avoidable interest for 2020 assuming that the weighted average accumulated expenditure is $534,000 (other things being equal).

The Eserine Wood Corporation manufactures desks. Most of the company’s desks are standard models that are sold at catalogue prices. At December 31, 2020, the following finished desks appear in the company’s inventory:

The 2020 catalogue was in effect through November 2020, and the 2021 catalogue is effective as of December 1, 2020. All catalogue prices are net of the usual discounts. Generally, the company tries to obtain a 20% gross margin on the selling price and it has usually been successful in achieving this.

a) Explain the rationale for using the lower of cost and net realizable rule for inventories.

b) Explain the impact if inventory was valued at lower of cost and net realizable value on a total basis.

I'm not sure if this is a good issue statement for short case study. Thanks for the help!

An American multinational widely diversified media and entertainment organization, Disney Company which started their journey from 1923 are now recognized as one of the most successful enterprise in the century. Bob Iger who has lead the company with his magical, yet fundamental and strong business strategy to overcome the barriers that Disney faced in the last ten years in his career as a newly appointed CEO from 2005. One of the main issues that Disney faced entered from the mass diversification and acquisition while expanding their business firms into three main divisions, Walt Disney Parks and Resorts, Disney Media Networks, and Disney Consumer Products and Interactive Media. The main issue in this process was the inability to maintain a neutral and open behavior and lack of communication in team based works. Two external environmental factors involved in diversification process are analyzed in the report; political as in dealing with local government where Disney expands their theme park in other countries and technological factors that is required to produce content that satisfies customer demand as well as producing high quality content. Understanding these issues and implementing preventative tools will seize the misleading of the company for the next ten years. Other possible issues and external environment factors are considered as out of scope in this report.

Royal West Airlines Ltd.
Income Statement
For the Year Ended December 31, 2020
Sales revenue $2,561,096
Cost of sales (1,003,860)
Gross margin $1,557,236
Other expenses ( 890,743)
Net income, before income tax $ 666,493
Royal West Airlines is a regional airline that services Western Canada.
Notes:
a) $10,000 in legal fees relating to the restructuring of a debt.
b) A brand new airplane costing $65,000 used to service a new route
c) Interest on late municipal tax balances of $1,000
d) Sponsorship of a local musical production costing $9,240
e) Convention that was held in Barcelona, Spain costing $3,300
f) Interest expense of $4,000 that was associated with the acquisition of a GIC
g) Cost of sponsoring local hockey teams $500
h) Food and entertainment for clients $60,000
i) Life insurance premiums on the life of the president (required by the bank) $2,000
Item 1. During the year the Company spent $6,500 for landscaping its head office grounds.
For accounting purposes this cost was deducted in the year
Item 2. The Other Expenses account included the following amounts:
Item 3. The Other Income and losses account included the following amount:
$32,000 spent on a staff Christmas party where all employees were invited to
attend the event.
Item 6. All of Royal’s remaining capital assets are Class 1 which related to an office
building that was purchased in 2019. The UCC at the beginning of 2020 was $625,100.
On July 1, the Company added an additional room for $20,000. No Class 1 assets were
disposed of in the year.
Item 5. In 2020, the Company deducted $21,000 bad debt expense based on a review
of specific accounts.
Item 4. For tax purposes, the machinery that was sold was a Class 10 asset. All assets
in class were disposed of. The machinery was purchased for $15,000 and its UCC
balance at the beginning of 2020 was $10,250. The asset was sold in 2020 for
$14,600.
Required:
Complete the table below and show the adjustments that would be required in Royal West Airlines 2020
SCHEDULE 1 for each item listed in the question. For each item, show whether it adds to NITP by
marking “+” in the appropriate column, a “-“ mark if it subtracts from NITP, and a “na” mark if it is not
applicable.
Description
Addition (+)
Subtraction (-)
(na)
$ amount
Citation
Net Income for accounting
$666,493 9(1)
Item 1.
Item 2. a)
b)
c)
d)
e)
f)
g)
h)
i)
Item 3.
Item 4.
Item 5.
Item 6.

Read the Chapter 12 Mini-Case: A Change at the Top at Procter & Gamble: An Indication of How Much the CEO Matters?

Respond to question 2: How Is it a good practice to rehire a former CEO who has retired? Please explain the potential advantages and disadvantages of doing so.