The first audit of the books of Whispering Company was made for the year ended December 31, 2018. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are:
| 1. | At the beginning of 2016, the company purchased a machine for $483,000 (salvage value of $48,300) that had a useful life of 6 years. The bookkeeper used straight-line depreciation but failed to deduct the salvage value in computing the depreciation base for the 3 years. | |
| 2. | At the end of 2017, the company failed to accrue sales salaries of $43,000 which was paid in 2018 and was debited to Salaries and Wages Expense. | |
| 3. | A tax lawsuit that involved the year 2016 was settled late in 2018. It was determined that the company owed an additional $89,000 in taxes related to 2016. The company did not record a liability in 2016 or 2017 because the possibility of loss was considered remote, and charged the $89,000 to a loss account in 2018. | |
| 4. | Whispering Company purchased a copyright from another company early in 2016 for $46,000. Whispering had not amortized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years. | |
| 5. | In 2018, the company wrote off $86,000 of inventory considered to be obsolete; this loss was charged directly to Retained Earnings. |
Prepare the journal entries necessary in 2018 to correct the books, assuming that the books have not been closed. Disregard effects of corrections on income tax.
In: Accounting
What is the Payback period of a project with cash flows of -350,000 in year 0, then 100,000 each in years 1, 2 & 3, then 250,000 in year 4? Assume the cost of capital is 10%.
|
2.0 years |
||
|
2.75 years |
||
|
3.2 years |
||
|
can't tell from information given |
Consider the project in the previous question, what is its IRR?
|
5.56% |
||
|
9.83% |
||
|
14.1% |
||
|
17.54% |
In: Finance
Prepare a Statement of Cash Flows for Kitten Mittens on the following page for the year ended December 31, 2004. Use the indirect method to calculate cash flows from operations.
The Balance sheet and Income Statement for "KittenMittens" for the year ending December 31, 2004, are
as follows:
Kitten Mittens Comparative Balance Sheets
Assets
December 31, 2003 December 31, 2004
Current Assets:
|
Cash and cash equivalents |
$130,000 |
$189,000 |
|
Accounts Receivable, net |
420,000 |
471,000 |
|
Inventory 530.000 642,000 |
||
|
Total Current Assets |
1,080,000 |
1,302,000 |
|
Land |
242,500 |
321,000 |
|
Property &Equipment - at cost |
750,000 |
999,000 |
|
Less Accumulated depreciation |
(425,000) |
(546,000) |
|
Net Property & Equipment |
325,000 |
453,000 |
|
Total Assets |
$1,647,500 |
$2,076,000 |
Liabilities and Equity
Current Liabilities :
|
Accounts payable - trade |
$195,000 |
$249,000 |
|
Interest Payable |
20,000 |
21,000 |
|
Total Current Liabilities |
215,000 |
270,000 |
|
Note Payable |
250,000 |
240,000 |
|
Common Stock |
875,000 |
1,125,000 |
|
Retained Earnings |
307,500 |
441,000 |
Total Liabilities and Stockholders' Equity $1,647,500 $2,076,000
QUESTION CONTINUES ON FOLLOWING PAGE
Kitten Mittens
Income Statement
For year ended December 31, 2004
|
Revenues Expenses |
$2,400,000 |
|
|
Cost of Goods Sold |
1,354,000 |
|
|
Wages and Salaries Expense |
320,000 |
|
|
Depreciation Expense |
190,000 |
|
|
Interest Expense |
12,000 |
|
|
Income Tax Expense Total |
65,000 |
(1,941,000) |
|
Less: Loss on Sale of Equipment |
(38,000) |
|
|
Net Income |
$421,000 |
|
|
Other available information: |
- Kitten Mittens purchased $500,000 of new equipment during 2004. The new equipment replaced old equipment,whichwassoldfor$144,000 in cash. As indicated on the income statement, the sale of equipment resulted in a loss of $38,000.
- Dividends were declared and paid to common stockholders during the year.
- No new debt was issued and no land was sold during 2004.
Required:
Prepare a Statement of Cash Flows for Kitten Mittens on the following page for the year ended December 31, 2004. Use the indirect method to calculate cash flows from operations.
In: Accounting
At the beginning of the school year, Craig Kovar decided to prepare a cash budget for the months of September, October, November, and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget:
| Cash balance, September 1 (from a summer job) | $6,470 |
| Purchase season football tickets in September | 90 |
| Additional entertainment for each month | 220 |
| Pay fall semester tuition in September | 3,500 |
| Pay rent at the beginning of each month | 310 |
| Pay for food each month | 180 |
| Pay apartment deposit on September 2 (to be returned December 15) | 400 |
| Part-time job earnings each month (net of taxes) | 800 |
a. Prepare a cash budget for September, October, November, and December. Use the minus sign to indicate cash outflows, a decrease in cash or cash payments.
| Craig Kovar | ||||
| Cash Budget | ||||
| For the Four Months Ending December 31 | ||||
| September | October | November | December | |
| Estimated cash receipts from: | ||||
| Part-time job | $ | $ | $ | $ |
| Deposit | ||||
| Total cash receipts | $ | $ | $ | $ |
| Less estimated cash payments for: | ||||
| Season football tickets | $ | |||
| Additional entertainment | $ | $ | $ | |
| Tuition | ||||
| Rent | ||||
| Food | ||||
| Deposit | ||||
| Total cash payments | $ | $ | $ | $ |
| Cash increase (decrease) | $ | $ | $ | $ |
| Plus cash balance at beginning of month | ||||
| Cash balance at end of month | $ | $ | $ | $ |
In: Accounting
As part of the process of preparing the master budget for the coming year, you’ve been asked to perform what-if analyses, in the form of scenarios, on the original planning assumptions regarding Product A produced by your company. The following are the baseline planning data for the coming year for this product: Sales volume (annual, in units) 2,500 Selling price per unit $ 1,500 Variable cost per unit $ 1,000 Fixed costs (per year) $ 200,000 Required: 1. Based on the baseline planning data, what is the budgeted operating income for Product A for the coming year? 2. Determine the estimated operating income under each of the following scenarios (for each scenario you should report both the new budgeted operating income and the percentage change in operating income from the baseline budgeted result): a. Selling price per unit is 10% higher than planned, while fixed costs per year are also 10% higher than planned. b. Variable cost per unit is 5% higher than planned, while fixed costs are lower by this same percentage. c. Selling price per unit is 10% higher than planned, while volume is decreased by 8%.
In: Accounting
The information that follows is for Becky’s Baskets for the year ended December 31, 2017 and covers questions 20-27.
Sales 2,000 baskets at $50 per basket = $100,000
Costs: (2,000 baskets produced and sold)
Variable Costs Total Cost
Direct materials 16,000
Direct labor 14,000
Manufacturing overhead 16,000
Selling and Administrative Costs 10,000
Fixed Costs
Manufacturing overhead 30,000
Selling and Administrative Costs 14,000
Assume 2,000 baskets are produced and sold this year unless the question specifies otherwise. The relevant range is from zero to 5,000 units.
20. If 2,000 baskets are produced, what is the product cost per basket?
21. What is the variable cost per basket (including period costs) at 4,000 baskets?
22. What is the fixed product cost per basket at 3,000 baskets?
23. If 3,000 baskets are produced, what is the product cost per basket?
24. What is the incremental cost (increase in cost) by increasing production from 2,000 baskets to 2,001 baskets?
25. If the company sells produces and sells 3,000 baskets how much operating income will they make?
26. If the company produces and sells 2,000 baskets how much will their cost of goods sold be?
27. What is the contribution margin per unit at 2,000 units of production and sales?
In: Accounting
Revenue and expense data for the current calendar year for Dawg Electronics Company and for the electronics industry are as follows. Dawg Electronics Company data are expressed in dollars. The electronics industry averages are expressed in percentages.
| Dawg Electronics Company |
Electronics Industry Average |
||||
| Sales | $ 3,750,000 | 100 | % | ||
| Cost of goods sold | (2,062,500) | (61.0) | |||
| Gross profit | $1,687,500 | 39.0 | % | ||
| Selling expenses | $(1,125,000) | (23.0) | % | ||
| Administrative expenses | (262,500) | (10.0) | |||
| Total operating expenses | $(1,387,500) | (33.0) | % | ||
| Operating income | $300,000 | 6.0 | % | ||
| Other revenue and expense: | |||||
| Other revenue | 15,000 | 3.0 | |||
| Other expense | $(3,750) | (1.0) | |||
| Income before income tax | $ 311,250 | 8.0 | % | ||
| Income tax expense | (93,750) | (2.5) | |||
| Net income | $217,500 | 5.5 | % | ||
a. Prepare a common-sized income statement comparing the results of operations for Dawg Electronics Company with the industry average. If required, round percentages to one decimal place.
| Dawg Electronics Company | |||
| Common-Sized Income Statement | |||
| Dawg Electronics Company Amount |
Dawg Electronics Company Percent |
Electronics Industry Average |
|
| Sales | $3,750,000 | % | 100.0% |
| Cost of goods sold | (2,062,500) | % | (61.0)% |
| Gross profit | $1,687,500 | % | 39.0% |
| Selling expenses | $(1,125,000) | % | (23.0)% |
| Administrative expenses | (262,500) | % | (10.0)% |
| Total operating expenses | $(1,387,500) | % | (33.0)% |
| Operating income | $300,000 | % | 6.0% |
| Other revenue and expense: | |||
| Other revenue | 15,000 | % | 3.0% |
| Other expense | (3,750) | % | (1.0)% |
| Income before income tax | $311,250 | % | 8.0% |
| Income tax expense | (93,750) | % | (2.5)% |
| Net income | $217,500 | % | 5.5% |
In: Accounting
Paul and Anna plan to form the PA LLC by the end of the current year to produce and sell specialty athletic apparel. Paul and Anna will both serve as member-managers of the LLC and will be active in its operations. The members will each contribute $80,000 cash, and in addition, the LLC will borrow $440,000 from First State Bank. The $600,000 will be used to buy equipment and to lease a property they can use as a small manufacturing facility and a storefront.
The bank has stated that the debt must be guaranteed, and Anna has agreed to guarantee the entire amount. At the end of the year, the LLC also expects to have accounts payable of $40,000 for inventory and supplies.
The LLC's operating agreement provides that all LLC items will be allocated equally. The agreement also provides that capital accounts will be properly maintained and that each member must restore any deficit in the capital account upon the LLC's liquidation.
If the LLC claims 100% bonus depreciation, it will report a loss of about $580,000 in its first year, which the LLC members would like to deduct.
Paul and Anna would like to know how the debt ($440,000 loan and $40,000 of accounts payable) will be allocated between them, and how that allocation affects their ability to deduct the losses. Paul and Anna are single individual taxpayers.
Consider all potential loss limitations and assume that neither Paul nor Anna will have business income or losses from other sources.
Complete the memo for the PA LLC tax planning file for your manager's review that describes how the debt will be shared between Paul and Anna for purposes of computing the adjusted basis of each LLC interest.
If an amount is zero, enter "0".
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In: Accounting
As a preliminary to requesting budget estimates of sales, costs, and expenses for the fiscal year beginning January 1, 20Y9, the following tentative trial balance as of December 31, 20Y8, is prepared by the Accounting Department of Regina Soap Co.:
| Cash | $109,000 | ||
| Accounts Receivable | 189,700 | ||
| Finished Goods | 39,800 | ||
| Work in Process | 26,600 | ||
| Materials | 43,600 | ||
| Prepaid Expenses | 3,200 | ||
| Plant and Equipment | 515,600 | ||
| Accumulated Depreciation—Plant and Equipment | $221,700 | ||
| Accounts Payable | 138,800 | ||
| Common Stock, $10 par | 350,000 | ||
| Retained Earnings | 217,000 | ||
| $927,500 | $927,500 |
Factory output and sales for 20Y9 are expected to total 25,000 units of product, which are to be sold at $120 per unit. The quantities and costs of the inventories at December 31, 20Y9, are expected to remain unchanged from the balances at the beginning of the year.
Budget estimates of manufacturing costs and operating expenses for the year are summarized as follows:
| Estimated Costs and Expenses | ||||
| Fixed (Total for Year) |
Variable (Per Unit Sold) |
|||
| Cost of goods manufactured and sold: | ||||
| Direct materials | _ | $30 | ||
| Direct labor | _ | 9.5 | ||
| Factory overhead: | ||||
| Depreciation of plant and equipment | $25,000 | _ | ||
| Other factory overhead | 7,800 | 5.5 | ||
| Selling expenses: | ||||
| Sales salaries and commissions | 89,800 | 15 | ||
| Advertising | 75,000 | _ | ||
| Miscellaneous selling expense | 6,500 | 2.5 | ||
| Administrative expenses: | ||||
| Office and officers salaries | 59,000 | 7.5 | ||
| Supplies | 3,000 | 1 | ||
| Miscellaneous administrative expense | 1,600 | 2 | ||
Balances of accounts receivable, prepaid expenses, and accounts payable at the end of the year are not expected to differ significantly from the beginning balances. Federal income tax of $272,200 on 20Y9 taxable income will be paid during 20Y9. Regular quarterly cash dividends of $1 per share are expected to be declared and paid in March, June, September, and December on 35,000 shares of common stock outstanding. It is anticipated that fixed assets will be purchased for $139,000 cash in May.
Required:
1. Prepare a budgeted income statement for 20Y9.
| Regina Soap Co. | |||
| Budgeted Income Statement | |||
| For the Year Ending December 31, 20Y9 | |||
| Sales | $ | ||
| Cost of goods sold: | |||
| Direct materials | $ | ||
| Direct labor | |||
| Factory overhead | |||
| Cost of goods sold | |||
| Gross profit | $ | ||
| Operating expenses: | |||
| Selling expenses: | |||
| Sales salaries and commissions | $ | ||
| Advertising | |||
| Miscellaneous selling expense | |||
| Total selling expenses | $ | ||
| Administrative expenses: | |||
| Office and officers salaries | $ | ||
| Supplies | |||
| Miscellaneous administrative expense | |||
| Total administrative expenses | |||
| Total operating expenses | |||
| Income before income tax | $ | ||
| Income tax expense | |||
| Net income | $ | ||
Feedback
Use information from the expected sales, cost of goods manufactured and sold, and selling and administrative expenses.
2. Prepare a budgeted balance sheet as of December 31, 20Y9.
| Regina Soap Co. Budgeted Balance Sheet December 31, 20Y9 |
|||
|---|---|---|---|
| Assets | |||
| Current assets: | |||
| Cash | $ | ||
| Accounts receivable | |||
| Inventories: | |||
| Finished goods | $ | ||
| Work in process | |||
| Materials | |||
| Prepaid expenses | |||
| Total current assets | $ | ||
| Property, plant, and equipment: | |||
| Plant and equipment | $ | ||
| Accumulated depreciation | |||
| Total property, plant, and equipment | |||
| Total assets | $ | ||
| Liabilities | |||
| Current liabilities: | |||
| Accounts payable | $ | ||
| Stockholders' Equity | |||
| Common stock | $ | ||
| Retained earnings | |||
| Total stockholders’ equity | |||
| Total liabilities and stockholders’ equity | $ | ||
In: Accounting
A fund manager is concerned about the performance of the market over the next year and plans to use one-year futures contracts on the S&P 500 to hedge the risk. The current index level is 1,200, and the one-year risk-free interest rate is 4% p.a. with continuous compounding. The current one-year futures price on a stock-index portfolio is 1,220. Assume that a dividend of $20 is expected after a year for a $1,200 investment in the market portfolio.
a) (4 points) Is the contract mispriced? Why? If yes, by how much is it overpriced (underpriced)?
b) (8 points) Identify an arbitrage opportunity such that you can obtain a riskless profit equal to the futures mispricing.
c) (8 points) Suppose that when you short sell the stocks in the market index, you do not receive any interest on the funds; instead, the broker receive it. Is there still an arbitrage opportunity now (assuming you don’t own the shares originally)? Explain the reason.
d) (10 points) Under the assumption of (c), i.e., you do not receive any interest on the funds if you short sell the stocks, whhat is the no-arbitrage range? That is, how high and how low can the futures price be such that there is no arbitrage opportunity?
In: Finance