AZA Company purchased a machine on July 1, 2019. The machine cost $400,000 and has an estimated residual value of $40,000. The expected useful life is 8 years. The machine is to be used for 100,000 machine hours. AZA’s year end is December 31. Required:

a. Calculate the depreciation expense for 2019 and 2020 using the straight-line method. Also list the Accumulated Depreciation Balances at December 31, 2019 and December 31, 2020.

b. Calculate the depreciation expense for 2019 and 2020 using the units-of-production method. The machine was used for 8,000 machine hours in 2019 and 23,000 machine hours in 2020.

c. Calculate the depreciation expense for 2019 and 2020 using the double-declining-balance method.

d. Determine the book value of the machine at December 31, 2019 under the (a) straight-line method and (b) units-of-production, and (c) double-declining-balance method.

e. Write the journal entry for recording depreciation expense for year ended December 31, 2019 using the double declining balance depreciation method.

Oak Creek Company is preparing its master budget for 2020. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.

Sales: Sales for the year are expected to total 1,000,000 units. Quarterly sales are 20%, 25%, 25%, and 30%, respectively. The sales price is expected to be $40 per unit for the first three quarters and $46 per unit beginning in the fourth quarter. Sales in the first quarter of 2021 are expected to be 10% higher than the budgeted sales for the first quarter of 2020.

Production: Management desires to maintain the ending finished goods inventories at 20% of the next quarter's budgeted sales volume.

Direct materials: Each unit requires 2 kg of raw materials at a cost of $10 per kilogram. Management desires to maintain raw materials inventories at 10% of the next quarter's production requirements. Assume the production requirements for the first quarter of 2021 are 630,000 kg.

1. Prepare the sales budget by quarters for 2020.

2. Prepare the production budget by quarters for 2020.

3. Prepare the direct materials budget by quarters for 2020.

Problem 4

Rent A Car, Inc. (RAC) purchased 100 vehicles on January 1, 2020, spending $2 million plus 11 percent total sales tax for a total cost of $2,220,000. RAC expects to use the vehicles for five years and then sell them for approximately $360,000. RAC anticipates the following average vehicle use over each year ended December 31:

To finance the purchase, RAC borrowed $1.8 million by signing a 6% promissory note.  The note is to be repaid in full by December 31, 2024.  On December 31 of each year, RAC makes one payment on the installment note comprising blended interest and principal components.  The amortization schedule for the note is presented below.  RAC has a December 31 year-end.  The company does not make monthly adjustments, but rather makes adjusting entries every quarter.

The note carries loan covenants that require RAC to maintain a minimum times interest earned ratio of 3.0. RAC forecasts that the company will generate the following sales and preliminary earnings (prior to recording depreciation on the vehicles and interest on the note). For purposes of this question, ignore income tax.

Required:

1. Assuming the company makes the required annual payments on December 31, use the amortization schedule to determine:
   1. The amount of the annual payment                                                           
   2. The total interest and principal paid over the note’s life                           

2. What portion of the Note Payable balance would be reported as current versus noncurrent on the December 31, 2021, balance sheet? Fill-in the two blanks below.

Note Payable, Current $                                              

Note Payable, Noncurrent                                          

3. Calculate the depreciation expense that would be recorded in 2020 and 2021, using the (a) straight-line, (b) double-declining balance, and (c) units-of-production depreciation method. [5 marks]

                                                                                                2020                            2021    

a) straight line:

b) double-declining balance:

c) units-of-production:

4. Using the information provided and your answers to requirement 3, determine net income and the loan covenant ratio in 2020 and 2021, assuming the company chooses the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method. [6 marks]

                                                                                                2020                            2021    

a) straight line:

Net Income =

Times Interest Earned Ratio =

b) double-declining balance:

Net Income =

Times Interest Earned Ratio =

c) units-of-production:

Net Income =

Times Interest Earned Ratio =

5. Using your answers to requirement 4, indicate whether the loan covenant would be violated under the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method.
6. If the loan covenant is violated at any point in requirement 5, what can the company do to make sure they are not offside?

The balance sheets for Kinder Company showed the following information. Additional information concerning transactions and events during 2020 are presented below.

Kinder Company

Balance Sheet

            December 31    

     2020                  2019

         Cash $ 30,900 $ 10,200

         Accounts receivable (net) 43,300 20,300

         Inventory 35,000 42,000

         Long-term investments 0 15,000

         Property, plant & equipment 236,500 150,000

         Accumulated depreciation     (37,700)              (25,000)

$308,000 $212,500

         Accounts payable $ 17,000           $ 26,500

         Accrued liabilities 21,000 17,000

         Long-term notes payable 70,000 50,000

         Common stock 130,000 90,000

         Retained earnings      70,000               29,000

$308,000 $212,500

Additional data:

1.   Net income for the year 2020, $61,000.

2. Gain on sale of investment, $18,000, included in net income.

3.   Paid a $40,000 long-term note payable by issuing common stock.

Prepare a Statement of Cash Flows for Kinder using the indirect method using Be sure to include required supplemental disclosures.

The balance sheets for Kinder Company showed the following information. Additional information concerning transactions and events during 2020 are presented below.

Kinder Company

Balance Sheet

            December 31    

     2020                  2019

         Cash $ 30,900 $ 10,200

         Accounts receivable (net) 43,300 20,300

         Inventory 35,000 42,000

         Long-term investments 0 15,000

         Property, plant & equipment 236,500 150,000

         Accumulated depreciation     (37,700)              (25,000)

$308,000 $212,500

         Accounts payable $ 17,000           $ 26,500

         Accrued liabilities 21,000 17,000

         Long-term notes payable 70,000 50,000

         Common stock 130,000 90,000

         Retained earnings      70,000               29,000

$308,000 $212,500

Additional data:

1.   Net income for the year 2020, $61,000.

2. Gain on sale of investment, $18,000, included in net income.

3.   Paid a $40,000 long-term note payable by issuing common stock.

Prepare a Statement of Cash Flows for Kinder using the indirect method using Be sure to include required supplemental disclosures.

Anthony is a new investor and has been closely watching a company by the name of CLS Ltd., a pharmaceutical company aiming to develop a coronavirus vaccine.

Anthony believes the following returns are possible in 2020 and has attached a probability to each potential outcome:

a) Calculate the Expected Return for CLS Ltd. in 2020.

Show formula, calculation and a concluding statement in your response.

b) Calculate the Risk (Standard Deviation) for CLS Ltd. in 2020.

Show formula, calculation and a concluding statement in your response.

c) Anthony is considering investing all his savings in buying shares in CLS Ltd. Explain to Anthony why he should not do this by referring to the risk/return trade-off. What action can Anthony take to reduce some of the risk?

d) Explain what the standard deviation actually measures in Finance. Include in your answer an explanation of what a high and low value for the standard deviation means.

1) Carol works for ABC Company and earned $64,500 for the entire year 2018. How much in FUTA tax is her employer required to withhold in her name? Assume that the employer receives the maximum credit for state unemployment taxes.

Choices:

A) $0

B) $435.00

C) $46.40

D) $42.00

2) Alice is single and self-employed in 2020. Her net business profit on her Schedule C for the year is $158,000.

What is her self-employment tax liability and additional Medicare tax liability for 2020? (Round your final answer to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

Self-Employment Tax Liability =

Additional Medicare Tax Liability =

3) Rasheed works for Company A, earning $360,000 in salary during 2020.

Assuming he is single and has no other sources of income, what amount of FICA tax will Rasheed pay for the year? (Round your intermediate and final answer to the nearest whole dollar amount.)

Amount of FICA Tax =

Consolidation spreadsheet for continuous sale of inventory - Equity method
Assume that a parent company acquired a subsidiary on January 1, 2016. The purchase price was $600,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following AAP assets:

The AAP assets with a definite useful life have been amortized as part of the parent’s equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired.

Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2018 and 2019:

The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The parent uses the equity method to account for its Equity Investment.

The financial statements of the parent and its subsidiary for the year ended December 31, 2019, follow in part d below.

a. Show the computation to yield the pre-consolidation $80,400 Income loss from subsidiary reported by the parent during 2019.

b. Show the computation to yield the Equity Investment balance of $1,152,000 reported by the parent at December 31, 2019.

c. Prepare the consolidation entries for the year ended December 31, 2019.

d. Prepare the consolidation spreadsheet for the year ended December 31, 2019.

Duval Company acquired a machine on January 1, 2018, that costs $2,700 and has an estimated residual value of $200. Required a) Complete the following schedule for 2019 using: A) straight-line, B) units-ofproduction, C) double declining-balance Method Estimated Useful Life or Units Depreciation Expense for 2019 Accumulated Depreciation at 12/31/2019 A SL 5 years B UOP 10,000 units (estimated total) 1,000 units (actual year 2018) 1,200 units (actual year 2019) C DB 5 years b) Duval estimates the future cash flows from the asset (fair value) to be equal to $1,500. Using the straight-line method, at the end of 2019, what is the result of the impairment test?