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Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption costing basis):

In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax’s Sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that inventory was excessive and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below:

Additional information about the company follows:

The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $6.00 per unit, and fixed manufacturing overhead expenses total $450,000 per year.  

Fixed manufacturing overhead costs are applied to units of product on the basis of each year’s production. That is, a new fixed manufacturing overhead rate is computed each year.

Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $80,000 per year.

The company uses a FIFO inventory flow assumption.

Starfax’s management can’t understand why profits more than doubled during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.

Required:

1. Prepare a contribution format variable costing income statement for each year.

2a. Compute the unit product cost in each year under absorption costing. (Round your answers to 2 decimal places.)

2b. Reconcile the variable costing and absorption costing net operating income (loss) figures for each year.

5b. If Lean Production had been used during Year 2 and Year 3 and the predetermined overhead rate is based on 50,000 units per year, what would the company's net operating income (loss) have been in each year under absorption costing? (Losses should be indicated by a minus sign.)

FORECASTING FINANCIAL STATEMENTS -

Company A reported an income statement and balance sheet as shown below:

Use the following assumptions to forecast pro-forma income statement and balance sheets for a 5-year period and a terminal year: (PLEASE SHOW FORMULAS USED TO SOLVE PROBLEM)

(a) Sales increase to $825 in the first year and then increase 20 percent the second year, 15 percent the third year, 10 percent in the fourth year, and 7 percent in the fifth year. Terminal year increases at the assumed growth rate of 4 percent.

(b) Cost of sales is 35 percent of sales.

(c) Sales, general, and administrative expenses are 15 percent of sales.

(d) Depreciation is 8 percent of gross end-of-year property, plant, and equipment.

(e) Interest expense is 5 percent of end-of-year notes payable.

(f) Tax expense is 35 percent of pretax income.

(g) Cash is equal to three month's cost of sales (use current year costs of sales divided by 4).

(h) Accounts receivable has a turnover ratio of 9.0.

(i) Inventory has a turnover ratio of 4.0

(j) Gross property, plant, and equipment gross at the same rate as sales.

(k) Accumulated depreciation increases in Years 1 through 5 by the amount of the current year depreciation. Accumulated depreciation in the terminal year is equal to $711.36

(l) Accounts payable has a turnover ratio of 6.0

(m) Other current liabilities are $35 in Year 1, increasing by $10 in each of Year 2 thorugh 5, and equal to $78.00 in the terminal year.

(n) Notes payable are $498.94 in Year 1, $521.48 in Year 2, $493,56 in Year 3, $401.47 in Year 4, $264.22 in Year 5, and $274.79 in the terminal year

(o) Common stock is remains at $100 in Years 1 through 5, increasing to $104 in the terminal year.

(p) Retained earnings increases by the current year net income less dividends of $125 in Year 1, $150.01 in Year 2, $174.99 in Year 3, $200.01 in Year 4, $224.99 in Year 5, and $339.19 in the terminal year.

q) The depreciation add back in the operating cash flow section of the statement of cash flows is equal to the change in accumulated depreciation for the year.

On January 1, Year 1, Hart Company issued bonds with a face value of $128,000, a stated rate of interest of 12 percent, and a five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 11 percent at the time the bonds were issued. The bonds sold for $132,731. Hart used the effective interest rate method to amortize the bond premium. (Round your intermediate calculations and final answers to the nearest whole number.)

Required
a. Prepare an amortization table.

b. What is the carrying value that would appear on the Year 4 balance sheet?
c. What is the interest expense that would appear on the Year 4 income statement?
d. What is the amount of cash outflow for interest that would appear in the operating activities section of the Year 4 statement of cash flows?

The following information was drawn from the annual report of Machine Imports Company (MIC).

*By definition, Infrequent items are not likely to recur in the future.

Required
a-1. Compute the percentage of growth in net income from Year 1 to Year 2.
a-2. Can stockholders expect a similar increase between Year 2 and Year 3?
c. Assuming that MIC experiences the same percentage of growth from Year 2 to Year 3 as it did from Year 1 to Year 2, determine the amount of income from continuing operations that the owners can expect to see on the Year 3 income statement.
d. During Year 3, MIC experienced a $59,000 loss due to storm damage. Liabilities and common stock were unchanged from Year 2 to Year 3. Use the information that you computed in Requirement c plus the additional information provided in the previous two sentences to prepare an income statement and balance sheet as of December 31, Year 3.
  

The City of Gurnee is preparing its Government-Wide financial statements for the year. Its accountant must prepare a number of journal entries to recognize assets and liabilities previously omitted from the Fund financial statements and to recognize revenues and expenses for the year under accrual accounting that were not recognized under the current financial resources measurement focus and the modified accrual basis of accounting used to prepare the Statement of Revenues, Expenditures, and Changes in Fund Balances for its Funds. The accountant identifies the following journal entries that must be made:

Recognize Capital Assets of $120,440 as of the beginning of the year.

Record Depreciation Expense of $6,850 for the year and reverse Expenditures of $7,360 for Capital Outlays during the year.

Recognize $21,000 of Bonds Payable as of the beginning of the year.

Reverse Other Financing Sources of $8,000 and Expenditures – Debt Payments of $3,100 relating to increases and decreases in the bond liability during the year.

Reverse Deferred Revenue of $10,340 as of the beginning of the year.

Reverse $1,430 of Deferred Revenue recognized during the year.

Recognize Compensated Absences of $1,980 as of the beginning of the year and an increase in that liability of $230 during the year.

Recognize $140 of Accrued Interest Payable as of the beginning of the year and an increase in that liability of $260 during the year.

Recognize a liability of $4,210 relating to the City’s landfill as of the beginning of the year. The estimate for this liability did not change during the year.

Required: Prepare journal entries for each of the items above.

The project will last for 8 years, beginning in 2011 (year 0) and ending in 2019 (year 8). Depreciation is straight line to zero, and taxation (at the time) is 35% in the United States. In any year with a negative EBIT, there is no tax. The capital investment for the fibre line project is $350,000,000 (invested in year 0), including costs of amplification sites, earthmoving equipment, easements etc. Working capital is expected to be $60,000,000, returned at the end of the project. A 24 hours a day, 7 days a week maintenance team is required to ensure 99.99% operational capacity, costing $60 million per year, and increasing at 3% per year. The project success hinges on access to the fibre ports in the exchanges, they know this and charge $50,000,000 per year (combined), declining by 5% p.a. as demand declines.      A team of surveyors and builders who inspected the 1400 km path cost $1.5 million. At the end of the project, the technology is obsolete for its purpose in investment banking, but it can be sold to a telecom provider (contributing to the revenue for year 8) for $127,000,000. Revenue is subscription based at $3,600,000 per year, per subscription. In year 1 there will be 200 subscriptions, year 2 is 150, year 3 is 100, year 4 is 50. In year 5, 6, 7, 8 only 20 subscriptions are taken in per year. The all-important discount rate is 14.5%.

Question: What is the NPV and IRR using excel?

Suppose that the Statistical Institute uses information about three goods to construct the basket to be used for construction of Consumer Price Index (CPI). The set of prices and the set of quantites describing the basket of goods at the year of t respectively is the following: Pt = {Pat , Pbt , Pct } ; Qt = {Qat , Qbt , Qct }
i) Please show the CPI for the year of t = 2 (2 years after base year- at the base year t=0) which would contain elements belong to sets of Pt and Qt. (Hint: The formulation should include summation over goods for t = 0 and t=2 ).   

ii)Suppose at the base year (t=0) all prices are doubled. Construct the CPI under the new setting for the year of t=2. (5 points)

iii) Suppose that a year after the base year (at t=1) all prices are freezed, was not allowed to change. Additionally, suppose that all price controls were lifted at the second year after the base year (at t=2). Pta increased by %150, Pbt increased by %100 and Pct increased by %200 at the year of t=2. Under these settings calculate the inflation from the year of t=0 to the year of t =1 and the inflation from the year of t=1 to the year of t =2. (Please solve (only) 1.iii) by assigning numbers to elements for the set of Pt and for the set of Qt ) (10 points)

Assume revenues decrease and expenses increase with the age of the machine as given in the table below and it can be sold for $200,000 at the end of year five. Calculate NPV, payback, BCR, and IRR, should the equipment be purchased if the discount rate is 6% or 10%?

           Revenue   Expense

   Year 0       -      $1,500,000 (investment)

   Year 1       $850,000   $200,000

   Year 2       $750,000   $250,000

   Year 3       $650,000   $300,000

   Year 4       $550,000   $350,000

   Year 5       $450,000   $400,000