Case 6-29 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2]

[The following information applies to the questions displayed below.]

O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

During its first year of operations, O’Brien produced 91,000 units and sold 79,000 units. During its second year of operations, it produced 84,000 units and sold 91,000 units. In its third year, O’Brien produced 83,000 units and sold 78,000 units. The selling price of the company’s product is $78 per unit.

Case 6-29 Part-1

Required:

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

During its first year of operations, O’Brien produced 98,000 units and sold 76,000 units. During its second year of operations, it produced 76,000 units and sold 93,000 units. In its third year, O’Brien produced 86,000 units and sold 81,000 units. The selling price of the company’s product is $78 per unit.

Required:

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

O’Brien Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

During its first year of operations, O’Brien produced 100,000 units and sold 79,000 units. During its second year of operations, it produced 79,000 units and sold 95,000 units. In its third year, O’Brien produced 83,000 units and sold 78,000 units. The selling price of the company’s product is $77 per unit.

Required:

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

1)Mary Jo wants to buy a boat that is available at two dealerships. The price of the boat is the same at both dealerships. Middlefield Motors would let her make quarterly payments of 2,324.41 dollars for 7 years at a quarterly interest rate of 2.17 percent. Her first payment to Middlefield Motors would be due immediately. If Fairfax Boats would let her make equal monthly payments of 1,493.46 for 3 years and if her first payment to Fairfax Boats would be in 1 month, then what is the monthly interest rate that Mary Jo would be charged by Fairfax Boats? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

2)What is the value of a building that is expected to generate fixed annual cash flows of 101,300 dollars every year for a certain amount of time if the first annual cash flow is expected in 4 years, the last annual cash flow is expected in 11 years, and the appropriate discount rate is 13.98 percent?

Bonds

Renco issued 8 percent, semiannual bonds with a face value of $30,000 and two year maturity on January 1, 2012. The market rate of interest on the date of the issue was 6 percent. Renco retired the bonds at the end of 2012 for $30,200/ Renco uses the effective interest method for recording bond interest expense.

1. Calculate the issue price of the bonds.

2. Prepare an amortiztion schedule for the binds.

3. Prepare the journal entries to record the following.

a. Issuance of bonds.

b. Semiannual interst payments, assuming the binds are not retired at the end of the first year.

c. Repayment of the bonds, assuming they are not retired at the end of the first year.

d. Retirement of binds at the end of the first year.

4. Repeat #1-#3, assuming the market rate of interest is 10 percent.

5. Repeat #3 a-c, assuming the straight-line method of amortization is used.

*** Please show all work and calculations so I can follow along and learn***

thanks!

7. Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is:

A. $10,000.

B. $500.

C. greater than $10,000.

D. less than $10,000.

8. Sydney purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if the prevailing interest rate is 5%?

A. $9,524

B. $10,000

C. $10,095

D. $10,600

9. One year before maturity the price of a bond with a principal amount of $1,000 and a coupon rate of 5% paid annually fell to $981. The one year interest rate:

A. rose to 8.5%.

B. rose to 7.0%.

C. rose to 6.0%.

D. remained at 5%.

10. When Federal Reserve actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bonds:

A. increase.

B. decrease.

C. remain unchanged.

D. decrease only if the coupon rate is less than 5%.

Exercise 6-47 (Algorithmic) Recording Purchases and Shipping Terms On May 12, Digital Distributors received three shipments of merchandise. The first was shipped F.O.B. shipping point, had a total invoice price of $150,000, and was delivered by a trucking company that charged an additional $12,000 for transportation charges from Digital Distributors. The second was shipped F.O.B. shipping point and had a total invoice price of $89,000, including transportation charges of $6,200 that were prepaid by the seller. The third shipment was shipped F.O.B. destination and had an invoice price of $21,000, excluding transportation charges of $1,200 paid by the seller. Digital uses a perpetual inventory system. Digital Distributors has not paid any of the invoices. Required: Prepare journal entries to record these purchases. Journalize the entries to record the first shipment and transportation charges, if required. May 12 Inventory Accounts Payable (Purchased inventory on account) May 12 Inventory Accounts Payable (Paid shipping costs, if required) Feedback Journalize the entries to record the second shipment and transportation charges, if required. If no entry is required, select "No entry required" and leave the amount boxes blank. May 12 (Purchased inventory on account) May 12 (Paid shipping costs, if required) Feedback Journalize the entries to record the third shipment and transportation charges, if required. If no entry is required, select "No entry required" and leave the amount boxes blank. May 12 (Purchased inventory on account) May 12 (Paid shipping costs, if required)

Mark is also interested in reducing the cost of selling of his Christian Dior shares, Ali suggested that he should use European electronic crossing network to sell some of his shares. He told Mark that these networks are cheap, preserve anonymity and allows for 6 crossing opportunities of trades per day. They also allow participants to place some restrictions such as price and minimum fill. All orders submitted to the network is good for day which is means that any unfulfilled part of an order is automatically resubmitted to subsequent crossing sessions during the day. Following Ali’s advice, Mark has submitted his 150,000 CD shares to be sold in the European crossing network with a minimum fill of 125,000. The following orders are on the network for the shares of CD at the time of the first crossing session of the day. The most recent trading price of CD at the Paris Bourse is € 37.

A order: a market order to buy 100,000 shares

B order: a market order to sell 50,000 shares

C: an order to buy 20,000 shares at € 36

In the next crossing session new orders are submitted. The most recent trading price of CD at the Paris Bourse is € 38.

D order: a market order to buy 150,000 shares

E order: A market order to sell 50,000

1.In the first crossing session discuss what trades would take place on the crossing network and what orders remain unfilled?

2.In the second crossing session discuss what trades would take place on the crossing network and what orders remain unfilled?

For each problem analyze the effects in the Goods and Services market.

For problems #1 to #3 assume the economy initially begins at a long-run equilibrium.

1. Suppose international oil prices temporarily decrease.

a) Given the various shifters discussed in class, which curve shifts first and why? Show the graph of the Goods and Services market, including the shift.

b) What happened to the price level and RGDP in the short-run? What type of business cycle did this cause?

c) Over time, if this is just a temporary change that eventually reverses itself, what subsequent shift will occur? Indicate this shift using your graph given above. What is the ultimate longrun effect on the Deflator and RGDP?

2. Suppose the amount of buildings and machinery in the U.S. decreases.

a) Which curve(s) shifts and why? Graph the Goods and Services market including the shift(s).

b) What happened to the price level and RGDP?

c) Will this cause a temporary business cycle? Why or why not?

3. Suppose the Fed increases interest rates in the country.

a) Which curve shifts first and why? Graph the Goods and Services market, including the shift.

b) What happened to the price level and RGDP in the short-run? What type of business cycle did this cause?

c) Over time, what will eventually happen to resource costs given the above scenario?

d) From your answer in part c, what subsequent shift will occur? Indicate this shift using your graph given above. What is the ultimate long-run effect on the Deflator and RGDP?