1. In which case will an investor receive the most interest:

a. 10%, compounded annually. b. 10%, compounded monthly. c. 10%, compounded continuously. d. 10%, compounded daily. e. There is not enough information provided to correctly answer this question

2. An annuity is:

a. a stream of equal payments at unequal time intervals.

b. a stream of equal payments at equal time intervals.

c. a stream of equal payments that continue forever.

d. all of the above.

e. none of the above.

3. A perpetuity is:

a. a stream of equal payments at unequal time intervals.

b. a stream of equal payments at equal time intervals.

c. a stream of equal payments that continue forever.

d. all of the above.

e. none of the above.

4. The basic rule of the time value of money (assuming positive interest rates) is:

a. investments will always be worth more tomorrow than they are today.

b. it’s always wiser to save a dollar for tomorrow than to spend it today.

c. a dollar in hand today is worth more than a dollar promised at some time in the future.

d. All of the statements above express an aspect of the basic rule of time value of money.

e. None of the statements above represent the basic rule of the time value of money.

5. The present value of a future amount (assuming positive interest rates and a time difference between the present and the future):

a. will always be less than the future amount.

b. can be calculated precisely if the discount rate and number of periods is known.

c. is greater than the future value.

d. both a. and b. above are true.

e. None of the statements above are correct

6. In 2 years you are to receive $10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would __________.

a. fall

b. rise

c. remain unchanged

d. The correct answer cannot be determined without more information

7. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams totaling $1,500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively.

a. $700 in Year 1; $500 in Year 2; $300 in Year 3

b. $300 in Year 1; $500 in Year 2; $700 in Year 3

c. $500 in Year 1; $500 in Year 2; $500 in Year 3

d. Any of the above, since they each sum to $1,500

8. Assume that the interest rate is equal to zero (i.e., 0%). Which of the following cash-inflow streams totaling $1,500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively.

a. $700 in Year 1; $500 in Year 2; $300 in Year 3

b. $300 in Year 1; $500 in Year 2; $700 in Year 3

c. $500 in Year 1; $500 in Year 2; $500 in Year 3

d. Any of the above, since they each sum to $1,500.

Problem 5-25 Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO5-1, LO5-2, LO5-3]

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:

1. The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $4.00 per unit, and fixed manufacturing overhead expenses total $540,000 per year.  
2. 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.
3. Variable selling and administrative expenses were $3 per unit sold in each year. Fixed selling and administrative expenses totaled $70,000 per year.
4. 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.)

The following is Aerie Corp.'s comparative balance sheet accounts worksheet at December 31, Year 8 and Year 7, with a column showing the increase (decrease) from Year 7 to Year 8.

Additional information:

On December 31, Year 7, Aerie acquired 25% of Acme's common stock for $275,000. There is no goodwill attributable to the investment, which is appropriately accounted for by the equity method. Acme reported income of $120,000 for the year ended December 31, Year 8. No dividend was paid on Acme's common stock during the year.

During Year 8, Aerie loaned $300,000 to Sky Co., an unrelated company. Sky made the first semi-annual principal payment of $30,000 on October 1, Year 8.

On January 2, Year 8, Aerie sold equipment costing $60,000, with a carrying amount of $35,000, for $40,000 cash.

On December 31, Year 8, Aerie entered into a capital lease for an office building. The present value of the annual rental payments is $400,000, which equals the fair value of the building. Aerie made the first rental payment of $60,000 when due on January 2, Year 9.

Net income for Year 8 was $360,000.

Aerie declared and paid cash dividends for both Year 7 and Year 8. For Year 7, Aerie declared a $90,000 dividend and paid it on February 28, Year 8. For Year 8, Aerie declared an $80,000 dividend to be paid on February 8, Year 9.

Using the indirect method, complete Aerie's statement of cash flows for the year ended December 31, Year 8, using the information above. Enter the appropriate amounts in the designated cells below. Indicate negative numbers by using a leading minus (-) sign.

Aerie Corp.
Statement of Cash Flows
For the year ended December 31, Year 8

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 96,000 units and sold 78,000 units. During its second year of operations, it produced 76,000 units and sold 89,000 units. In its third year, O’Brien produced 84,000 units and sold 79,000 units. The selling price of the company’s product is $78 per unit.

1.

value:
6.25 points

Required information

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.

References

eBook & Resources

Financial StatementsLearning Objective: 05-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.

Difficulty: 3 HardLearning Objective: 05-02 Prepare income statements using both variable and absorption costing.

Check my work

2.

value:
6.25 points

Required information

2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest 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.

References

eBook & Resources

Financial StatementsLearning Objective: 05-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.

Difficulty: 3 HardLearning Objective: 05-02 Prepare income statements using both variable and absorption costing.

Check my work

3.

value:
6.25 points

Required information

3. Assume the company uses absorption 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. (Round your intermediate calculations and final answers to 2 decimal places.)

b. Prepare an income statement for Year 1, Year 2, and Year 3. (Round your intermediate calculations to 2 decimal places.)

References

eBook & Resources

Financial StatementsLearning Objective: 05-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method.

Difficulty: 3 HardLearning Objective: 05-02 Prepare income statements using both variable and absorption costing.

Check my work

4.

value:
6.25 points

Required information

4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3. (Round your intermediate calculations and final answers to 2 decimal places.)

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

A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. this merchandise was omitted from the year end physical count. how will these errors affect assets, liabilities, and stockholders equity at year end and net income for the year?

What is the present value of the declining uniform gradient series that has end of first-year payment of $9,000 declining by 10% per year to year 10 with an interest rate of 10% compounded annually? Note: 10% is based on the end of the first-year payment.

Find the Discounted Payback period for the following project. The discount rate is 10%

Round the answer to two decimal places.

Find the discounted payback period for the following project. The discount rate is 10%

Round the answer to two decimal places.

You plan to open a bank account by depositing $500 today and end of each year for the next nine years (year 1, year 2, ……. year 9). If the interest rate is 2%, what will be your balance in ten years? show workings in excel file