Shisman Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 8.00%

Cash flows Year 0: -$650 Year 1: $400 Year 2: $600 Year 3: $600

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Calculate the Pay-off Period for an IS project that has a $200,000 development cost in year 1 and annual $40,000 maintenance costs from year 2 onwards. The benefits are expected to be $100,000 in Year 2 and growing $25,000 a year as adoption of the system increases. The discount rate is 0%.

Required information

Chapter 7: Applying Excel

Step 1: Download the Applying Excel form located on the left-hand side, under files.

Step 2: Then enter formulas in all cells that contain question marks. For example, in cell B26 enter the formula "= B17".

Step 3: Check your worksheet by changing the units sold in the Data to 6,000 for Year 2. The cost of goods sold under absorption costing for Year 2 should now be $240,000. If it isn’t, check cell C41. The formula in this cell should be =IF(C26<C27,C26*C36+(C27-C26)*B36,C27*C36).]

If your worksheet is operating properly, the net operating income under both absorption costing and variable costing should be $(34,000) for Year 2. That is, the loss in Year 2 is $34,000 under both methods. If you do not get these answers, find the errors in your worksheet and correct them. Assume that the units produced in year 2 were sold first.

Step 4: Proceed to the requirements below only after completing your worksheet as it will be used to answer the following questions.

The LIFO inventory flow assumption is used throughout the problem.

Chapter 7: Applying Excel: Exercise

2. Change all of the numbers in the data area of your worksheet so that it looks like this:

Problem 6-25 Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO6-1, LO6-2, LO6-3] Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 800,000 $ 1,000,000 Cost of goods sold 740,000 520,000 785,000 Gross margin 260,000 280,000 215,000 Selling and administrative expenses 230,000 200,000 230,000 Net operating income (loss) $ 30,000 $ 60,000 $ (15,000 ) 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 it had excess inventory and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: Year 1 Year 2 Year 3 Production in units 50,000 60,000 40,000 Sales in units 50,000 40,000 50,000 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 $4.00 per unit, and fixed manufacturing overhead expenses total $540,000 per year. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced. 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. (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first.) Starfax’s management can’t understand why profits 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. 2. Refer to the absorption costing income statements above. a. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed. b. Reconcile the variable costing and absorption costing net operating income figures for each year. 5b. If Lean Production had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing?

Problem 6-25 Prepare and Interpret Income Statements; Changes in Both Sales and Production; Lean Production [LO6-1, LO6-2, LO6-3]

Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations 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 it had excess inventory 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 $6.00 per unit, and fixed manufacturing overhead expenses total $450,000 per year.

2. A new fixed manufacturing overhead rate is computed each year based that year's actual fixed manufacturing overhead costs divided by the actual number of units produced.

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

4. The company uses 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.)

Starfax’s management can’t understand why profits 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.

2. Refer to the absorption costing income statements above.

a. Compute the unit product cost in each year under absorption costing. Show how much of this cost is variable and how much is fixed.

b. Reconcile the variable costing and absorption costing net operating income figures for each year.

5b. If Lean Production had been used during Year 2 and Year 3, what would the company’s net operating income (or loss) have been in each year under absorption costing?

Cuneo Company’s income statements for the last 3 years are as follows:

Labels and Amount Descriptions

Refer to the list below for the exact wording of an account title within your income statement.

Common-Size Income Statement

1. Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. (Note: Enter all amounts as positive numbers. Round answers to the nearest tenth of a percent. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.)

2. Prepare a common-size income statement for Year 3 by expressing each line item for Year 3 as a percentage of that same line item from Year 1. (Note: Enter all amounts as positive numbers. Round answers to the nearest tenth of a percent. Refer to the Labels and Amount Descriptions list provided for the exact wording of the answer choices for text entries.)

The trial balance of Pacilio Security Services, Inc. as of January 1, Year 6, had the following normal balances: Cash $ 74,210 Accounts Receivable 13,500 Supplies 200 Prepaid Rent 3,200 Merchandise Inventory (24 @ $265; 1 @ $260) 6,620 Land 4,000 Accounts Payable 1,950 Unearned Revenue 900 Salaries Payable 1,000 Common Stock 50,000 Retained Earnings 47,880 During Year 6, Pacilio Security Services experienced the following transactions: Paid the salaries payable from Year 5. On March 1, Year 6, Pacilio established a $100 petty cash fund to handle small expenditures. Paid $4,800 on March 1, Year 6, for a one-year lease on the company van in advance. Paid $7,200 on May 2, Year 6, for one year’s office rent in advance. Purchased $400 of supplies on account. Purchased 100 alarm systems for $28,000 cash during the year. Sold 102 alarm systems for $57,120. All sales were on account. Record the cost of goods sold related to the sale from Event 7 using the FIFO method. Paid $2,100 on accounts payable during the year. Replenished the petty cash fund on August 1. At this time, the petty cash fund had only $7 of currency left. It contained the following receipts: office supplies expense, $23; cutting grass, $55; and miscellaneous expense, $14. Billed $52,000 of monitoring services for the year. Paid installers and other employees a total of $25,000 cash for salaries. Collected $89,300 of accounts receivable during the year. Paid $3,600 of advertising expense during the year. Paid $2,500 of utilities expense for the year. Paid a dividend of $10,000 to the shareholders. Adjustment There was $160 of supplies on hand at the end of the year. Recognized the expired rent for both the van and the office building for the year. (The rent for both the van and the office remained the same for Year 5 and Year 6.) Recognized the balance of the revenue earned in Year 6 where cash had been collected in Year 5. Accrued salaries at December 31, Year 6, were $1,400. The following information is available for the bank reconciliation: (1) Checks written but not paid by the bank, $8,350. (2) A deposit of $6,500 made on December 31, Year 6, had been recorded but was not shown on the bank statement. (3) A debit memo for $55 for a new supply of checks. (Hint: Use Office Supplies Expense account.) (4) A credit memo for $30 for interest earned on the checking account. (5) An NSF check for $120. (6) The balance shown on the bank statement was $80,822. Recorded any debit memos or checks not included on books as part of the bank reconciliation. Recorded any credit memos or interest received not included on books as part of the bank reconciliation.

A. Changes in SE

B. Stmt of Cash Flows

C. Bank Reconciliation

Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $28,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 32 percent this year and will be 35 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Use Exhibit 3.1.

a. What is the after-tax income if Hank sends his client the bill in December?

b. What is the after-tax income if Hank sends his client the bill in January? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return
4%   5%   6%   7%   8%   9%   10%   11%   12%
Year 1   .962   .952   .943   .935   .926   .917   .909   .901   .893
Year 2   .925   .907   .890   .873   .857   .842   .826   .812   .797
Year 3   .889   .864   .840   .816   .794   .772   .751   .731   .712
Year 4   .855   .823   .792   .763   .735   .708   .683   .659   .636
Year 5   .822   .784   .747   .713   .681   .650   .621   .593   .567
Year 6   .790   .746   .705   .666   .630   .596   .564   .535   .507
Year 7   .760   .711   .665   .623   .583   .547   .513   .482   .452
Year 8   .731   .677   .627   .582   .540   .502   .467   .434   .404
Year 9   .703   .645   .592   .544   .500   .460   .424   .391   .361
Year 10   .676   .614   .558   .508   .463   .422   .386   .352   .322
Year 11   .650   .585   .527   .475   .429   .388   .350   .317   .287
Year 12   .625   .557   .497   .444   .397   .356   .319   .286   .257
Year 13   .601   .530   .469   .415   .368   .326   .290   .258   .229
Year 14   .577   .505   .442   .388   .340   .299   .263   .232   .205
Year 15   .555   .481   .417   .362   .315   .275   .239   .209   .183

c. Should Hank send his client the bill in December or January?

• December

• January

d. What is the after-tax income if Hank expects his marginal tax rate to be 24 percent next year and sends his client the bill in January? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

e. Should Hank send his client the bill in December or January if he expects his marginal tax rate to be 32 percent this year and 24 percent next year?

On January 1, Year 1, Victor Company issued bonds with a $750,000 face value, a stated rate of interest of 5%, and a 5-year term to maturity. The bonds sold at 96. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense appearing on the income statement for the year ending December 31, Year 3?

On January 1, Year 1, Victor Company issued bonds with a $650,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums. What is the amount of interest expense appearing on the income statement for the year ending December 31, Year 3?