KLM Company purchased a Mixer Machine on January 2, 2008, for $14,500. The Mixer was expected to have a useful life of five (5) years and a residual value of $1,000. The company engineers estimated that the Mixer would have a useful life of 7,500 hours. It was used 1,500 hours in 2008, 2625 hours in 2009, 2250 hours in 2010, 750 hours in 2011, and 375 hours in 2012. KLM Company's year end is December 31. Required:

1. Compute the depreciation expense and carrying value for 2008 to 2012, using the following methods: (a) Straight-Line, (b) Production, (c) Double-Declining-Balance.

2. Prepare the adjusting entry to record the depreciation for 2008 that you that you calculated in 1(a), 1(b), and 1(c). (Three separate independent entries.)

3. Show Accumulated Depreciation Account (in T Account form) using all three (3) methods mentioned in 2 from 2008 to 2012. (Three separate independent accounts.)

4. Show the Balance Sheet presentation for the Mixer Machine after the entries in 2, under all three methods, on December 31, 2008. (Three separate independent presentations.)

5. Show the Balance Sheet presentation for the Mixer Machine after the entries in 2, under all three methods, on December 31, 2012. (Three separate independent presentations.)

6. What conclusions can you draw from the patterns of yearly depreciation? Please answer this question as well , please.

Fostering Entrepreneurship in Unlikely Places

Vic Ahmed is no stranger to business start-ups; he’s been involved in at least 15 or 20. But his latest venture is a start-up … for start-ups. Ahmed founded Innovation Pavilion, a business incubator in Centennial, Colorado (Denver’s Tech Center), in 2011. A typical business incubator provides start-up companies with workspace, mentoring, training, and sometimes a path to funding, but Innovation Pavilion goes further.

Innovation Pavilion (IP) is an 80,000 square foot “entrepreneurial ecosystem,” housing dozens of start-ups and renting out desks, office space, and event space. But it also hosts meetups, educational workshops, and a Toastmasters group designed specifically for entrepreneurs. It contains a makerspace (a workspace providing shared tools and manufacturing equipment for prototyping products) and encourages the growth of niche entrepreneurial communities based on specific industries. For example, IP has a space for IoT (the Internet of Things), one for health care, and another for aerospace. These communities bring together people in an industry to learn from and collaborate with each other.

While IP has a traditional incubator program, with companies housed within the IP campus, it has a semi-virtual hypergrowth accelerator program for more mature firms, too, which is open to companies around the country. It also seeks out educational partnerships, working with the Highland’s Ranch STEM program, for instance, and has its own educational spin-off, Xuno Innovative Learning, designed to help companies train their staff and find new employees with the skills they need. IP operates its own streaming TV service, filming educational events and interviews with entrepreneurs.

Innovation Pavilion has national expansion plans—and several signed agreements with specific cities—targeting not the giant metropolitan areas but also second tier and “ring” cities across the country, such as Joliet, Illinois, and Olathe, Kansas, smaller cities that don’t get the attention of the larger cities yet have plenty of educated and creative people.

IP is in discussions with 20 cities around the nation, with the goal of building 200,000-square-foot campuses providing incubator services, office space, makerspace, education and training, outreach to young entrepreneurs, conference centers, retail space, and even housing. Entrepreneurs will be able to live and work in a space with everything they need, providing a complete entrepreneurial ecosystem in smaller cities across the nation.

Steve Case, the cofounder of America Online (AOL), shares Vic Ahmed’s vision for entrepreneurship in mid-America. His “Rise of the Rest” bus tour has traveled 8,000 miles over the last three years, investing in local start-ups in 33 cities across the country. Case hosts a pitch competition with the best start-ups in each city, and one lucky winner receives a $100,000 investment from Case.

Media attention has focused on the entrepreneurial engines of America’s coastal cities, but Ahmed and Case have a more expansive entrepreneurial vision, in which smaller cities throughout the nation rise up alongside larger, start-up hot spots.

Critical Thinking Questions

1. What characteristics made Vic Ahmed a successful entrepreneurs?
2. How did their Ahmed and Steven Case's partnership and shared vision of "Rise of the Rest" serve their business goals?
3. Is focusing on smaller cities rather than areas like silicon valley a good strategy, why?

Stock Valuation Assignment (Fall 2017 Data)

The purpose of this analysis is to find an intrinsic value for Microsoft (MSFT) using the both the Constant Dividend Discount Model (DDM) and the Non-constant DDM. You will need to (1) estimate Beta in order to calculate the required return for MSFT; (2) estimate dividend growth rate; and (3) estimate future dividends.   

Submit your Excel spreadsheet with all data and formulas so that your answers can be replicated. You may answer the questions on the spreadsheet. HOWEVER, WRAP YOUR TEXT!!! I do NOT want to see text running across 40 columns. Remember, Excel is not a word processor. Do a simple draft print to see if your output is in readable form. Follow instructions as written. NEATNESS AND ORGANIZATION MATTERS!

You are analyzing Microsoft to find an intrinsic value for Microsoft (MSFT) using the both the Constant Dividend Discount Model (DDM) and the Non-constant DDM. I have provided you with an Excel spreadsheet of monthly prices (121 months) from Sept 1, 2007 to Sept 1, 2017). These prices have already been adjusted for dividends. List dates and prices out on your spreadsheet in order to calculate monthly returns.

Using the prices provided, calculate the monthly returns for each of the stocks, where r = (P_t/P_t-1) – 1; which is the same as [(P_t-P_t-1)/ P_t-1] as I covered in the Lecture Video. PLEASE NOTE THAT THE DATA IS LISTED FROM SEPT 2007 TO SEPT 2017! SO BE CAREFUL WITH YOUR RETURN FORMULA! There are 121 months to calculate 120 monthly returns. You may post monthly returns as decimals to 6 places or percentages to 4 places. For example, average return for MSFT can be written as .009999 or .9999%.

(10 points)

At the bottom of the column for each stock calculate the Average Monthly Return (use AVERAGE() function) and the Standard Deviation [use STDEV.P()] population function NOT STDEV() sample function).

As a check, you should find your average returns to be: MSFT = 1.2310% and SPY = .6861%.

(5 points)

Calculate and Interpret the Correlation Coefficient (r_1,2) between Microsoft (MSFT) and S&P 500 Index (SPY). (use CORREL() function). (5 points)

We can estimate the Beta for MSFT over the 120-month period by running a Regression of SPY returns on the x-axis (independent variable) and MSFT returns on the y-axis (dependent variable). The Beta is the SLOPE of the regression. To find Beta use the SLOPE function in Excel. Be careful use RETURNS NOT prices!

How does your estimate compare to the FinanceYahoo.com beta and the Value Line beta? What does Beta represent? (10 points)

Now, let’s check the stability of Beta. You may again use the SLOPE function in Excel, where SPY is independent & MSFT is dependent variable.

Estimate Beta over the first 60 monthly returns (5 years): October 1, 2007 to September 1, 2012.

Estimate Beta over the second 60 monthly returns (5 years):         October 1, 2012 to September 1, 2017.

What is the beta for each period? Is there a substantial difference between the two Betas?

(5 points)

Given the information below, use the CAPM to estimate the required rate of return for MSFT. Round to 2 decimals, e.g., x.xx%, 1.23%

Return on the market portfolio (SPY) R_SPY = 9.25% (based on 25 years of historical data); the risk free rate is R_f = 3.0% (based on L-T inflation rate of 2.0% & real return of 1.0%); USE MSFT beta estimate: b = 0.97

(10 points)

Based on past trends and ValueLine estimate, let’s assume MSFT will pay a dividend of $1.64 in 2018. Therefore, let’s assume that D₁ = $1.64, because it will not be fully paid until the end of Year 2018. Let’s also assume that MSFT will grow its future dividends at a L-T constant rate of g = 6%. Assuming a required rate of return found in (7) above, estimate the current value of MSFT using the Constant Growth DDM.   Assume that D₁ = $1.64

(10 points)

Now, using the Value Line sheet, estimate the average growth rate of dividends for MSFT over the last 10 years, from 2007-2017? Round your growth estimate to 4 decimal places. [Hint: The Growth rate (g) can be calculated as CPT i on your calculator or in Excel as a TVM problem.

(5 points)

Two-stage Non-constant DDM: Now let’s assume that for the next four years MSFT will grow its dividends at the growth rate you estimated in (9) above. Assuming D₁ = $1.64, what are the dividends for: D₂ ; D₃ ; D₄; and D₅ if they grow at the rate estimated in (9)? You may round each dividend estimate to the nearest penny.

(10 points)

Now, let’s assume that the dividend growth reverts back to a L-T sustainable growth rate = 6% after Year 5 to infinity. Estimate is D₆ and P₅.

(5 points)

Use the Non-constant growth DDM from the Stock Video Lecture (at 17:20) to estimate the current value of MSFT using the dividend information you found in (10) & (11) above; assume a L-T sustainable growth rate of g = 6% after Year 5; and the required rate of return found in (7). [HINT: You already have all the data, not much work left here….find the sum of the PV of the cash flows.]

(10 points)

Which of the two models do you think is more reasonable (Constant DDM or Non-constant DDM)? WHY?

(5 points)

What is the current market price of MSFT? Based on your analysis, would you recommend buying this stock at the current market price? Explain why or why not?

(10 points)

Two countries produce two different items, root beer and cheese. The table below shows the amounts of each commodity that each country can produce with 400 units of factor inputs (productive units). Before trade consumption in each country is equal to production – that is, if trade is warranted, citizens need to receive at least as much root beer and cheese as they started with before trade. Given the following production levels, calculate the best possible trading scenario that maximizes production in this two-country world. Remember each country has 400 productive units which they can use in any combination. Before trade, each country has allocated 50% of their productive units to each product. That is, before trade, Hokieland makes 100 gallons of root beer and 20 wheels of cheese. Based on the theory of Comparative Advantage, what should each country do if they trade? [be careful, you need to make at least as much of each output after trade as you had before trade.] Explain your solution. Use this example to clearly explain the difference between Absolute and Comparative advantage. Bold the Solution

Appen Ltd. incurred fixed manufacturing costs of $25,000 during 2020. Other information for 2020 includes:

            The budgeted denominator level is 2,500 units.

            Units produced total 2,600 units.

            Units sold total 1,600 units.

            Variable cost per unit is $5

            Beginning inventory is zero.

The fixed manufacturing cost rate is based on the budgeted denominator level. There is no spending variance for fixed manufacturing cost.

Under absorption costing, calculate the production-volume variance. Clearly label whether the variance is ‘favourable’ or ‘unfavourable’ (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) Show all workings.

Windsor Construction Company began work on a $404,000 construction contract in 2020. During 2020, Windsor incurred costs of $273,000, billed its customer for $232,000, and collected $182,000. At December 31, 2020, the estimated additional costs to complete the project total $163,660.

Prepare Windsor’s journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Additional information from the accounting records:

1. Investment revenue includes Arduous Company’s $6 million share of the net income of Demur Company, an equity method investee.
2. Treasury bills were sold during 2021 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
3. Equipment originally costing $70 million that was one-half depreciated was rendered unusable by a flood. Most major components of the equipment were unharmed and were sold for $17 million.
4. Temporary differences between pretax accounting income and taxable income caused the deferred tax liability to increase by $3 million.
5. The preferred stock of Tory Corporation was purchased for $25 million as a long-term investment.
6. Land costing $46 million was acquired by issuing $23 million cash and a 15%, four-year, $23 million note payable to the seller.
7. The right to use a building was acquired with a 15-year lease agreement; present value of lease payments, $82 million. Annual lease payments of $7 million are paid at the beginning of each year starting January 1, 2021.
8. $60 million of bonds were retired at maturity.
9. In February, Arduous issued a 5% stock dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at that time.
10. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $9 million.

Required:
Prepare the statement of cash flows for Arduous Company using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

The following are transactions for the account period of 5/1/2020 through 5/31/2020 for the Sandy’s East Coast Kites and Novelties, a sole proprietorship owned by Windy Uberflier. Create a trial balance, Income Statement, Statement of Owners Equity, and Balance Sheet at the end of day on 5/31/20. Don’t forget to adjust accounts.

1. 5/1/20 - Deposited $53,000 into a business bank account for the company.
2. 5/1/20 - Signed a lease for retail and manufacturing space and paid cash for the first six months rent of $4,200. (Hint- When to you count rent as revenue?)
3. 5/1/20 - Bought office supplies to be used immediately from Dewey’s Office and Hunting Supply on account for $600.
4. 5/1/20 - Bought a one-year liability insurance policy from Louie’s Ducky Insurance Company and Nail Salon for $12,000 cash.
5. 5/1/20 - Bought novelty inventory with a wholesale value of $5,000, paying $2,500 in cash and promising to pay the balance on 6/1/20.
6. 5/2/20 - Bought a Chevy truck from Donald’s Truck and Egg Supply with an extended bed and saddle tanks for $23,000 cash.
7. 5/3/20 - Bought a truck shell from Huey’s Truck Accessories and Novelties for $2,500 on account.
8. 5/4/20 - Invested personal computer equipment to the company having a fair market value of $3,400.
9. 5/10/20 - Signs a contracted to perform a Kite Demo in Philadelphia on 6/1/20 and is paid $2,500 cash.
10. 5/11/20 - Paid Huey’s Truck Accessories and Novelties $1,500 cash.
11. 5/11/20 - Purchased an ad in the local newspaper The Righteous Dempublicrat for $200 on account.
12. 5/20/20 - Performed a Kite Demo to the Boy’s and Girl’s Club of Greater Hoboken with a promise to receive $2,500 cash from Scrooge McDuck by 9/1/20.
13. 5/20/20 - Paid $1,000 cash to Huey’s Truck Accessories and Novelties.
14. 5/20/20 - Purchased 45 gallons of gas for truck for $160 cash.
15. 5/22/20 - Paid $200 cash to the local newspaper for ad purchased on 5/11.
16. 5/23/20 - Hired a new employee who will start on 5/26 and will be paid $15 per hour (working 8 hours a day M-F), and instantly paid her a bonus of $1,000 cash. Paydays are the first day of the month.
17. 5/24/20 - Bought a trailer from Huey’s Truck Accessories and Novelties for $2,120 paying $620 cash down and putting the remaining balance on account.
18. 5/25/20 - Received a check from Scrooge McDuck for $850 for partial payment for Kite demo on 5/20.
19. 5/28/20 - Customer purchases an ACME Super Duper Flier and various novelty accessories for $4,220 cash. The wholesale value of the merchandise was $2,110.
20. 5/28/20 - Withdraws $2,500 in cash from the business to quarantine with style.

Simmons Corp

Balance Sheet

As of December 31, 2019 and June 30, 2020

During 2020 to date (June 30, 2020), Simmons had the following transactions:

1. Provided services to customers on account for $1,000.
2. Paid cash for salaries of employees for $400 (includes amounts owed as of December 31, 2019).
3. Paid cash for utility bills of $100
4. Collected $30 cash from customers on account.
5. Paid $40 cash to suppliers on account.

Additional information:

1. The Note Payable bears interest at 6% per year, but no interest is due until the due date of the note, which is 2024.
2. The equipment, purchased in 2019, is being depreciated using the straight-line method with an estimated service life of 5 years and no estimated residual value.

1. Provide any adjusting entries needed to account for interest on the note payable and depreciation on the equipment through June 30, 2020.
2. Prepare an income statement for Simmons Corp for the period January 1 – June 30, 2020.
3. Enter the balances of balance sheet accounts as of June 30, 2020 in the balance sheet above. Don’t forget the closing entry needed to make the balance sheet balance!
4. In Simmons Corp.’s cash flow statement for the period January 1 – June 30, 2020, what would be the reported amounts of each of the following? (You do NOT have to prepare a cash flow statement)
5. Cash flows from operating activities:
6. Cash flows from investing activities
7. Cash flows from financing activities:
8. Based on the financial statements (income statement and balance sheet) that you prepared, and based on the cash flow information you determined in part (4), comment on the performance of the company, both from a profit and a cash flow perspective. Also comment on the company’s financial position (its ability to pay bills, e.g.).

Tamarisk Construction Company began work on a $406,500 construction contract in 2020. During 2020, Tamarisk incurred costs of $292,500, billed its customer for $213,500, and collected $177,000. At December 31, 2020, the estimated additional costs to complete the project total $161,340.

Prepare Tamarisk’s journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)