1. Suppose Kifwong is a small economy with only five people and two income tax rates. The first $4,000 earned each month are taxed 30%. Anything earned over $4,000 each month is taxed 45%. Anyone who is not working receives unemployment benefits of $2,500, paid for by the government. The table below shows the income for the five people at two different time periods. (5 pts.)

1. Calculate the total tax revenue during the first period

2. Calculate the total tax revenue when the economy during the second period

3. Excluding Billy’s income, what is the percent change between total income in the first period and total income in the second period?

4. Briefly explain how the taxes act as an automatic stabilizer as the income increases from the first period to the second perio

5. Briefly explain how the fact that Billy earned a job in the second period acts as an automatic stabilizer.

Splish Company invests $10,400,000 in 5% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now $11,078,000. Interest is paid on January 1.

Prepare journal entries for Splish Company to (a) record the transactions related to these bonds in 2017, assuming Splish does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Splish Company elects the fair value option to account for these bonds. (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.)

AirQual Test Corporation provides on-site air quality testing services. The company has provided the following cost formulas and actual results for the month of February:

The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses should be $4,600 plus $35 per job, and the actual mobile lab operating expenses for February were $8,640. The company expected to work 120 jobs in February, but actually worked 124 jobs.

Required:

Prepare a flexible budget performance report showing AirQual Test Corporation’s revenue and spending variances and activity variances for February. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

1. Suppose Kifwong is a small economy with only five people and two income tax rates. The first $4,000 earned each month are taxed 30%. Anything earned over $4,000 each month is taxed 45%. Anyone who is not working receives unemployment benefits of $2,500, paid for by the government. The table below shows the income for the five people at two different time periods. (5 pts.)

1. Calculate the total tax revenue during the first period

2. Calculate the total tax revenue when the economy during the second period

3. Excluding Billy’s income, what is the percent change between total income in the first period and total income in the second period?

4. Briefly explain how the taxes act as an automatic stabilizer as the income increases from the first period to the second perio

5. Briefly explain how the fact that Billy earned a job in the second period acts as an automatic stabilizer.

1. Existing machine was purchased 2 years ago at a cost of $3,200. It is being depreciated straight line over its 8 year life. It can be sold now for $3,000 or used for 6 more years at which time it will be sold for an estimated $500. It provides revenue of $5,000 annually and cash operating costs of $2,000 annually. A replacement machine can be purchased now for $7,800. It would be used for 6 years, and depreciated straight line. It will result in additional sales revenue of $1,500 annually, but because of its increased efficiency it would reduce cash operating costs by $600 per year. The new machine would require additional inventories of $700, and accounts receivable would increase by $300. Its expected salvage value in 6 years is $2,000.

The tax rate is 40% and the required rate of return is 13%. Should the old machine be replaced?

a. Calculate the incremental cash flow at time 0 (ie the initial cost of this replacement project). [5marks]

b. Calculate the incremental annual operating cash flows that result from the new machine. [5marks]

c. Calculate the incremental terminal cash flow. [5marks]

Problem 1 (Hedging)

A US exporter expects to receive £1 million in 2 months for her exports to the UK. The current exchange rate is US$2.30/£. She is worried that the pound might depreciate over the next 2 months and wants protection against its decline but she also want to benefit from a possible rise in £ over the next 2 months. Put options and call options on the £, with 2-month maturity are available.

1. What should she do?

2. Suppose the 2-month put options exercisable at US$2.50/£ are trading at US$0.01. What would be her cash revenue, given your answer in part a), if at the 2 month end the spot exchange rate turns out to be

   1. US$2.00/£

   2. US$3.00/£

3. What would be her minimum cash revenue, no matter what the spot rate at the end of 2 months turn out to be?

4. What would be the upfront cost (fee) for undertaking the appropriate options contract?

5. What would she do if the expected £1 million at the 2-month end are not received and what would be her loss if that happens?

The following transactions apply to Jova Company for Year 1, the first year of operation:

1. Issued $15,500 of common stock for cash.
2. Recognized $64,500 of service revenue earned on account.
3. Collected $57,600 from accounts receivable.
4. Paid operating expenses of $36,000.
5. Adjusted accounts to recognize uncollectible accounts expense. Jova uses the allowance method of accounting for uncollectible accounts and estimates that uncollectible accounts expense will be 2 percent of sales on account.

The following transactions apply to Jova for Year 2:

1. Recognized $72,000 of service revenue on account.
2. Collected $65,600 from accounts receivable.
3. Determined that $890 of the accounts receivable were uncollectible and wrote them off.
4. Collected $300 of an account that had previously been written off.
5. Paid $48,400 cash for operating expenses.
6. Adjusted the accounts to recognize uncollectible accounts expense for Year 2. Jova estimates uncollectible accounts expense will be 1 percent of sales on account.

Required
Complete the following requirements for Year 1 and Year 2. Complete all requirements for Year 1 prior to beginning the requirements for Year 2.

c. Organize the transaction data in accounts under an accounting equation for each year.

AirQual Test Corporation provides on-site air quality testing services. The company has provided the following cost formulas and actual results for the month of February:

The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses should be $2,900 plus $35 per job, and the actual mobile lab operating expenses for February were $4,530. The company expected to work 50 jobs in February, but actually worked 52 jobs.

Required:

Prepare a flexible budget performance report showing AirQual Test Corporation’s revenue and spending variances and activity variances for February. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 23 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 28,100 Sales revenue $ 15,200 $ 16,800 $ 18,200 $ 14,700 Operating costs 3,800 3,550 6,000 4,600 Depreciation 7,025 7,025 7,025 7,025 Net working capital spending 390 290 405 240 ? a. Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.) b. Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign.) c. Suppose the appropriate discount rate is 10 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)