Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2020. As of that date, Jackson had the following trial balance:

During 2020, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2021, Jackson reported net income of $132,000 while paying dividends of $36,000. Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2020, Jackson's land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years.

Matthews decided to use the equity method for this investment.

Required:

Using Excel

(A.) Prepare consolidation worksheet entries for December 31, 2020.

(B.) Prepare consolidation worksheet entries for December 31, 2021.

1.      Washington Co. exchanged nonmonetary assets with Stranger Co. No cash was exchanged and the exchange had no commercial substance. The carrying amount of the asset surrendered by Washington exceeded. Both the fair value of the asset received and Stranger’s carrying amount of that asset. Washington should recognize the difference between the carrying amount of the asset it surrendered and

a.       The fair value of the asset it received as a loss.

b.      The fair value of the asset it received as a gain.

c.       Stranger’s carrying amount of the asset it received as a loss.

d.      Stranger’s carrying amount of the asset it received as a gain.

2.      Charles County owned an idle parcel of real estate consisting of land and a factory building. Charles gave title to this realty to Parson Co. as an incentive for Parson to establish manufacturing operations in the county. Parson paid nothing for this realty, which had a fair value of $250,000 at the date of the grant. Parson should record this nonmonetary transaction as a

a.       Memo entry only

b.      Credit to Contribution Revenue for $250,000

c.       Credit to Comprehensive Income for $250,000

d.      Credit to Donated Capital for $250,000

3.      On September 10, 2015, Jenks Co. incurred the following costs for one of its printing presses:

Purchase of attachment                                                           $55,000

Installation of attachment                                                       $5,000

Replacement parts for renovation of press                             $18,000

Labor and overhead in connection with renovation of press   $7,000

     Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized?

a.       $0

b.      $67,000

c.       $78,000

d.      $85,000

4.      On February 2, 2016, Yarley Corp. replaced its boiler with a more efficient one. The following information was available on that date:

Purchase price of new boiler                                                   $150,000

Carrying amount of old boiler                                                $10,000

Fair value of old boiler                                                                $4,000        

Installation cost of new boiler                                                $20,000

The old boiler was sold for $4,000. What amount should Yarley capitalize as the cost of the new boiler?

a.       $170,000

b.      $164,000

c.       $160,000

d.      $150,000

On January 1, 2015, Pack Co. acquired 80% of the common stock of Sack Co. by paying $80,000. On that date Sack' land was undervalued $3,800 and its Buildings (7 yr life) were undervalued $4,200 and its equipment (5 Yr life) were undervalued $2,000. A. Show the elements making of the cost of the investment. (Hint: Set up a schedule showing the controlling and non-controlling interest in the individual elements) B. Prepare consolidation entry S to eliminate the sub’s equity accounts at 12/31/15: C. Prepare consolidation entry A (acquisition) D. Prepare consolidation entry I (income) E. Prepare consolidation entry D (dividends) F. Prepare consolidation entry E (expenses)

Stulz Co. is considering to start a new project. If Stulz Co. commits and invests $450 mil today, the present value project is $500 mil (i.e. NPV = $50 mil). If the project gets off to a good start and demand is high in year 1, the cash flow at year 1 will be $62.5 mil and the value of project rises to $625 mil. But, if things don't work out, the cash flow at year 1 is only $40 mil and the value of project falls to $400 mil. Although the project lasts indefinitely, we assume that investment can’t be postponed beyond the end of the first year, and therefore we observe only the cash flows for the first year and the possible value of project at the end of the first year. If Stulz Co. undertakes project right away, it captures the first year’s cash flows ($62.5 mil or $40 mil). If Stulz Co. delays, it misses out this cash flow, but it will have more information on how the project is likely to work out.

Risk free interest rate is 2%.     Calculate the value of timing (delay) option.

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $400,000 and the interest rate on its debt is 5.2 percent. Both firms expect EBIT to be $79,000. Ignore taxes.

a. Rico owns $60,000 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. Suppose Rico invests in ABC Co. and uses homemade leverage. Calculate his total cash flow and rate of return. (Do not round intermediate calculations and enter your rate of return answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c. What is the cost of equity for ABC and XYZ? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

d. What is the WACC for ABC and XYZ? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

The comparative balance sheets for Wildhorse Co. as of December 31 are presented below.

Additional information:

Prepare a statement of cash flows for the year ended December 31, 2017, using the indirect method.

Stulz Co. is considering to start a new project. If Stulz Co. commits and invests $450 mil today, the present value project is $500 mil (i.e. NPV = $50 mil). If the project gets off to a good start and demand is high in year 1, the cash flow at year 1 will be $62.5 mil and the value of project rises to $625 mil. But, if things don't work out, the cash flow at year 1 is only $40 mil and the value of project falls to $400 mil. Although the project lasts indefinitely, we assume that investment can’t be postponed beyond the end of the first year, and therefore we observe only the cash flows for the first year and the possible value of project at the end of the first year. If Stulz Co. undertakes project right away, it captures the first year’s cash flows ($62.5 mil or $40 mil). If Stulz Co. delays, it misses out this cash flow, but it will have more information on how the project is likely to work out. Risk free interest rate is 2%. Calculate the value of timing (delay) option.

A. $22.90 mil B. $105.88 mil C. $48.52 mil D. $37.19 mil E. $57.17 mil F. $78.59 mil G. $98.03 mil H. $72.73 mil

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $500,000 of equity. XYZ uses both equity and perpetual debt; its equity is worth $280,000 and the interest rate on its debt is 10 percent. Both firms expect EBIT to be $60,000. Ignore taxes (i.e. Modigliani-Miller without taxes or other frictions).

Compute the cost of equity for ABC.

Compute the cost of equity for XYZ.

Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals. The company is split into two divisions: Division F and Division N. Each division operates separately as an investment centre, with each one having full control over its non-current assets. In addition, both divisionns are responsible for their own current assets, controlling their own levels of inventory and cash and having full responsibility for the credit terms granted to customers and the collection of receivables balances. Similarly, each division has full responsibility for its current liabilities and deals directly with its own suppliers.

Each divisional manager is paid a salary of $120,000 per annum plus an annual performance-related bonus, based on the return on investment (ROI) achieved by their division for the year. Each divisional manager is expected to achieve a minimum ROI for their division of 10% per annum. If a manager only meets the 10% target, they are not awarded a bonus. However, for each whole percentage point above 10% which the division achieves for the year, a bonus equivalent to 2% of annual salary is paid, subject to a maximum bonus equivalent to 30% of annual salary.

The following figures relate to the year ended 31 August 2015:

During the year ending 31 August 2015, Division N invested $6.8m in new equipment including a technologically advanced cutting machine, which is expected to increase productivity by 8% per annum. Division F has made no investment during the year, although its computer system is badly in need of updating. Division F's manager has said that he has already had to delay payments to suppliers (i.e. accounts payables) because of limited cash and the computer system 'will just have to wait', although the cash balance at Division F is still better than that of Division N.

Required:

(a) For each division, for the year ended 31 August 2015, calculate the appropriate closing return on investment (ROI) on which the payment of management bonuses will be based. Briefly justify the figures used in your calculations.

(b) Based on your calculation in (a), calculate each manager's bonus for the year ended 31st August 2015.