Gary Farmer had the following sales of business property during the 2018 tax year:

1. Sold land acquired on December 3, 2007, at a cost of $24,000, for $37,000 on January 5, 2018. The cost of selling the land was $500, and there was no depreciation allowable or capital improvements made to the asset over the life of the asset.
2. Sold a business computer with an adjusted basis of $20,700 that was acquired on April 5, 2015. The original cost was $25,875, and accumulated depreciation was $5,175. The computer was sold on May 2, 2018, for $14,000, resulting in a $6,700 loss.
3. Sold equipment on July 22, 2018 for gross proceeds of $16,000. The equipment was acquired on October 21, 2017 at a cost of $25,000 and accumulated depreciation was $4,300 at the time of the sale. Gary used an equipment broker on this sale and paid a sales commission of $1,600.

Calculate Gary’s net gain or loss and determine the character as either capital or ordinary (ignore any depreciation recapture).

The land and computer  are Section 1231 properties, resulting in a net Section 1231 gain  of $. This is treated as a net long-term capital gain . The equipment  is treated as an ordinary asset . As such it results in an ordinary loss  of $._______________

On July 1, 2018, The Shepard Company purchased the following securities: 500 debentures (6% interest) of Tatum Incorporated for $520,200 690 common shares of Cook Ltd. for $167,400 4,000 common shares of Green Co. for $504,900 850 preferred shares of Frisbee Corp. for $76,500 2,000 common shares of Kelly, Inc. for $212,700 Shepard acquired 5% of Kelly’s outstanding shares, 10% of Frisbee’s preferred stock, and 8% of Cook’s common stock. Shepard’s investment in Tatum’s securities will mature in nine years. Shepard’s acquisition of 24% of Green’s common shares resulted in its owning the largest single concentration of stock held by any of Green’s stockholders. On December 1, 2018, Kelly issued a 2-for-1 stock split. At December 31, 2018, Shepard had the following data for the companies in which it had invested: Investee Company Results for 2018 Market Value of Total Total Shepard’s Investment Name Net Income Dividends Paid In Each Company Kelly $5,030,000 $920,000 $258,300 Frisbee 4,010,000 870,000 62,800 Green 1,240,000 250,000 516,500 Cook 2,690,000 430,000 172,500 Tatum 3,370,000 680,000 618,600 Each investee company paid its dividend or interest in cash on December 31, 2018. Record the journal entries that Shepard made with regard to its investments at December 31, 2018.

1. For each of the following events, identify the impact on a company’s assets, liabilities and shareholders’ equity:

• declare a dividend
• pay a dividend
• create a general reserve
• create a revaluation surplus
• make a bonus issue of shares
• make a rights issue of shares
• applied the lower of cost or net realisable value rule to some damaged inventory
• recognised taxation expense for the year (to be paid in the following year)
• a controlling interest in another company was acquired by purchasing shares in that company in exchange for land and cash (the value of the shares received for land was greater than the book value of the land)
• issued 100 000 $10 7% debentures to raise funds for expansion into new markets

2. If you were considering buying shares in a company, and both ordinary and preference shares were available, what factors would you take into account in making the choice? What types of preference shares can companies offer?

3. Calculate the profit of a company for a year given that:
   • assets went up by $33 400 (part of this increase was the result of land being re-valued upwards by $20 000)
   • liabilities went down by $15 700
   • shareholders contributed $5 000 in new capital
   • dividends distributed to shareholders amounted to $7 500 (these dividends were declared and paid in the current year)
   • debt of $12 000 was reduced by an exchange for an equivalent amount of ownership capital.

You are a senior member of management for a development and construction company where the original two owners wish to retire and sell the business. Along with several experienced co-workers, you are considering a buyout of the business. As part of your due diligence, you have performed some analysis of the historical financial statements and determined the following:

·         Audited financial statements indicate a net book value of $4,500,000.

·         The owners recently had the tangible assets appraised and the fair value of assets is $2,000,000 higher than audited book value. Part of the difference results from the owners having acquired several development sites over a period of years that are recorded in the audited financial statements at original cost.

·         A guideline public company recent price to earnings multiple for a comparable public company times weighted average income results in a business value of $9,000,000.

·         Using a discounted cash flow approach with a five-year projection period and terminal value results in a business value of $10,000,000.

You and your co-workers have offered $9,500,000 for the company. The owners will be paid consultants for one year following the purchase of the business so that there will be no loss of key employees.  

The owners are motivated to sell but negotiations are at an impasse. The owners insist that they be paid $11,500,000 - $9,500,000 offered plus the $2,000,000 incremental fair value of assets over book value. How do you respond to the counter-offer of the owners? Explain briefly the reason if you accept or reject the offer

Poudre Industries is a diversified manufacturing company with a decentralized management structure. Each division is treated as a profit center. One of these divisions is Wellington Processing, which produces a variety of products at a single plant. Wellington operates below capacity. Wellington’s biggest customer for a major product, XB42, is Eaton Industries, another division of Poudre. At the normal production level of 30,000 units, XB42 costs $840 to produce: direct materials, $310; direct labor, $80; overhead, $450). The composition of the overhead cost is 60% fixed and 40% variable. The current selling price of XB42 is $1,120/unit. Eaton has been paying $1,075/unit, with the discount reflecting lower transaction costs for Wellington. Eaton has found another supplier for XB42 at a price of $690/unit. Wellington’s president refuses to meet this price, as it is below cost, and she will lose money on the sale.   Required: As CEO of Poudre, discuss the factors to be considered in resolving the pricing dispute between Wellington and Eaton.

** (a) (i) What is Managerial Economics?

(ii) What is the scope of Managerial Economics?

(iii) As a CEO of a company, of what relevance is Managerial Economics to you?

(b) Define and give an example of each of the following demand terms and concepts and illustrate diagrammatically a change in each.

(i) Demand

(ii) Normal good

(iii) Inferior good

(iv) Substitute good

(v) Complementary good

(c) The market demand for brand X has been estimated as Qx= 1,500 – 3Px – 0.05I- 2.5Py + 7.5Pz, where Px is the price of the brand X, I is per-capita income, Py is the price of brand Y, and Pz is the price of brand Z. Assume that Px = $2, I = $20,000, Py = $4, and Pz =$4

(i) With respect to changes in per-capita income, what kind of good is brand X?

(ii) How are brands X and Y related?

(iii) How are brands X and Z related?

(iv) How are brands Z and Y related?

(v) What is the market demand for brand X?

Your company, Sonic Video, Inc., has conducted research that shows the probability distribution, where X is the number of video arcades in a randomly chosen city with more than 500,000 inhabitants. x 0 1 2 3 4 5 6 7 8 9 P(X = x) 0.07 0.09 0.37 0.22 0.16 0.03 0.02 0.02 0.01 0.01 (a) Compute the mean, variance and standard deviation (accurate to one decimal place). mean variance standard deviation (b) As CEO of Startrooper Video Unlimited, you wish to install a chain of video arcades in Sleepy City, U.S.A. The city council regulations require that the number of arcades be within the range shared by at least 75% of all cities. What is this range? (Find the interval containing at least 3/4 of the data as guaranteed by Chebyshev's Rule. Round your answers to one decimal place.) , What is the largest (whole) number of video arcades you should install so as to comply with this regulation? arcades

Baxter Corp is a diversified manufacturing company with a decentralized management structure. Each division is treated as a profit center. One of these divisions is Duke Processing, which produces a variety of products at a single plant. Duke operates below capacity. Duke’s biggest customer for a major product, XB42, is Eastwood Industries, another division of Baxter Corp. At the normal production level of 30,000 units, XB42 costs $840 to produce: direct materials, $310; direct labor, $80; overhead, $450). The composition of the overhead cost is 60% fixed and 40% variable. The current selling price of XB42 is $1,120/unit. Eastwood has been paying $1,075/unit, with the discount reflecting lower transaction costs for Duke. Eastwood has found another supplier for XB42 at a price of $690/unit. Duke’s president refuses to meet this price, as it is below cost, and she will lose money on the sale.

Discuss: As CEO of Baxter Corp, discuss the factors to be considered in resolving the pricing dispute between Duke and Eastwood.