The following CVP income statements are available for Blanc Company and Noir Company.

a.) Compute the break-even point in dollars for each company. (Round answers to 0 decimal places, e.g. 5,125.)

b.) Compute the margin of safety ratio for each company. (Round answers to 0 decimal places, e.g. 5,125.)

c.) Compute the degree of operating leverage for each company. (Round answers to 0 decimal places, e.g. 5,125.)

d.) Assuming that sales revenue increase by 20%, prepare a CVP income statement for each company.

The adjusted trial balance for Ivanhoe Company is given below.

Prepare the closing entries for the temporary accounts at August 31. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

List of Accounts

• Accounts Payable
• Accounts Receivable
• Accumulated Depreciation-Buildings
• Accumulated Depreciation-Equipment
• Advertising Expense
• Amortization Expense
• Buildings
• Cash
• Common Stock
• Depreciation Expense
• Dividends
• Equipment
• Income Summary
• Income Tax Expense
• Income Taxes Payable
• Insurance Expense
• Interest Expense
• Interest Payable
• Interest Receivable
• Interest Revenue
• Land
• Maintenance and Repairs Expense
• Mortgage Payable
• No Entry
• Notes Payable
• Prepaid Advertising
• Prepaid Cleaning
• Prepaid Insurance
• Prepaid Rent
• Property Tax Expense
• Property Taxes Payable
• Rent Expense
• Rent Revenue
• Retained Earnings
• Salaries and Wages Expense
• Salaries and Wages Payable
• Sales Revenue
• Service Revenue
• Supplies
• Supplies Expense
• Ticket Revenue
• Unearned Rent Revenue
• Unearned Sales Revenue
• Unearned Service Revenue
• Unearned Ticket Revenue
• Utilities Expense
• Website

AVOIDING PAYING TAXES—CHEATING THE GOVERNMENT

Very few people talk about wanting to pay taxes—for most citizens in most countries it is a natural inclination to avoid paying taxes, particularly when people object to the way the government spends the tax dollars on activities and programs which are contrary to the personal beliefs of individual citizens. Yet most students reading this textbook, and in a college or university course in Canada where this course is being taught, are the beneficiary of tax dollars in the context of how the government collects personal income tax and corporate tax and uses that money to subsidize educational costs—costs such as the building, the salary of the professor, the transportation system that gets you to class etc.

Sometimes national and regional governments operate in areas where there are not enough medium and large-sized companies paying corporate tax—therefore the government has a difficult time obtaining tax revenue to provide educational and health care services to the citizens. When the government does not have the means to collect enough taxes it has to make choices and often one of the primary ways governments cut costs is to cut education funding—meaning cuts to the number of teachers and cuts to facilities, technology, and other things necessary for students to obtain an education.

Recently (in 2012 and 2013), a number of leading American IT companies, such as Apple and Google, have been harshly criticized for using various strategies to avoid paying taxes in the United States, for example by outsourcing, offshoring, and listing income under foreign subsidiaries. The irony of the situation is bitter since both Apple and Google produce products and services that make it easier for students to carry out their studies, yet by avoiding paying millions in tax, these actions deprive the government of tax dollars that could be used to fund education.

Tax avoidance is not limited to the United States. In May 2013, The Economist magazine²¹ reported that “Google came under fire from British politicians, one of whom publicly accused the Internet giant of using unethical methods to avoid paying its fair share of tax.” In the United States, the Senate's Permanent Subcommittee on Investigations reported that “between 2009 and 2012 Apple avoided paying tax in America on at least $74 billion of profits by setting up subsidiaries in Ireland that had no purpose other than to ensure these profits were shielded from tax.”

Questions

1. Tax avoidance has been a hot topic in the United States, has it become a topic in Canada as well? Research some news stories to see if you can find some Canadian companies criticized for avoiding Canadian taxes.

2. The national government in Canada is now making more stringent efforts to collect tax from companies paying late, or not paying the full amount. Searching online, can you find out what the government is doing to recover money owed?

Also, many studies of unethical behaviour in a business setting have concluded that business people sometimes do not realize they are behaving unethically, primarily because they simply fail to ask, “Is this decision or action ethical?”²⁰ Instead, they apply a straightforward business evaluation to what they perceive to be a business decision, forgetting that the decision may also have an important ethical dimension.

Your company, VZ, is evaluating the proposal of expanding FiOS Internet, Voice and TV service coverage to Western New York. The expansion project requires a new system costs $108,000, and it would incur another installation and configuration expense of $12,500. The system falls into the MACRS 3-year class, and it would be sold after 3 years for $65,000. The project would require an increase in net working capital (Labor, Office Leasing) of $5,500. The project is expected to generate additional revenue of $44,000 each year for 3 years. Verizon’s marginal tax rate is 36%.

1. What is the investment outlay of the system for capital budgeting purposes? (i.e. What is Year 0 net cash flow?)

2. What are the incremental operating cash flows in Year 1, 2, and 3?

3. What is the terminal cash flow in Year 3?

4. If the project’s required rate of return is 12%, should the project be pursued? What if the required rate of return is 18%? What if the required rate of return is 8%?

5. How would different financing strategies affect your decision on the profitability of the project?

Required information

Exercise 3-31 Manufacturing Cost Flows (LO 3-2, 3-5, 3-6)

[The following information applies to the questions displayed below.]

Reimel Furniture Company, Inc. incurred the following costs during 20x2.

During 20x2, products costing $120,000 were finished, and products costing $132,000 were sold on account for $195,000. There were no purchases of raw material during the year. The beginning balances in the firm’s inventory accounts are as follows:

Exercise 3-31 Part 1

Required:

1. Prepare T-accounts to show the flow of costs through the company’s manufacturing accounts during 20x2.

Raw material inventory

work in process inventory

wages payable

manufacturing overehad

finished goods inventory

sales revenue

accounts receivable

Cost of goods sold

2. Prepare a partial balance sheet and a partial income statement to reflect the information given above.

How would you solve this using excel formulas, step by step?

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $ 790 Second birthday: $ 790 Third birthday: $ 890 Fourth birthday: $ 890 Fifth birthday: $ 990 Sixth birthday: $ 990 After the child’s sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $370,000. If the relevant interest rate is 11 percent for the first six years and 7 percent for all subsequent years, what is the value of the policy at the child's 65th birthday? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Please answer each part.

Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 2% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly.

At the end of 2017, accounts receivable were $608,000 and the allowance account had a credit balance of $72,000. Accounts receivable activity for 2018 was as follows:

The company’s controller prepared the following aging summary of year-end accounts receivable:

Required:
1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year.
2. Prepare the necessary year-end adjusting entry for bad debt expense.
3-a. What is total bad debt expense for 2018?
3-b. How would accounts receivable appear in the 2018 balance sheet?

You are to invest $100,000 for a client. Because the funds are to be invested in business(es) at the end of one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the following investment alternatives shown with their probabilities and associated outcomes.

                                   Returns On Alternative Investments              

                                                  Estimated Rate Of Return                   

    State of            ??     T-         Alta      Repo          Am.         Market            2-Stock

     Economy              Prob.      Bills      Inds Men       Foam       Portfolio           Portfolio

Recession                 0.1        8.0%    -22.0%    28.0%    10.0%      -13.0%         3.0%

Below Avg                0.2         8.0          -2.0        14.7       -10.0             1.0             6.4

Average                    0.4         8.0         20.0          0.0          7.0           15.0           10.0

Above Avg               0.2         8.0         35.0       -10.0        45.0           29.0           12.5

Boom                        0.1         8.0         50.0       -20.0        30.0           43.0           15.0

Expected Return ()             8.0         17.4%   1.7% 13.8%       15.0%       9.58%

Std Dev (?)                           0.0         20.0       13.4 18.8          15.3           3.34

Beta (?) 0          1.29 -0.86 0.68 1           0.215

The estimated returns of Am.Foam(American Foam) do not always move in the same direction as the overall economy. For example, when the economy is below average, consumers purchase fewer mattresses than they would if the economy was stronger. However, if the economy is in a flat-out recession, a large number of consumers who were planning to purchase a more expensive inner spring mattress may purchase, instead, a cheaper foam mattress. Under these circumstances, we would expect American Foam’s stock price to be higher if there is a recession than if the economy was just below average.

Alta Inds(Alta Industries) is an electronics firm; Repo Men collects past-due debts; and American Foam manufactures mattresses and other foam products.

Sungkyunkwan Investment’s economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts have estimated the rate of return on each alternative under each state of the economy.

Sungkyunkwan Investment also maintains an “index fund” which owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund, and thus obtain average stock market results.

Disregard for now the items at the bottom of the data; you will fill in the blanks later.

Given the situation as described, answer the following questions:

1) Why is T-Bill's return independent of economic conditions? Can T-Bill promise completely risk free rates? (5 points)

2) Calculate the expected return on Alta Inds. (5 points)

3) You should be aware that making investment decisions based solely on expected returns is possible only if it is risk neutral. Your customers are risk takers and recognize that the level of risk of each investment alternative is a very important part of investment decisions. The standard deviation of returns is presented as an estimate of risk.

(a) Alta Ind. Present an equation to calculate the standard deviation of returns and do the actual calculation. (5 points)

(b) What type of risk is measured by the standard deviation?

4) Assume that you invested $ 50,000 each in Alta Inds and Repo Men.

(a) Calculate expected returns and standard deviations for this portfolio. (5 points)

(b) What is the risk level of this 2-stock portfolio compared to the risk level of each individual stock before forming the portfolio? Is it higher or lower? (5 points)

5) How is market risk measured for individual stocks? What does beta (?) mean? (10 points)

6) Sungkyunkwan Investment Inc. (Sungkyunkwan Investment Company) presents statistically estimated expected rates of return and beta coefficients for individual investments as follows. (Summarized in the table above)

Security                      Return ()                  Risk (?)

                                 Alta Inds                       17.4%                         1.29

                                 Market 15.0 1.00

                                 Am. Foam                    13.8 0.68

                                 T-Bills                           8.0 0.00

                                 Repo Men                     1.7 (0.86)

(a) Calculate the required rate of return for each investment alternative using the stock market linear equations. (10 points)

(b) Compare each of the investment alternatives with the expected rates of return and the required rates of return (CAPM-theorized expected return) to give an overvaluation or undervaluation . (10 points)

(c) Calculate the market risk and demand rate of a portfolio consisting of 50% each of Alta Ind and Repo Men. (10 points)