Essan Construction Inc., which has a calendar year end, has entered into a non-cancellable fixed price contract for $2.8 million beginning September 1, 2020, to build a road for a municipality. It has been estimated that the road construction will be complete by June 2022. The following data pertain to the construction period.
| 2020 | 2021 | 2022 | |
| Cost to date | $800,000 | $1,800,000 | $2,3500,000 |
| Estimated costs to complete | $1,700,000 | $600,000 | 0 |
| Progress billings to date (non-refundable) | $850,000 | $2,300,000 | $2,800,000 |
| Cash collected to date | $700,000 | $2,200,000 | $2,800,00 |
(A) Using the percentage-of-completion method, calculate the estimated gross profit that would be recognized during each year of the construction period. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
| 2020 | 2021 | 2022 | |
| Gross profit / (loss) | $ | $ | $ |
(B) Using the percentage-of-completion method, prepare the journal entries for 2020 and 2021. (Use Materials, Cash, Payables for costs incurred to date.) (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.)
For Year 2020:
| Account Titles and Explanations | Debit | Credit |
| (To record cost of construction) | ||
| (To record progress billings) | ||
| (To record collections) | ||
| (To record revenues) | ||
| (To record construction expenses) |
For Year 2021:
| Account Titles and Explanation | Debit | Credit |
| (To record cost of construction) | ||
| (To record progress billings) | ||
| (To record collections) | ||
| (To record revenues) | ||
| (To record construction expenses) |
(C) Using the percentage-of-completion method, what is the balance in the Contract Asset/Liability account at December 31, 2020 and 2021? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
| December 31,2020 | December 31, 2021 | ||
|
$ | $ |
(D)
In: Accounting
Naa Tetterley Company Ltd engaged your firm to prepare
a Cash Budget for them. They informed you that:
a. They have two bills payable of $55,000 and $60,000 with due
dates of 31st July and 30th September, 2020 respectively.
These bills will be paid on their due dates
b. The Company wishes to arrange with its bankers for any necessary
re-financing in advance, which will ensure a minimum end of month
cash balance of $25,000
You are also given the following information: i. The projected
sales and purchases:
SALES
($) PURCHASES
($)
June
65,000
July. 57,000
July 90,000 August. 45,000
August 65,000 September. 51,000
September 68,000 October. 42,000
October 75,000
ii. The cash balance on 1st July, 2020 will be $18,000
iii. All sales are on terms of a 2% discount allowed on any payment made by the tenth of the month following the sale. Past experience indicates that 70% of the sales are collected within the first 10 days; 20% during the remainder of the first month; and 8% in the second month following the sale. 2% of the sales are considered irrecoverable.
iv. All payments for purchases qualify for 2% discount. Two-thirds of the invoices will be paid in the month of the purchase, and one-third in the month following the purchase.
v. Operating expenses are expected at $6,000 for July 2020. This will increase by 10% per month for the subsequent months.
vi. The company will receive $1,500 monthly from property rentals. This amount will be paid half-a-month in arrears.
vii. An amount of $2,500 will be realised in July from the sale of obsolete equipment.
viii. The company will buy a new plant for $42,000 on 1st June, 2020. The payment for this amount will be spread over 6 monthly equal instalments, starting from August, 2020.
ix. The company anticipates receiving interest on investment of $10,000 every month.
Required:
a. Prepare the Cash Budget for the three months ending 30th
September, 2020
b. Outline any four benefits and four limitations
respectively of a Cash
Budget.
In: Finance
Smart Company prepared its annual financial statements dated
December 31, 2020. The company applies the FIFO inventory costing
method; however, the company neglected to apply the LC&NRV
valuation to the ending inventory. The preliminary 2020 statement
of earnings follows:
| Sales revenue | $ | 297,000 | ||||
| Cost of sales | ||||||
| Beginning inventory | $ | 32,700 | ||||
| Purchases | 201,000 | |||||
| Cost of goods available for sale | 233,700 | |||||
| Ending inventory (FIFO cost) | 75,536 | |||||
| Cost of sales | 158,164 | |||||
| Gross profit | 138,836 | |||||
| Operating expenses | 63,700 | |||||
| Pretax earnings | 75,136 | |||||
| Income tax expense (40%) | 30,054 | |||||
| Net earnings | $ | 45,082 | ||||
Assume that you have been asked to restate the 2020 financial
statements to incorporate the LC&NRV inventory valuation rule.
You have developed the following data relating to the ending
inventory at December 31, 2020:
| Acquisition Cost | ||||||||||||
| Item | Quantity | Unit | Total | Net Realizable Value | ||||||||
| A | 3,220 | $ | 4.70 | $ | 15,134 | $ | 5.70 | |||||
| B | 1,670 | 6.70 | 11,189 | 5.20 | ||||||||
| C | 7,270 | 3.20 | 23,264 | 5.20 | ||||||||
| D | 3,370 | 7.70 | 25,949 | 5.70 | ||||||||
| $ | 75,536 | |||||||||||
1. Restate the statement of earnings to reflect the valuation of the ending inventory on December 31, 2020, at the LC&NRV. Apply the LC&NRV rule on an item-by-item basis.(FINISHED BELOW ANSWER QUESTION 2)
|
|||||||||||||||||||||||||||||||||||||||||||||||||
2. Compare and explain the LC&NRV effect on each amount that was changed in part 1. (Negative answers should be indicated by a minus sign.)
In: Accounting
In: Accounting
Question 1:
Tonka toys manufactures a toy truck called “Big Red” that they distribute to retailers. The company is now planning for the third quarter of 2020. In order to keep production and shipments moving smoothly, the company has the following inventory requirements:
Budgeted Sales (units)
April 30,000
May 35,000
June 39,000
July 40,000
August 50,000
September 70,000
October 35,000
November 20,000
December 10,000
30% are collected in the month of sale
40 % are collected in the month following the sale
20 % are collected two months after the sale
5% are collected three months after the sale
The remaining 5% are bad debts.
Required:
In: Accounting
Big toys manufacture a toy truck called “Big Red” that they distribute to retailers. The company is now planning for the third quarter of 2020. In order to keep production and shipments moving smoothly, the company has the following inventory requirements:
Budgeted Sales (units)
April 30,000
May 35,000
June 39,000
July 40,000
August 50,000
September 70,000
October 35,000
November 20,000
December 10,000
30% are collected in the month of sale
40 % are collected in the month following the sale
20 % are collected two months after the sale
5% are collected three months after the sale
The remaining 5% are bad debts.
Required:
In: Accounting
Tonka toys manufactures a toy truck called “Big Red” that they distribute to retailers. The company is now planning for the third quarter of 2020. In order to keep production and shipments moving smoothly, the company has the following inventory requirements:
Budgeted Sales (units)
April 30,000
May 35,000
June 39,000
July 40,000
August 50,000
September 70,000
October 35,000
November 20,000
December 10,000
30% are collected in the month of sale
40 % are collected in the month following the sale
20 % are collected two months after the sale
5% are collected three months after the sale
The remaining 5% are bad debts.
Required:
In: Accounting
Stott Plc (Stott) has £150 million in excess cash and no debt. The firm expects to generate additional free cash flows of £105 million per year in subsequent years and will pay out these future free cash flows as regular dividends.
Stott’s unlevered cost of capital is 6% and the company presently has 6 million shares outstanding. Stott's board is meeting to decide whether to pay out its £150 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
As some preliminary calculations to assist the board meeting you have been tasked with answering the following: -
c) Assume that Stott uses the entire £150 million to repurchase shares at the cummulative div price calculated in (a) and answer the following: -
i. What is the number of repurchased shares?
ii. What is the number of outstanding shares?
iii. What is the amount of regular yearly dividends in the future?
iv. Calculate the share price after the repurchase.
d) The board of Pawson plc is considering changing from its current dividend policy of paying out what is left over from its available cash after making investments. The forecast dividends if the company continues with its current policy and the forecast dividends if it changes to the new policy are shown below.
Forecast dividend payments 1 – If current dividend policy continues
|
Year |
2020 |
2021 |
2022 |
2023 |
2024 |
|
Dividend per share (pence) |
20 |
36 |
42 |
47 |
48 |
Forecast dividend payments 2 – If new policy is employed
|
Year |
2020 |
2021 |
2022 |
2023 |
2024 |
|
Dividend per share (pence) |
20 |
25 |
31 |
39 |
48 |
Explain which dividend policy Pawson is currently using and the advantages and disadvantages of the policy. Explain which policy is being employed in the new proposal and explain the advantages and disadvantages of the policy.
In: Accounting
Year Expected EPS ($) Expected Dividend Payout Ratio (%)
|
2016 |
$3.25 |
40% |
|
2017 |
$3.40 |
40% |
|
2018 |
$3.90 |
45% |
|
2019 |
$4.40 |
45% |
2020 $5.00 45%
The stock currently trades at $60 per share. Yoda thinks that within five years it should be trading at $75 to $80 a share. Luke realizes that to buy the Galactic Empire stock, he will have to sell his holdings of Han Solo Industries—a highly regarded growth stock that Luke is disenchanted with because of recent substandard performance.
determine the amount of annual dividends Galactic Empire can be expected to pay over the years 2016 to 2020.In: Finance
Under what circumstances would it be advisable to borrow money to take a cash discount?
Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?
How have new banking laws influenced competition?
What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?
What does LIBOR mean? Is LIBOR normally higher or lower than the
U.S. prime interest rate?
What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporate borrowers?
Commercial paper may show up on corporate balance sheets as either
a current asset or a current liability. Explain this statement.
What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?
What is the difference between pledging accounts receivable and factoring accounts receivable?
What is an asset-backed public offering?
Briefly discuss three types of lender control used in inventory financing.
What is meant by hedging in the financial futures market to offset interest rate risks?
The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 13.3 percent. If they increase to 14.5 percent, assume the value of the contracts will go down by 5 percent. Also if interest rates do increase by 1.2 percent, assume the firm will have additional interest expense on its business loans and other commitments of $53,000. This expense, of course, will be separate from the futures contracts.
a. What will be the profit or loss on the futures contract if interest rates go to 14.5 percent by December when the contract is closed out?
b. Explain why a profit or loss took place on the futures contracts.
c. After considering the hedging in part a, what is the net cost to the firm of the increased interest expense of $53,000? What percent of this $53,000 cost did the treasurer effectively hedge away?
d. Indicate whether there would be a profit or loss on the futures contracts if interest rates dropped.
In: Finance