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Accounting_Chapter_26 Accounting_Chapter_26

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TRUE-FALSE STATEMENTS

1. An important step in management's decision-making process is to determine and evaluate

possible courses of action.

2. In making decisions, management ordinarily considers both financial and nonfinancial

information.

3. In incremental analysis, total variable costs will always change under alternative courses

of action, and total fixed costs will always remain constant.

4. Accountants are mainly involved in developing nonfinancial information for management's

consideration in choosing among alternatives.

5. Decision-making involves choosing among alternative courses of action.

6. Financial data are developed for a course of action under an incremental basis and then it

is compared to data developed under a differential basis before a decision is made.

7. A special one-time order should never be accepted if the unit sales price is less than the

unit variable cost.

8. If a company has excess capacity and present markets will not be affected, it would be

profitable to accept an order at a special unit price even though the price is less than the

unit variable cost to manufacture the item.

9. A company should never accept an order for its product at less than its regular sales

price.

10. A decision whether to continue to make a product or buy it externally, depends on the

external price and the amount of variable and fixed costs that can be eliminated assuming

no alternative uses of resources.

11. An opportunity cost is the potential benefit obtained by using resources in an alternative

course of action.

12. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make

an item, management should always make the decision to choose the lowest cost

alternative.

13. In a sell or process further decision, management should process further as long as the

incremental revenues from additional processing exceed the incremental variable costs.

14. It is always better to sell now rather than process further because of the time value of

money.

15. In a decision concerning replacing old equipment with new equipment, the book value of

the old equipment can be considered a sunk cost.

16. In a decision to retain or replace old equipment, the salvage value of the old equipment is

relevant in incremental analysis.

17. It is better not to replace old equipment if it is not fully depreciated.

18. From a quantitative standpoint, a segment should be eliminated if its contribution margin

is less than the fixed costs that can be eliminated.

19. The elimination of an unprofitable product line may adversely affect the remaining product

lines.

20. When a company has limited resources to manufacture products, it should manufacture

those products which have the highest contribution margin per unit of limited resource.

21. If a company has only a certain number of machine hours available for production, it is

generally more profitable to produce and sell the product with the highest unit contribution

margin.

22. Capital budgeting decisions usually involve large investments and can have a significant

impact on a company's future profitability.

23. The annual rate of return technique requires dividing a project's annual cash inflows by

the economic life of the project.

24. A hurdle rate is the rate of return set by applying ideal standards.

25. A major advantage of the annual rate of return technique is that it considers the time value

of money.

26. The cash payback capital budgeting technique is a quick way to calculate a project's net

present value.

27. The cash payback method is frequently used as a screening tool but it does not take into

consideration the profitability of a project.

28. Using the net present value method, a net present value of zero indicates that the project

would be acceptable.

29. The net present value method can only be used in capital budgeting if the expected cash

flows from a project are an equal amount each year.

30. The interest rate yielded by a project is a rate that will cause the present value of the

proposed capital expenditure to equal the present value of the expected annual cash

inflows.

31. Accounting contributes to management's decision-making process through internal

reports that review the actual impact of the decision.

32. The process used to identify the financial data that change under alternative courses of

action is called allocation of limited resources.

33. If a company is operating at full capacity, the incremental costs of a special order will likely

include fixed manufacturing costs.

34. The basic decision rule in a sell or process further decision is: sell without further

processing as long as the incremental revenue from processing exceeds the incremental

processing costs.

35. In deciding on the future status of an unprofitable segment, management should

recognize that net income could decrease by eliminating the unprofitable segment.

36. The annual rate of return is computed by dividing expected annual net income by average

investment.

37. The discounted cash flow technique considers estimated total cash inflows from the

investment but not the time value of money.

MULTIPLE CHOICE QUESTIONS

38. A major accounting contribution to the managerial decision-making process in evaluating

possible courses of action is to

a. assign responsibility for the decision.

b. provide relevant revenue and cost data about each course of action.

c. determine the amount of money that should be spent on a project.

d. decide which actions that management should consider.

39. Which of the following stages of the management decision-making process is improperly

sequenced?

a. Evaluate possible courses of action Make decision.

b. Assign responsibility for the decision Identify the problem.

c. Identify the problem Determine possible courses of action.

d. Assign responsibility for decision Determine possible courses of action.

40. Internal reports that review the actual impact of decisions are prepared by

a. department heads.

b. the controller.

c. management accountants.

d. factory workers.

41. Which of the following steps in the management decision-making process does not

generally involve the managerial accountant?

a. Determine possible courses of action

b. Make the appropriate decision based on relevant data

c. Prepare internal reports that review the impact of decisions

d. None of these

42. The process of evaluating financial data that change under alternative courses of action is

called

a. double entry analysis.

b. contribution margin analysis.

c. incremental analysis.

d. cost-benefit analysis

.

43. Nonfinancial information that management might evaluate in making a decision would not

include

a. employee turnover.

b. contribution margin.

c. the environment.

d. the corporate profile in the community.

44. Incremental analysis is synonymous with

a. difficult analysis.

b. differential analysis.

c. gross profit analysis.

d. derivative analysis.

45. In incremental analysis,

a. only costs are analyzed.

b. only revenues are analyzed.

c. both costs and revenues may be analyzed.

d. both costs and revenues that stay the same between alternate courses of action will

be analyzed.

46. Incremental analysis is most useful

a. in developing relevant information for management decisions.

b. in choosing between the net present value method and the internal rate of return

method.

c. in evaluating the master budget.

d. as a replacement technique for variance analysis.

47. The source of data to serve as inputs in incremental analysis is generated by

a. market analysts.

b. engineers.

c. accountants.

d. all of these.

48. Which of the following is not a true statement?

a. Incremental analysis might also be referred to as differential analysis.

b. Incremental analysis is the same as CVP analysis.

c. Incremental analysis is useful in making decisions.

d. Incremental analysis focuses on decisions that involve a choice among alternative

courses of action.

49. Incremental analysis would not be appropriate for

a. a make or buy decision.

b. an allocation of limited resource decision.

c. elimination of an unprofitable segment.

d. analysis of manufacturing variances.

50. Incremental analysis would be appropriate for

a. acceptance of an order at a special price.

b. a retain or replace equipment decision.

c. a sell or process further decision.

d. all of these.

51. Which of the following is a true statement about cost behaviors in incremental analysis?

1. Fixed costs will not change between alternatives.

2. Fixed costs may change between alternatives.

3. Variable costs will always change between alternatives.

a. 1

b. 2

c. 3

d. 2 and 3

52. A company is considering the following alternatives:

Alternative 1 Alternative 2

Revenues $120,000 $120,000

Variable costs 60,000 70,000

Fixed costs 35,000 35,000

Which of the following are relevant in choosing between the alternatives?

a. Variable costs

b. Revenues

c. Fixed costs

d. Variable costs and fixed costs

53. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom

scale which normally sells for $35. A foreign wholesaler offers to purchase 2,000 scales at

$15 each. Garner would incur special shipping costs of $1 per scale if the order were

accepted. Garner has sufficient unused capacity to produce the 2,000 scales. If the

special order is accepted, what will be the effect on net income?

a. $4,000 increase

b. $4,000 decrease

c. $6,000 decrease

d. $30,000 increase

54. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales

price of $88. Fixed manufacturing costs were $240,000 when 10,000 units were produced

and sold. The company has a one-time opportunity to sell an additional 1,000 units at $70

each in a foreign market which would not affect its present sales. If the company has

sufficient capacity to produce the additional units, acceptance of the special order would

affect net income as follows:

a. Income would decrease by $4,000.

b. Income would increase by $4,000.

c. Income would increase by $70,000.

d. Income would increase by $20,000.

55. In incremental analysis,

a. costs are not relevant if they change between alternatives.

b. all costs are relevant if they change between alternatives.

c. only fixed costs are relevant.

d. only variable costs are relevant.

56. If a plant is operating at full capacity and receives a one-time opportunity to accept an

order at a special price below its usual price, then

a. only variable costs are relevant.

b. fixed costs are not relevant.

c. the order will likely be accepted.

d. the order will likely be rejected.

57. Miley, Inc. has excess capacity. Under what situations should the company accept a

special order for less than the current selling price?

a. Never

b. When additional fixed costs must be incurred to accommodate the order

c. When the company thinks it can use the cheaper materials without the customer's

knowledge

d. When incremental revenues exceed incremental costs

58. If a company must expand capacity to accept a special order, it is likely that there will be

a. an increase in unit variable costs.

b. no increase in fixed costs.

c. an increase in variable and fixed costs per unit.

d. an increase in fixed costs.

59. Which of the following is true if a company can accept a special order without affecting its

regular sales and is within plant capacity?

a. Net income will not be affected.

b. Net income will increase if the special sales price per unit exceeds the unit variable

costs.

c. Net income will decrease.

d. Additional fixed costs will probably be incurred.

60. If a company anticipates that other sales will be affected by the acceptance of a special

order, then

a. lost sales should be considered in the incremental analysis.

b. lost sales should not be considered in the incremental analysis.

c. the order should not be accepted.

d. the order will only be accepted if the plant is below capacity.

61. Martin Company incurred the following costs for 50,000 units:

Variable costs $180,000

Fixed costs 240,000

Martin has received a special order from a foreign company for 5,000 units. There is

sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will

require spending an additional $8,500 for shipping.

If Martin wants to break even on the order, what should the unit sales price be?

a. $10.10

b. $5.30

c. $3.60

d. $8.40

62. Martin Company incurred the following costs for 50,000 units:

Variable costs $180,000

Fixed costs 240,000

Martin has received a special order from a foreign company for 5,000 units. There is

sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will

require spending an additional $8,500 for shipping.

If Martin wants to earn $8,000 on the order, what should the unit price be?

a. $3.30

b. $11.70

c. $5.20

d. $6.90

63. Which decision will involve no incremental revenues?

a. Make or buy decision

b. Drop a product line

c. Accept a special order

d. Additional processing decision

64. An opportunity cost

a. should be initially recorded as an asset.

b. is the cost of a new product proposal.

c. is the potential benefit that may be obtained by following an alternative course of action.

d. is classified as manufacturing overhead.

65. Opportunity cost must be considered in decisions involving

a. budgeting.

b. financial accounting.

c. CVP analysis.

d. resources that have alternative uses.

66. The opportunity cost of an alternate course of action that is relevant to a make-or-buy

decision is

a. subtracted from the "Make" costs.

b. added to the "Make" costs.

c. added to the "Buy" costs.

d. none of these.

67. Opportunity cost is usually

a. a standard cost.

b. a potential benefit.

c. a sunk cost.

d. included as part of cost of goods sold.

68. Each of the following is a disadvantage of buying rather than making a component of a

company's product except that

a. quality control specifications may not be met.

b. the outside supplier could increase prices significantly in the future.

c. profitable product lines may be dropped.

d. the supplier may not deliver on time.

69. Tex's Manufacturing Company can make 100 units of a necessary component part with

the following costs:

Direct Materials $60,000

Direct Labor 10,000

Variable Overhead 30,000

Fixed Overhead 20,000

If Tex's Manufacturing Company purchases the component externally, $15,000 of the

fixed costs can be avoided. At what external price for the 100 units is the company

indifferent between making or buying?

a. $120,000

b. $85,000

c. $115,000

d. $100,000

70. Tex's Manufacturing Company can make 100 units of a necessary component part with

the following costs:

Direct Materials $60,000

Direct Labor 10,000

Variable Overhead 30,000

Fixed Overhead 20,000

If Tex's Manufacturing Company can purchase the component externally for $110,000

and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy

decision?

a. Make and save $5,000

b. Buy and save $5,000

c. Make and save $15,000

d. Buy and save $15,000

71. Bell's Shop can make 1,000 units of a necessary component with the following costs:

Direct Materials $72,000

Direct Labor 18,000

Variable Overhead 9,000

Fixed Overhead ?

The company can purchase the 1,000 units externally for $117,000. The avoidable fixed

costs are $6,000 if the units are purchased externally. An analysis shows that at this

external price, the company is indifferent between making or buying the part. What are the

fixed overhead costs of making the component?

a. $24,000

b. $18,000

c. $12,000

d. Cannot be determined.

72. Ruth Company produces 1,000 units of a necessary component with the following costs:

Direct Materials $24,000

Direct Labor 16,000

Variable Overhead 4,000

Fixed Overhead 7,000

Ruth Company could avoid $3,000 in fixed overhead costs if it acquires the components

externally. If cost minimization is the major consideration and the company would prefer to

buy the components, what is the maximum external price that Ruth Company would

accept to acquire the 1,000 units externally?

a. $51,000

b. $47,000

c. $48,000

d. $44,000

73. Ruth Company produces 1,000 units of a necessary component with the following costs:

Direct Materials $24,000

Direct Labor 16,000

Variable Overhead 4,000

Fixed Overhead 7,000

None of Ruth Company's fixed overhead costs can be reduced, but another product could

be made that would increase profit contribution by $8,000 if the components were

acquired externally. If cost minimization is the major consideration and the company

would prefer to buy the components, what is the maximum external price that Ruth

Company would be willing to accept to acquire the 1,000 units externally?

a. $43,000

b. $55,000

c. $48,000

d. $52,000

74. Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Materials $30,000

Direct Labor 13,000

Variable Overhead 32,000

Fixed Overhead 22,000

If Fornelli, Inc. can purchase the units externally for $80,000, by what amount will its total

costs change?

a. An increase of $80,000

b. An increase of $5,000

c. An increase of $17,000

d. A decrease of $22,000

75. Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Materials $30,000

Direct Labor 13,000

Variable Overhead 32,000

Fixed Overhead 22,000

If Fornelli, Inc. can purchase the component part externally for $88,000 and only $8,000 of

the fixed costs can be avoided, what is the correct make-or-buy decision?

a. Make and save $1,000

b. Buy and save $1,000

c. Make and save $5,000

d. Buy and save $13,000

76. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following

costs:

Direct Materials $11,000

Direct Labor 15,000

Variable Overhead 3,000

Fixed Overhead 7,000

Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost

minimization is the major consideration and the company would prefer to buy the 60,000

units externally, what is the maximum external price that Crigui would expect to pay for

the units?

a. $32,000

b. $29,000

c. $36,000

d. $33,000

77. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following

costs:

Direct Materials $11,000

Direct Labor 15,000

Variable Overhead 3,000

Fixed Overhead 7,000

None of Crigui’s fixed overhead costs can be reduced, but another product could be made

that would increase profit contribution by $4,000 if the CDs were acquired externally. If

cost minimization is the major consideration and the company would prefer to buy the

CDs, what is the maximum external price that Crigui would be willing to accept to acquire

the 60,000 units externally?

a. $36,000

b. $32,000

c. $33,000

d. $40,000

78. Tasty Bites produces corn chips. The cost of one batch is below:

Direct materials $18.00

Direct labor 13.00

Variable overhead 11.00

Fixed overhead 14.00

An outside supplier has offered to produce the corn chips for $25 per batch. How much

will Tasty Bites save if it accepts the offer?

a. $2.00 per batch

b. $17.00 per batch

c. $31.00 per batch

d. $6.00 per batch

79. NF Toy Company is unsure of whether to sell its product assembled or unassembled. The

unit cost of the unassembled product is $30 and NF Toy would sell it for $65. The cost to

assemble the product is estimated at $21 per unit and the company believes the market

would support a price of $85 on the assembled unit. What decision should NF Toy make?

a. Sell before assembly, the company will be better off by $1 per unit.

b. Sell before assembly, the company will be better off by $20 per unit.

c. Process further, the company will be better off by $29 per unit.

d. Process further, the company will be better off by $14 per unit.

80. Moreland Clean Company spent $4,000 to produce Product 89, which can be sold as is

for $5,000, or processed further incurring additional costs of $1,500 and then be sold for

$7,000. Which amounts are relevant to the decision about Product 89?

a. $4,000, $5,000, and $7,000

b. $4,000, $1,500, and $7,000

c. $5,000, $1,500, and $7,000

d. $4,000, $5,000, $1,500 and $7,000

81. Pratt Company has old inventory on hand that cost $12,000. Its scrap value is $16,000.

The inventory could be sold for $40,000 if manufactured further at an additional cost of

$12,000. What should Pratt do?

a. Sell the inventory for $16,000 scrap value

b. Dispose of the inventory to avoid any further decline in value

c. Hold the inventory at its $12,000 cost

d. Manufacture further and sell it for $40,000

82. New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce

and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen

at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each.

a. Face cream must be processed further because its profit is $9 each.

b. Face cream must not be processed further because costs increase more than

revenue.

c. Face cream must not be processed further because it decreases profit by $1 each.

d. Face cream must be processed further because it increases profit by $3 each.

83. Janssen Company has old inventory on hand that cost $18,000. Its scrap value is

$24,000. The inventory could be sold for $60,000 if manufactured further at an additional

cost of $18,000. What should Janssen do?

a. Sell the inventory for $24,000 scrap value

b. Dispose of the inventory to avoid any further decline in value

c. Hold the inventory at its $18,000 cost

d. Manufacture further and sell it for $60,000.

84. A company has a process that results in 15,000 pounds of Product A that can be sold for

$8 per pound. An alternative would be to process Product A further at a cost of $100,000

and then sell it for $14 per pound. Should management sell Product A now or should

Product A be processed further and then sold? What is the effect of the action?

a. Process further, the company will be better off by $10,000.

b. Sell now, the company will be better off by $10,000.

c. Process further, the company will be better off by $90,000.

d. Sell now, the company will be better off by $100,000.

85. The decision rule on whether to sell or process further

a. varies from situation to situation.

b. is process further as long as total revenue exceeds present revenues.

c. is process further if incremental revenue from such processing exceeds incremental

fixed costs.

d. is process further if incremental revenue from such processing exceeds the

incremental processing costs.

86. Eddy Company is starting business and is unsure of whether to sell its product assembled

or unassembled. The unit cost of the unassembled product is $80 and Eddy Company

would sell it for $180. The cost to assemble the product is estimated at $36 per unit and

Eddy Company believes the market would support a price of $232 on the assembled unit.

What is the correct decision using the sell or process further decision rule?

a. Sell before assembly, the company will be better off by $36 per unit.

b. Sell before assembly, the company will be better off by $52 per unit.

c. Process further, the company will be better off by $52 per unit.

d. Process further, the company will be better off by $16 per unit.

87. Mallory Company manufactures widgets. Bowden Company has approached Mallory with

a proposal to sell the company widgets at a price of $80,000 for 100,000 units. Mallory is

currently making these components in its own factory. The following costs are associated

with this part of the process when 100,000 units are produced:

Direct material $ 31,000

Direct labor 29,000

Manufacturing overhead 40,000

Total $100,000

The manufacturing overhead consists of $16,000 of costs that will be eliminated if the

components are no longer produced by Mallory. From Mallory's point of view, how much

is the incremental cost or savings if the widgets are bought instead of made?

a. $20,000 incremental savings

b. $4,000 incremental cost

c. $4,000 incremental savings

d. $20,000 incremental cost

88. The focus of a sell or process further decision is

a. incremental revenue.

b. incremental cost.

c. both incremental revenue and incremental cost.

d. neither incremental revenue nor incremental cost.

89. Marcus Company gathered the following data about the three products that it produces:

Present Estimated Additional Estimated Sales

Product Sales Value Processing Costs if Processed Further

A $12,000 $8,000 $21,000

B 14,000 5,000 18,000

C 11,000 3,000 16,000

Which of the products should not be processed further?

a. Product A

b. Product B

c. Product C

d. Products A and C

90. A company decided to replace an old machine with a new machine. Which of the following

is considered a relevant cost?

a. The book value of the old equipment

b. Depreciation expense on the old equipment

c. The loss on the disposal of the old equipment

d. The current disposal price of the old equipment

91. Which of the following is not relevant information in a decision whether old equipment

presently being used should be replaced by new equipment?

a. The cash price of the new equipment

b. The salvage value of the old equipment

c. The book value of the old equipment

d. The cost savings if the new equipment is purchased

92. Book value of old equipment is considered to be a

a. relevant cost.

b. semi-relevant cost.

c. sunk cost.

d. cost that can be changed by a present or future decision.

93. A company is deciding on whether to replace some old equipment with new equipment.

Which of the following is not a relevant cost for incremental analysis?

a. Annual operating cost of the new equipment

b. Annual operating cost of the old equipment

c. Net cost of the new equipment

d. Accumulated depreciation on the old equipment

94. A company is considering replacing old equipment with new equipment. Which of the

following is a relevant cost for incremental analysis?

a. Annual depreciation charge on the old equipment

b. Book value of the old equipment

c. Estimated annual depreciation of the new equipment

d. Cost of the new equipment

95. In a retain or replace equipment decision, trade-in allowance available on old equipment

a. increases the cost of the new equipment.

b. is relevant because it will not be realized if the old equipment is retained.

c. is not relevant to the decision.

d. reduces the cost of the old equipment.

96. Sala Co. is contemplating the replacement of an old machine with a new one. The

following information has been gathered:

Old Machine New Machine

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $200,000 $150,500

If the old machine is replaced, it can be sold for $20,000.

Which of the following amounts is a sunk cost?

a. $200,000

b. $150,500

c. $500,000

d. $175,000

97. Sala Co. is contemplating the replacement of an old machine with a new one. The

following information has been gathered:

Old Machine New Machine

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $200,000 $150,500

If the old machine is replaced, it can be sold for $20,000.

Which of the following amounts is relevant to the replacement decision?

a. $175,000

b. $250,000

c. $49,500

d. $0

98. Sala Co. is contemplating the replacement of an old machine with a new one. The

following information has been gathered:

Old Machine New Machine

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $200,000 $150,500

If the old machine is replaced, it can be sold for $20,000.

The net advantage (disadvantage) of replacing the old machine is

a. $15,000

b. $20,000

c. $(5,000)

d. $(50,000)

99. Abel Company produces three versions of baseball bats: wood, aluminum, and hard

rubber. A condensed segmented income statement for a recent period follows:

Wood Aluminum Hard Rubber Total

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be

total net income if the line is dropped?

a. $125,000

b. $103,000

c. $105,000

d. $140,000

100. Abel Company produces three versions of baseball bats: wood, aluminum, and hard

rubber. A condensed segmented income statement for a recent period follows:

Wood Aluminum Hard Rubber Total

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total

net income if the line is dropped?

a. $125,000

b. $103,000

c. $105,000

d. $140,000

101. What will most likely occur if a company eliminates an unprofitable segment when a

portion of fixed costs are unavoidable?

a. All expenses of the eliminated segment will be eliminated.

b. Net income will decrease.

c. Net income will increase.

d. The company's variable costs will increase.

102. A company has three product lines, one of which reflects the following results:

Sales $215,000

Variable expenses 125,000

Contribution margin 90,000

Fixed expenses 140,000

Net loss $ (50,000)

If this product line is eliminated, 60% of the fixed expenses can be eliminated and the

other 40% will be allocated to other product lines. If management decides to eliminate this

product line, the company's net income will

a. increase by $50,000.

b. decrease by $90,000.

c. decrease by $6,000.

d. increase by $6,000.

103. A company is considering eliminating a product line. The fixed costs currently allocated to

the product line will be allocated to other product lines upon discontinuance. If the product

line is discontinued,

a. total net income will increase by the amount of the product line's fixed costs.

b. total net income will decrease by the amount of the product line's fixed costs.

c. the contribution margin of the product line will indicate the net income increase or

decrease.

d. the company's total fixed costs will decrease.

104. A segment has the following data:

Sales $350,000

Variable expenses 150,000

Fixed expenses 275,000

What will be the incremental effect on net income if this segment is eliminated, assuming

the fixed expenses will be allocated to profitable segments?

a. $200,000 increase

b. $200,000 decrease

c. $275,000 decrease

d. Cannot be determined from the data provided.

105. Talbot Company expects income of $2,000 per year over the life of an investment that will

cost $25,000. The calculation of the accounting rate of return is .16. The rate of return

indicates that

a. Talbot expects to earn 16% of $2,000 as profit each year the asset is used.

b. Talbot expects to earn 16% of its investment annually.

c. Talbot expects to earn 16% of its cash outlay back over the life of the asset.

d. Talbot expects the asset will earn 16 times as much profit as its cost.

106. A company can sell all the units it can produce of either Product A or Product B but not

both. Product A has a unit contribution margin of $16 and takes two machine hours to make

and Product B has a unit contribution margin of $30 and takes three machine hours to

make. If there are 1,000 machine hours available to manufacture a product, income will be

a. $2,000 more if Product A is made.

b. $2,000 less if Product B is made.

c. $2,000 less if Product A is made.

d. the same if either product is made.

107. If a company has limited resources, the key factor in performing incremental analysis is

a. contribution margin.

b. limited resources required.

c. contribution margin per unit of limited resource.

d. none of these.

108. A company can produce and sell only one of the following two products:

Machine Contribution

Hours Required Margin Per Unit

Product 1 3 $30

Product 2 2 $25

If the company has machine capacity of 2,000 hours, what is the total contribution margin

of the product it should produce to maximize net income?

a. $20,000

b. $24,000

c. $25,000

d. $16,000

109. Ruiz Company’s contribution margin is $4 per unit for Product A and $5 for Product B.

Product A requires 2 machine hours and Product B requires 4 machine hours. How much

is the contribution margin per unit of limited resource for each product?

A B

a. $4.00 $5.00

b. $2.00 $1.25

c. $1.25 $2.00

d. $2.50 $1.00

110. A company is considering purchasing factory equipment that costs $320,000 and is

estimated to have no salvage value at the end of its 8-year useful life. If the equipment is

purchased, annual revenues are expected to be $90,000 and annual operating expenses

exclusive of depreciation expense are expected to be $38,000. The straight-line method of

depreciation would be used.

If the equipment is purchased, the annual rate of return expected on this equipment is

a. 32.5%.

b. 3.8%.

c. 7.5%.

d. 16.3%.

111. A company is considering purchasing factory equipment that costs $320,000 and is

estimated to have no salvage value at the end of its 8-year useful life. If the equipment is

purchased, annual revenues are expected to be $90,000 and annual operating expenses

exclusive of depreciation expense are expected to be $38,000. The straight-line method of

depreciation would be used.

The cash payback period on the equipment is

a. 13.3 years.

b. 8.0 years.

c. 6.2 years.

d. 3.1 years.

112. Aaron Co. is considering purchasing a new machine which will cost $200,000, but which

will decrease costs each year by $40,000. The useful life of the machine is 10 years. The

machine would be depreciated straight-line with no residual value over its useful life at the

rate of $20,000/year. The cash payback period is

a. 4.0 years.

b. 4.5 years.

c. 5.0 years.

d. 10.0 years.

113. The following are all quantitative capital budgeting techniques except

a. annual rate of return technique.

b. cost-volume-profit technique.

c. discounted cash flow technique.

d. cash payback technique.

114. A company's cost of capital refers to the

a. rate management expects to pay on all borrowed and equity funds.

b. total cost of a capital project.

c. cost of printing and registering common stock shares.

d. rate of return earned on total assets.

115. How is annual cash inflow determined?

a. Depreciation is subtracted from net income because it is an expense.

b. Depreciation is added back to net income because it is not an outflow of cash.

c. Depreciation is subtracted from net income because it is an outflow of cash.

d. Depreciation is added back to net income because it is an inflow of cash.

116. If an asset cost $210,000 and is expected to have a $30,000 salvage value at the end of

its ten-year life, and generates annual net cash inflows of $30,000 each year, the cash

payback period is

a. 8 years.

b. 7 years.

c. 6 years.

d. 5 years.

117. If the payback period for a project is greater than its economic life, the

a. project will always be profitable.

b. entire initial investment will never be recovered.

c. project would only be acceptable if the company's cost of capital was low.

d. project's return will always exceed the company's cost of capital.

118. A company is considering purchasing factory equipment which costs $480,000 and is

estimated to have no salvage value at the end of its 8-year useful life. If the equipment is

purchased, annual revenues are expected to be $225,000 and annual operating expenses

exclusive of depreciation expense are expected to be $95,000. The straight-line method of

depreciation would be used. If the equipment is purchased, the annual rate of return

expected on this project is

a. 54.2%.

b. 14.6%.

c. 29.2%.

d. 27.1%.

119. Capital budgeting is the process

a. used in sell or process further decisions.

b. of determining how much capital stock to issue.

c. of making capital expenditure decisions.

d. of eliminating unprofitable product lines.

120. Which of the following is not a common method of capital budgeting?

a. Gross profit method

b. Payback method

c. Discounted cash flow method

d. Annual rate of return method

121. The rate that management expects to pay on borrowed or equity funds is known as

a. the hurdle rate.

b. the cost of capital.

c. the cutoff rate.

d. all of these.

122. The higher the rate of return for a given risk, the

a. more attractive the investment.

b. less attractive the investment.

c. higher the cost of capital.

d. higher the hurdle rate.

123. The annual rate of return method is based on

a. accounting data.

b. time value of money data.

c. market values.

d. replacement values.

124. A company projects an increase in net income of $225,000 each year for the next five

years if it invests $900,000 in new equipment. The equipment has a five-year life and an

estimated salvage value of $300,000. What is the annual rate of return on this

investment?

a. 25.0%

b. 37.5%

c. 50.0%

d. 57.5%

125. When using the payback method, payback is expressed in terms of

a. a percent.

b. dollars.

c. time.

d. a discount factor.

126. The payback method is criticized on the grounds that it

a. ignores obsolescence factors.

b. ignores the cost of an investment.

c. is complicated to use.

d. ignores the time value of money.

127. Nance Company is considering buying a machine for $90,000 with an estimated life of ten

years and no salvage value. The straight-line method of depreciation will be used. The

machine is expected to generate net income of $6,000 each year. The cash payback on

this investment is

a. 15 years.

b. 10 years.

c. 6 years.

d. 3 years.

128. Garza Company is considering buying equipment for $240,000 with a useful life of five

years and an estimated salvage value of $12,000. If annual expected income is $21,000,

the denominator in computing the annual rate of return is

a. $240,000.

b. $120,000.

c. $126,000.

d. $252,000.

129. A capital budgeting technique which takes into consideration the time value of money is

the

a. annual rate of return approach.

b. return on stockholders' equity approach.

c. payback approach.

d. net present value method.

130. Mussina Company had an investment which cost $260,000 and had a salvage value at

the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the

annual rate of return is:

a. 5.8%.

b. 9.8%.

c. 11.5%.

d. 15%.

131. Giraldi Company has identified that the cost of a new computer will be $60,000, but with

the use of the new computer, net income will increase by $5,000 a year. If depreciation

expense is $3,000 a year, the cash payback period is:

a. 30 years.

b. 20 years.

c. 12 years.

d. 7.5 years.

132. Benaflek Co. purchased some equipment 3 years ago. The company's required rate of

return is 12%, and the net present value of the project was $(450). Annual cost savings

were: $5,000 for year 1; $4,000 for year 2; and $3,000 for year 3. The amount of the initial

investment was

Present Value PV of an Annuity

Year of 1 at 12% of 1 at 12%

1 .893 .893

2 .797 1.690

3 .712 2.402

a. $10,239.

b. $9,158.

c. $10,058.

d. $9,339.

.

133. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The cash payback period for Project Blue is

a. 20 years.

b. 10 years.

c. 5 years.

d. 4 years.

134. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The annual rate of return for Project Blue is

a. 5%.

b. 10%.

c. 25%.

d. 50%.

135. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The net present value for Project Gray is

a. $618,410.

b. $182,912.

c. $100,000.

d. $18,410.

136. Fehr Company is considering two capital investment proposals. Estimates regarding each

project are provided below:

Project Blue Project Gray

Initial investment $400,000 $600,000

Annual net income 20,000 42,000

Net annual cash inflow 100,000 142,000

Estimated useful life 5 years 6 years

Salvage value 0 0

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The internal rate of return for Project Gray is approximately

a. 10%.

b. 11%.

c. 12%.

d. 9%.

137. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 10% and is considering investing in a

project that requires an investment of $98,000 and is expected to generate cash inflows of

$42,000 at the end of each year for three years. The present value of future cash inflows

for this project is

a. $98,000.

b. $104,454.

c. $114,898.

d. $6,454.

138. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 9% and is considering investing in a

project that costs $175,000 and is expected to generate cash inflows of $70,000 at the

end of each year for three years. The net present value of this project is

a. $177,170.

b. $35,000.

c. $17,718.

d. $2,170.

139. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 8% and is considering investing in a

project that costs $68,337 and is expected to generate cash inflows of $27,000 each year

for three years. The approximate internal rate of return on this project is

a. 8%.

b. 9%.

c. 10%.

d. less than the required 8%.

140. Woods Company wants to purchase an asset with a 3-year useful life, which is expected

to produce cash inflows of $15,000 each year for two years, and $10,000 in year 3.

Woods has a 14% cost of capital, and uses the following factors. What is the present

value of these future cash flows?

Present Value of 1

Period 14%

1 .88

2 .77

3 .67

a. $29,800

b. $30,400

c. $31,450

d. $34,750

. Humphrey, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful

life. The equipment will provide cost savings of $7,300 and will be depreciated straight-line

over its useful life with no salvage value. Humphrey, Inc. requires a 10% rate of return.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

6 4.623 4.486 4.355 4.231 4.111 3.784

What is the approximate net present value of this investment?

a. $13,800

b. $1,792

c. $886

d. $2,748

142. Humphrey, Inc. is considering purchasing equipment costing $30,000 with a 6-year useful

life. The equipment will provide cost savings of $7,300 and will be depreciated straight-line

over its useful life with no salvage value. Humphrey, Inc. requires a 10% rate of return.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

6 4.623 4.486 4.355 4.231 4.111 3.784

What is the approximate internal rate of return for this investment?

a. 9%

b. 10%

c. 11%

d. 12%

143. Which one of the following is correct?

a. Cash flows are used to calculate the internal rate of return.

b. Accrual income is used to calculate the payback period.

c. Cash flows are used to calculate the annual rate of return.

d. Accrual income is used to calculate the net present value.

144. If a company's required minimum rate of return is 10%, and in using the net present value

method, a project's net present value is zero, this indicates that the

a. project's rate of return exceeds 10%.

b. project's rate of return is less than the minimum rate required.

c. project earns a rate of return of 10%.

d. project earns a rate of return of 0%.

145. Using the net present value method, the total present value of cash inflows for Project A is

$30,000 and the total present value of cash inflows of Project B is $36,000. If Project A

and Project B both require an initial investment of $30,000 and have the same economic

life, the project that should be accepted is

a. Project A.

b. Project B.

c. neither; they are both the same.

d. not capable of being calculated.

146. Hale Plumbing used the net present value method and determined that project 34 had a

zero net present value. What does this tell management about the project?

a. The return from this project is equal to the cost of capital.

b. The project guarantees company profitability.

c. The project's cash inflows will equal its cash outflows.

d. The project earns the company's desired minimum rate of return.

147. In using the internal rate of return method, the internal rate of return factor was 4.0 and

the equal annual cash inflows were $40,000. The initial investment in the project must

have been

a. $40,000.

b. $10,000.

c. $160,000.

d. an amount which cannot be determined.

148. Use the following table,

Present value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 9%. It is considering investing in a

project which costs $420,000 and is expected to generate cash inflows of $168,000 at the

end of each year for three years. The net present value of this project is

a. $425,208.

b. $252,000.

c. $42,516.

d. $5,208.

149. Use the following table,

Present value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 8%. It is considering investing in a

project that costs $227,790 and is expected to generate cash inflows of $90,000 each

year for three years. The approximate internal rate of return on this project is

a. 8%.

b. 9%.

c. 10%.

d. The IRR on this project cannot be approximated.

150. Use the following table,

Present value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 10%. It is considering investing in a

project that requires an investment of $210,000 and is expected to generate cash inflows

of $90,000 at the end of each year for three years. The present value of future cash

inflows for this project is

a. $210,000.

b. $223,830.

c. $246,210.

d. $13,830.

151. The conceptually superior approach to capital budgeting is

a. a discounted cash flow method.

b. the payback method.

c. the annual rate of return method.

d. none of these.

152. The appropriate table to use when an investment promises to return unequal cash flows is the

a. future value of 1 table.

b. future value of annuity table.

c. present value of 1 table.

d. present value of annuity table.

153. Accounting's contribution to the decision-making process occurs in all of the following

steps except to

a. identify the problem and assign responsibility.

b. determine possible courses of action.

c. review results of the decision.

d. make a decision.

154. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product,

which normally sells for $38 per unit. A foreign wholesaler offers to purchase 3,000 units

at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were

accepted. Dryer has sufficient unused capacity to produce the 3,000 units. If the special

order is accepted, what will be the effect on net income?

a. $3,000 decrease

b. $3,000 increase

c. $9,000 increase

d. $54,000 increase

155. In a make-or-buy decision, opportunity costs are

a. added to the make total cost.

b. deducted from the make total cost.

c. added to the buy total cost.

d. ignored.

156. Which of the following would generally not affect a make-or-buy decision?

a. Selling expenses

b. Direct labor

c. Variable manufacturing costs

d. Opportunity cost

157. A cost that cannot be changed by any present or future decision is a(n)

a. incremental cost.

b opportunity cost.

c. sunk cost.

d. variable cost.

158. If an unprofitable segment is eliminated

a. it is impossible for net income to decrease.

b. fixed expenses allocated to the eliminated segment will be eliminated.

c. variable expenses of the eliminated segment will be eliminated.

d. it is impossible for net income to increase.

159. All of the following are relevant in deciding whether to eliminate an unprofitable segment

except the segment's

a. sales.

b. variable expenses.

c. contribution margin.

d. fixed expenses.

160. In the Rossetto Company, contribution margin per unit is $12 for Product X and $20 for

Product Y. Product X requires 4 machine hours and Product Y requires 8 machine hours.

What is the contribution margin per unit of limited resource for each product?

X Y

a. $3.00 $2.50

b. $5.00 $3.00

c. $2.50 $1.50

d. $5.00 $1.50

161. The rate of return that management expects to pay on all borrowed and equity funds is the

a. cost of capital.

b. cutoff rate.

c. hurdle rate.

d. minimum rate.

162. The cash payback formula is

a. Cost of capital investment Net income.

b. Cost of capital investment Annual cash inflow.

c. Average investment Net income.

d. Average investment Annual cash inflow.

163. To determine annual cash inflow, depreciation is

a. subtracted from net income because it is an expense.

b. subtracted from net income because it is an outflow of cash.

c. added back to net income because it is an inflow of cash.

d. added back to net income because it is not an outflow of cash.

164. Net present value is the difference between the

a. future cash inflows and the capital investment.

b. future cash inflows and the present value of the capital investment.

c. present value of future cash inflows and the capital investment.

d. present value of future net income and the capital investment.

165. A negative net present value means that the

a. project's rate of return exceeds the required rate of return.

b. project's rate of return is less than the required rate of return.

c. project's rate of return equals the required rate of return.

d. project is acceptable.

BRIEF EXERCISES

BE 166

Sedgwick Inc. is considering Plan 1 which is estimated to have sales of $40,000 and costs of

$15,000. The company currently has sales of $38,000 and costs of $14,000.

Instructions

Compare plans using incremental analysis.

BE 167

Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs

and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of

which Pederson has the capacity to produce. Pederson will incur extra shipping costs of $1.25

per bear.

Instructions

Determine the incremental income or loss that Pederson Enterprises would realize by accepting

the special order.

BE 168

Notson, Inc. produces several models of clocks. An outside supplier has offered to produce the

commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has

provided the following unit costs for its commercial clocks:

Direct materials $100

Direct labor 120

Variable overhead 80

Fixed overhead (40% avoidable) 150

Instructions

Prepare an incremental analysis which shows the effect of the make-or-buy decision.

BE 169

Parks Corporation currently manufactures 3,000 staplers annually for its main product. The costs

per stapler are as follows:

Direct materials $ 3.00

Direct labor 8.00

Variable overhead 4.00

Fixed overhead 7.00

Total $22.00

Gallup Company has contacted Parks with an offer to sell it 3,000 staplers for $18.00 each. $5 of

the fixed overhead per unit is unavoidable.

Instructions

Prepare an incremental analysis for the make-or-buy decision.

BE 170

Paola Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production

generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or the

chickens can be slaughtered in house and then sold for $2.25 each. It costs $55,000 more to turn

the annual chicken crop into chicken meat.

Instructions

If Paola Farms slaughters the chickens, determine how much incremental profit or loss it would

report. What should Paola Farms do?

BE 171

Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of

$60,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient

machine is available at a cost of $225,000 that will have a 5-year useful life with no salvage

value. The new machine will lower annual variable production costs from $400,000 to $310,000.

Instructions

Prepare an analysis showing whether the old machine should be retained or replaced.

BE 172

Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. The allocated fixed

costs are based on units sold and are unavoidable. Demand of individual products is not affected

by changes in other product lines. 40% of the fixed costs are direct, and the other 60% are

allocated. Results of June follow:

Sour Cream Ice Cream Yogurt Butter Total

Units sold 2,000 500 400 200 3,100

Revenue $10,000 $20,000 $10,000 $20,000 $60,000

Variable departmental costs 6,000 13,000 4,200 4,800 28,000

Fixed costs 5,000 2,000 3,000 7,000 17,000

Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $15,000

Instructions

Prepare an incremental analysis of the effect of dropping the sour cream product line.

BE 173

Meierhoff Company provided the following information concerning two products:

Contribution margin per unit—Product 12 $23

Contribution margin per unit—Product 43 $15

Machine hours required for one unit—Product 12 2.5 hours

Machine hours required for one unit—Product 43 1.5 hours

Instructions

Compute the contribution margin per unit of limited resource for each product. Which product

should Meierhoff tell its sales personnel to ‘push’ to customers?

BE 174

Lightle Co. is considering investing in new equipment that will cost $900,000 with a 10-year useful

life. The new equipment is expected to produce annual net income of $30,000 over its useful life.

Depreciation expense, using the straight-line rate, is $90,000 per year.

Instructions

Compute the cash payback period.

BE 175

Holt Co. is considering investing in a new facility to extract and produce salt. The facility will

increase revenues by $240,000, but will also increase annual expenses by $160,000. The facility

will cost $980,000 to build, but will have a $20,000 salvage value at the end of its 20-year useful

life.

Instructions

Calculate the annual rate of return on this facility.

BE 176

Puckett Company is proposing to spend $140,000 to purchase a machine that will provide annual

cash flows of $25,000. The appropriate present value factor for 10 periods is 5.65.

Instructions

Compute the proposed investment’s net present value, and indicate whether the investment

should be made by Puckett Company.

BE 177

An investment costing $90,000 is being contemplated by Linn Co. The investment will have a life

of 8 years with no salvage value and will produce annual cash flows of $16,870.

Instructions

Compute the approximate internal rate of return for this investment. (Table C-2 is needed)

EXERCISES

Ex. 178

Felter Company produced and sold 50,000 units of product and is operating at 70% of plant

capacity. Unit information about its product is as follows:

Sales Price $70

Variable manufacturing cost $45

Fixed manufacturing cost ($500,000 ÷ 50,000) 10 55

Profit per unit $15

The company received a proposal from a foreign company to buy 15,000 units of Felter

Company's product for $50 per unit. This is a one-time only order and acceptance of this proposal

will not affect the company's regular sales. The president of Felter Company is reluctant to accept

the proposal because he is concerned that the company will lose money on the special order.

Instructions

Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the

acceptance of this order might have on the company's income.

.

Ex. 179

Carney Company manufactures cappuccino makers. For the first eight months of 2010, the

company reported the following operating results while operating at 80% of plant capacity:

Sales (500,000 units) $90,000,000

Cost of goods sold 54,000,000

Gross profit 36,000,000

Operating expenses 24,000,000

Net income $12,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and

variable operating expenses are $35 per unit.

Ex. 179 (Cont.)

In September, Carney Company receives a special order for 30,000 machines at $135 each from

a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs

but no increase in fixed expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Carney Company accept the special order? Justify your answer.

Ex. 180

Gregg Company supplies schools with floor mattresses to use in physical education classes.

Gregg has received a special order from a large school district to buy 600 mats at $45 each.

Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping

costs.

For the first 6 months of 2010, the company reported the following operating results while

operating at 80% capacity:

Sales (100,000 units) $7,000,000

Cost of goods sold 4,200,000

Gross profit 2,800,000

Operating expenses 2,000,000

Net income $ 800,000

Cost of goods sold was 70% variable and 30% fixed; operating expenses were 75% variable and

25% fixed.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Gregg Company accept the special order? Justify your answer.

Ex. 181

Larkin Company produces golf discs which it normally sells to retailers for $6 each. The cost of

manufacturing 25,000 golf discs is:

Materials $ 10,000

Labor 30,000

Variable overhead 20,000

Fixed overhead 40,000

Total $100,000

Innova also incurs 5% sales commission ($0.30) on each disc sold.

Rudd Corporation offers Innova $4.25 per disc for 5,000 discs. Rudd would sell the discs

under its own brand name in foreign markets not yet served by Larkin. If Larkin accepts the offer,

its fixed overhead will increase from $50,000 to $55,000 due to the purchase of a new imprinting

machine. No sales commission will result from the special order.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Innova accept the special order? Why or why not?

Ex. 181 (Cont.)

(b) As shown in the incremental analysis, Larkin should accept the special order because

incremental revenue exceeds incremental expenses by $4,250.

Ex. 182

Kasten, Inc. budgeted 10,000 widgets for production during 2010. Kasten has capacity to produce

12,000 units. Fixed factory overhead is allocated to production. The following estimated costs

were provided:

Direct material ($7/unit) $ 70,000

Direct labor ($15/hr. × 2 hrs./unit) 300,000

Variable manufacturing overhead ($3/unit) 30,000

Fixed factory overhead costs ($5/unit) 50,000

Total $450,000

Cost per unit = $45

Instructions

Answer each of the following independent questions:

1. Kasten received an order for 1,000 units from a new customer in a country in which Kasten

has never done business. This customer has offered $43 per widget. Should Kasten accept

the order?

2. Kasten received an offer from another company to manufacture the same quality widgets for

$39. Should Kasten let someone else manufacture all 10,000 widgets and focus only on

distribution?

Ex. 183

Coyle Company manufactured 6,000 units of a component part that is used in its product and

incurred the following costs:

Direct materials $35,000

Direct labor 15,000

Variable manufacturing overhead 10,000

Fixed manufacturing overhead 20,000

$80,000

Another company has offered to sell the same component part to the company for $12 per unit.

The fixed manufacturing overhead consists mainly of depreciation on the equipment used to

manufacture the part and would not be reduced if the component part was purchased from the

outside firm. If the component part is purchased from the outside firm, Coyle Company has the

opportunity to use the factory equipment to produce another product which is estimated to have a

contribution margin of $14,000.

Instructions

Prepare an incremental analysis report for Coyle Company which can serve as informational

input into this make or buy decision.

.

Ex. 184

Agler Corporation currently manufactures a subassembly for its main product. The costs per unit

are as follows:

Direct materials $ 1

Direct labor 10

Variable overhead 5

Fixed overhead 8

Total $24

Funkhouser Company has contacted Agler with an offer to sell it 5,000 of the subassemblies for

$18 each. If Agler makes the subassemblies, $3 of the fixed overhead per unit will be allocated to

other products.

Ex. 184 (Cont.)

Instructions

Should Agler make or buy the subassemblies? Explain your answer.

Ex. 185

Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company is

currently operating at 100% capacity, and variable manufacturing overhead is charged to

production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per

unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000

bicycles per year.

A supplier offers to make the bicycle seats at a price of $20 each. If the bicycle company accepts

this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed

manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by

other products.

Instructions

(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.

(b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer.

Ex. 186

Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint

manufacturers. In 2010, the company incurred $344,000 of costs to produce 40,000 gallons of the

chemical. The selling price of the chemical is $11.00 per gallon. The costs per unit to

manufacture a gallon of the chemical are presented below:

Direct materials $6.00

Direct labor 1.20

Variable manufacturing overhead .80

Fixed manufacturing overhead .60

Total manufacturing costs $8.60

The company is considering manufacturing the paint itself. If the company processes the

chemical further and manufactures the paint itself, the following additional costs per gallon will be

incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No

increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.00

per gallon.

Instructions

Determine the incremental per gallon increase in net income and the total increase in net income

if the company manufactures the paint.

Ex. 187

Ecker, Inc. produces milk at a total cost of $66,000. The production generates 60,000 gallons of

milk which can be sold for $1 per gallon to a pasteurization company, or the milk can be

processed further into ice cream and then sold for $2.50 per gallon. It costs $75,000 more to turn

the annual milk supply into ice cream.

Ex. 187 (Cont.)

Instructions

If Ecker processes the milk into ice cream, how much is the incremental profit or loss? Should

Ecker process the milk into ice cream or sell it as is?

.

Ex. 188

Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an

unassembled bike is as follows.

Direct materials $150

Direct labor 70

Variable overhead (70% of direct labor) 49

Fixed overhead (30% of direct labor) 21

Manufacturing cost per unit $290

The unassembled bikes are sold to retailers at $400 each.

Speedy currently has unused productive capacity that is expected to continue indefinitely;

management has concluded that some of this capacity can be used to assemble the bikes and

sell them at $440 each. Assembling the bikes will increase direct materials by $5 per bike, and

direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but

there will be no additional fixed overhead as a result of assembling the bikes.

Instructions

(a) Prepare an incremental analysis for the sell-or-process-further decision.

(b) Should Speedy sell or process further? Why or why not?

Ex. 189

Harris Timber Corporation uses a machine that removes the bark from cut timber. The machine is

unreliable and results in a significant amount of downtime and excessive labor costs. The

management is considering replacing the machine with a more efficient one which will minimize

downtime and excessive labor costs. Data are presented below for the two machines:

Old Machine New Machine

Original purchase cost $340,000 $430,000

Accumulated depreciation 230,000 —

Estimated life 5 years 5 years

It is estimated that the new machine will produce annual cost savings of $95,000. The old

machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of

zero if operated for the remainder of their useful lives.

Instructions

Determine whether the company should purchase the new machine.

Ex. 190

Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy

clerk has not been able to process all the necessary copies within the regular work week.

Management is considering updating the copier machine with a faster model.

Current Copier New Model

Original purchase cost $10,000 $20,000

Accumulated depreciation 8,000 —

Estimated operating costs (annual) 9,000 4,200

Useful life 5 years 5 years

If sold now, the current copier would have a salvage value of $1,000. If operated for the

remainder of its useful life, the current machine would have zero salvage value. The new machine

is expected to have zero salvage value after five years..

Ex. 190 (Cont.)

Instructions

Prepare an analysis to show whether the company should retain or replace the machine.

.

Ex. 191

Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2010 are presented

below.

Bud Wise Er Total

Units sold 3,000 5,000 2,000 10,000

Revenue $70,000 $50,000 $40,000 $160,000

Less variable costs 32,000 26,000 16,000 74,000

Less direct fixed costs 14,000 19,000 12,000 45,000

Less allocated fixed costs 6,000 10,000 4,000 20,000

Net income $18,000 $ (5,000) $ 8,000 $ 21,000

All of the allocated costs will continue even if a division is discontinued. Milwaukee allocates

indirect fixed costs based on the number of units to be sold. Since the Wise division has a net

loss, Milwaukee feels that it should be discontinued. Milwaukee feels if the division is closed, that

sales at the Bud division will increase by 10%, and that sales at the Er division will stay the same.

Instructions

(a) Prepare an analysis showing the effect of discontinuing the Wise division.

(b) Should Milwaukee close the Wise division? Briefly indicate why or why not.

Ex. 192

Trump Forest Corporation operates two divisions, the Timber Division and the Consumer

Division. The Timber Division manufactures and sells logs to paper manufacturers. The

Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself

homeowner market. The company is considering disposing of the Consumer Division

since it has been consistently unprofitable for a number of years. The income statements for the

two divisions for the year ended December 31, 2010 are presented below:

Timber Division Consumer Division Total

Sales $1,500,000 $500,000 $2,000,000

Cost of goods sold 900,000 350,000 1,250,000

Gross profit 600,000 150,000 750,000

Selling & administrative expenses 250,000 180,000 430,000

Net income $ 350,000 $ (30,000) $ 320,000

In the Consumer Division, 70% of the cost of goods sold are variable costs and 25% of selling

and administrative expenses are variable costs. The management of the company feels it can

save $45,000 of fixed cost of goods sold and $60,000 of fixed selling expenses if it discontinues

operation of the Consumer Division.

Instructions

(a) Determine whether the company should discontinue operating the Consumer Division.

(b) If the company had discontinued the division for 2010, determine what net income would

have been.

Ex. 193

Mercer has three product lines in its retail stores: books, videos, and music. Results of the fourth

quarter are presented below:

Books Music Videos Total

Units sold 1,000 2,000 2,000 5,000

Revenue $22,000 $40,000 $23,000 $85,000

Variable departmental costs 17,000 22,000 12,000 51,000

Direct fixed costs 1,000 3,000 2,000 6,000

Allocated fixed costs 7,000 7,000 7,000 21,000

Net income (loss) $ (3,000) $ 8,000 $ 2,000 $ 7,000

The allocated fixed costs are unavoidable. Demand of individual products are not affected by

changes in other product lines.

Instructions

What will happen to profits if Mercer discontinues the Books product line?

Ex. 194

A recent accounting graduate from Marvel State University evaluated the operating perform-ance

of Fanning Company's four divisions. The following presentation was made to Fanning's Board of

Directors. During the presentation, the accountant made the recommendation to eliminate the

Southern Division stating that total net income would increase by $60,000. (See analysis below.)

Other Three Divisions Southern Division Total

Sales $2,000,000 $480,000 $2,480,000

Cost of Goods Sold 950,000 400,000 1,350,000

Gross Profit 1,050,000 80,000 1,130,000

Operating Expenses 800,000 140,000 940,000

Net Income $ 250,000 $ (60,000) $ 190,000

For the other divisions, cost of goods sold is 80% variable and operating expenses are 70%

variable. The cost of goods sold for the Southern Division is 35% fixed, and its operating

expenses are 75% fixed. If the division is eliminated, only $10,000 of the fixed operating costs will

be eliminated.

Instructions

Do you concur with the new accountant's recommendation? Present a schedule to support your

answer.

Ex. 195

Ridley Company has 8,000 machine hours available to use to produce either Product A or

Product B. The cost accounting department developed the following unit information for each of

the products:

Product A Product B

Sales price $57 $71

Direct materials 19 21

Direct labor 15 14

Variable manufacturing overhead 8 12

Fixed manufacturing overhead 3 6

Machine hours required .6 1.2

Management desires to make a decision regarding which product to produce in order to maximize

the company's income.

Instructions

Taking into consideration the constraint under which the company operates, prepare a report to

show which product should be produced and sold.

Ex. 196

Hughes Company manufactures and sells two products. Relevant per unit data concerning each

product are given below:

Product

Standard Deluxe

Selling price $28 $32

Variable costs $10 $12

Machine hours 4 5

Ex. 196 (Cont.)

Instructions

(a) Compute the contribution margin per unit of the limited resource for each product.

(b) If 1,000 additional machine hours are available, which product should be manufactured?

(c) Prepare an analysis showing the total contribution margin if the additional hours are

(1) Divided equally among the products.

(2) Allocated entirely to the product identified in (b) above.

Ex. 197

Finney Company estimates the following cash flows and depreciation on a project that will cost

$200,000 and will last 10 years with no salvage value:

Revenues

Sales $70,000

Operating expenses

Salary expense $32,000

Depreciation expense 20,000

Miscellaneous expenses 8,000 60,000

Net Income $10,000

Ex. 197 (Cont.)

Instructions

(a) Calculate the expected annual rate of return on this project showing calculations to support

your answer.

(b) Calculate the cash payback on this project showing calculations to support your answer.

Ex. 198

Wesley Medical Center is considering purchasing an ultrasound machine for $1,135,000. The machine

has a 10-year life and an estimated salvage value of $40,000. Installation costs and freight

charges will be $24,200 and $800, respectively. The Center uses straight-line depreci-ation.

The medical center estimates that the machine will be used five times a week with the average

charge to the patient for ultrasound of $850. There are $10 in medical supplies and $40 of

technician costs for each procedure performed using the machine.

Instructions

(a) Compute the payback period for the new ultrasound machine.

(b) Compute the annual rate of return for the new machine.

Ex. 199

Laramie Service Center just purchased an automobile hoist for $13,000. The hoist has a 5-year

life and an estimated salvage value of $960. Installation costs were $2,900, and freight charges

were $740. Laramie uses straight-line depreciation.

The new hoist will be used to replace mufflers and tires on automobiles. Laramie estimates

that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler

sells for $65 installed. The cost of a muffler is $35, and the labor cost to install a muffler is $10.

Instructions

(a) Compute the payback period for the new hoist.

(b) Compute the annual rate of return for the new hoist. (Round to one decimal.)

Ex. 200

Cepeda Manufacturing Company is considering three new projects, each requiring an equipment

investment of $20,000. Each project will last for 3 years and produce the following cash inflows.

Year AA BB CC

1 $ 7,000 $ 9,500 $11,000

2 9,000 9,500 10,000

3 15,000 9,500 9,000

Total $31,000 $28,500 $30,000

The equipment's salvage value is zero. Cepeda uses straight-line depreciation. Cepeda will not

accept any project with a payback period over 2 years. Cepeda's minimum required rate of return

is 12%.

Instructions

(a) Compute each project's payback period, indicating the most desirable project and the least

desirable project using this method. (Round to two decimals.)

(b) Compute the net present value of each project. Does your evaluation change? (Round to

nearest dollar.)

e.

Ex. 201

Gantner Company is considering a capital investment of $200,000 in additional productive

facilities. The new machinery is expected to have a useful life of 5 years with no salvage value.

Depreciation is by the straight-line method. During the life of the investment, annual net income

and cash inflows are expected to be $18,000 and $58,000, respectively. Gantner has a 12% cost

of capital rate, which is the minimum acceptable rate of return on the investment.

Instructions

(Round to two decimals.)

(a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed

capital expenditure.

(b) Using the discounted cash flow technique, compute the net present value.

Ex. 202

Ace Corporation recently purchased a new machine for its factory operations at a cost of

$840,000. The investment is expected to generate $250,000 in annual cash flows for a period of

five years. The required rate of return is 12%. The new machine is expected to have zero salvage

value at the end of the five-year period.

Instructions

Calculate the internal rate of return. (Table 2 from Appendix C is needed.)

Ex. 203

Sargent Company is considering two new projects, each requiring an equipment investment of

$72,000. Each project will last for three years and produce the following annual net income.

Year TIP TOP

1 $ 6,000 $ 9,000

2 9,000 9,000

3 14,000 9,000

$29,000 $27,000

The equipment will have no salvage value at the end of its three-year life. Sargent Company uses

straight-line depreciation. Sargent requires a minimum rate of return of 12%. Present value data

are as follows:

Present Value of 1 Present Value of an Annuity of 1

Period 12% Period 12%

1 .893 1 .893

2 .797 2 1.690

3 .712 3 2.402

Instructions

(a) Compute the net present value of each project.

(b) Which project should be selected? Why?

Ex. 204

Yanik Company is considering investing in a project that will cost $162,000 and have no salvage

value at the end of its 5-year life. It is estimated that the project will generate annual cash inflows

of $45,000 each year. The company has a hurdle or cutoff rate of return of 8% and uses the

following compound interest table:

Present Value of an Annuity of 1

Period 6% 8% 10% 12% 15%

5 4.212 3.993 3.791 3.605 3.352

Instructions

Using the internal rate of return method, determine if this project is acceptable by calculating an

approximate interest yield for the project.

Ex. 205

Martinez Company has money available for investment and is considering two projects each

costing $70,000. Each project has a useful life of 3 years and no salvage value. The investment

cash flows follow:

Project A Project B

Year 1 $ 8,000 $28,000

Year 2 24,000 28,000

Year 3 52,000 28,000

Ex. 205 (Cont.)

Instructions

If 8% is an acceptable earnings rate, which project should be selected? Justify your response.

(Table 1 from Appendix C is needed.)

COMPLETION STATEMENTS

206. An important purpose of management accounting is to provide _____________________

for decision making.

207. The process used to identify the financial data that change under alternative courses of

action is called __________________ analysis.

208. In a decision on whether an order should be accepted at a special price when there is

plant capacity available, a major consideration is whether the special price exceeds

__________________.

209. The potential benefit that may be obtained by following an alternative course of action is

called an _________________ cost.

210. A decision whether to sell a product now or to process it further, depends on whether the

incremental _____________ from processing further are greater than the incremental

processing ______________.

211. The ______________ value of old equipment is irrelevant in a decision to replace that

equipment and is often referred to as a _____________ cost.

212. In an environment where there are limited resources, the products with the highest

contribution per unit of ______________ should identify the products to be produced.

213. The process of making capital expenditure decisions in business is called ___________.

214. Three quantitative techniques which are frequently used in capital budgeting decisions are

(1) _________________, (2) _________________, and (3) ___________________.

215. A major limitation of the annual rate of return approach is that it does not consider the

_______________ of money.

216. The technique which identifies the time period required to recover the cost of the

investment is called the ________________ method.

217. The two discounted cash flow techniques used in capital budgeting are (1) the

_______________________ method and (2) the ______________________ method.

218. Knowledge of the ______________________ is necessary when discounting future cash

flows under the net present value approach.

219. In using the net present value approach, a project is acceptable if the project's net present

value is ____________ or _______________.

220. The internal rate of return method differs from the net present value method in that it

results in finding the ___________________ of the potential investment.

MATCHING

221. Match the items below by entering the appropriate code letter in the space provided.

A. Incremental analysis F. Cash payback technique

B. Opportunity cost G. Hurdle or cutoff rate

C. Discounted cash flow technique H. Net present value method

D. Capital budgeting I. Sunk cost

E. Annual rate of return technique J. Internal rate of return method

____ 1. A cost that cannot be changed by any present or future decision.

____ 2. A capital budgeting technique that considers both the estimated total cash inflows

from the investment and the time value of money.

____ 3. A method used in capital budgeting in which cash inflows are discounted to their

present value and then compared to the capital outlay required by the capital

investment.

____ 4. The process of identifying the financial data that change under alternative courses of

action.

____ 5. A method used in capital budgeting that results in finding the interest yield of the

potential investment.

____ 6. The minimum rate of return management requires on an investment.

____ 7. The determination of the profitability of a capital expenditure by dividing expected

annual net income by the average investment.

____ 8. The potential benefit that may be lost from following an alternative course of action.

____ 9. The process of making capital expenditure decisions in business.

____ 10. A capital budgeting technique that identifies the time period required to recover the

cost of a capital investment from the annual cash inflow produced by the investment.

SHORT-ANSWER ESSAY QUESTIONS

S-A E 222

Management is often faced with the alternative of continuing to make a product or component

internally, or going to an external source and purchasing the product or component. In gathering

relevant information for these two alternatives, briefly identify the quantitative factors that should

be considered. Are there any qualitative factors that should also be considered?

Ans: N/A,

S-A E 223

Management uses several capital budgeting approaches in evaluating projects for possible

investment. Identify those approaches that are more desirable from a conceptual standpoint, and

briefly explain what features these approaches have that make them more desirable than other

approaches. Also identify the least desirable approach and explain its major weaknesses.

S-A E 224

Define the term "opportunity cost." How may this cost be relevant in a make-or-buy decision?

Ans: N/A,

S-A E 225

Manny Perez is trying to understand the term "cost of capital." Define the term, and indicate its

relevance to the decision rule under the annual rate of return technique.

S-A E 226 (Ethics)

Tom Mullins is on the capital budgeting committee for his company, Colgan Tile. Ken Scales is an

engineer for the firm. Ken expresses his disappointment to Tom that a project that was given to

him to review before submission looks extremely good on paper. "I really hoped that the cost

projections wouldn't pan out," he tells his friend. "The technology used in this is pie in the sky

kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing.

I haven't sent it on yet, though I probably should."

"You can keep it if it's really that bad," assures Tom. "Anyway, you can probably get it shot out of

the water pretty easily, and not have the guy who submitted it mad at you for not turning it in. Just

fix the numbers. If you figure, for instance, that a cost is only 50% likely to be that low, then

double it. We do it all the time, informally. Best of all, the rank and file don't get to come to those

sessions. Your engineering genius need never know. He'll just think someone else's project was

even better than his."

Required:

1. Who are the stakeholders in this situation?

2. Is it ethical to adjust the figures to compensate for risk? Explain.

3. Is it ethical to change the proposal before submitting it? Explain.

S-A E 227 (Communication)

You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles,

California. The company has decided to upgrade its equipment. It currently has a widely used

version of a word processing program. The company wishes to invest in more up-to-date software

and to improve its printing capabilities.

Two options have emerged. Option #1 is for the company to keep its existing computer system,

and upgrade its word processing program. The memory of each individual work station would be

enhanced, and a larger, more efficient printer would be used. Better telecommunications

equipment would allow for the electronic transmission of some documents as well.

Option #2 would be for the company to invest in an entirely different computer system. The

software for this system is extremely impressive, and it comes with individual laser printers.

However, the company is not well known, and the software does not connect well with well-known

software. The net present value information for these options follows:

Option #1 Option #2

Initial Investment $(95,000) $(270,000)

Returns Year 1 55,000 90,000

Year 2 30,000 90,000

Year 3 10,000 90,000

Net Present Value 0 0

Required:

Prepare a brief report for management in which you make a recommendation for one system or

the other, using the information given.

Accounting_Chapter_3_brief_exercise Accounting_Chapter_3_brief_exercise

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BRIEF EXERCISES BE 165 Shaffer Inc. is considering two alternatives to finance its construction of a new $5 million plant. (a) Issuance of 500,000 shares of common stock at the market price of $10 per share. (b) Issuance of $5 million, 8% bonds at par. Instructions Complete the following table. Issue Stock Issue Bonds Income before interest and taxes $2,000,000 $2,000,000 Interest expense from bonds _________ _________ Income before income taxes $ $ Income tax expense (30%) _________ _________ Net income $________ $________ Outstanding shares _________ 700,000 Earnings per share _________ _________ BE 166 On January 1, 2010, Beltway Enterprises issued 9%, 5-year bonds with a face amount of $700,000 at par. Interest is payable semiannually on June 30 and December 31. Instructions Prepare the entries to record the issuance of the bonds and the first semiannual interest payment. BE 167 On January 1, 2010, Kentwood Company issued bonds with a face value of $800,000. The bonds carry a stated interest of 7% payable each January 1 and July 1. Instructions a. Prepare the journal entry for the issuance assuming the bonds are issued at 97. b. Prepare the journal entry for the issuance assuming the bonds are issued at 102. BE 168 On July 1, 2010, Frodo Corporation issued $600,000, 6%, 10-year bonds at face value. Interest is payable semiannually on January 1 and July 1. Frodo Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2010. BE 169 On January 1, 2010, Zooland Enterprises sold 8%, 20-year bonds with a face amount of $1,000,000 for $960,000. Interest is payable semiannually on July 1 and January 1. Instructions Calculate the carrying value of the bond at December 31, 2010 and 2011. BE 170 Delta Company issued bonds with a face amount of $1,500,000 in 2005. As of January 1, 2010, the balance in Discount on Bonds Payable is $4,800. At that time, Delta redeemed the bonds at 101. Instructions Assuming that no interest is payable, make the entry to record the redemption. BE 171 Nicholson Inc. issues a $1,200,000, 10%, 10-year mortgage note on December 31, 2010, to obtain financing for a new building. The terms provide for semiannual installment payments of $96,291. Instructions Prepare the entry to record the mortgage loan on December 31, 2010, and the first installment payment. BE 172 Franco Corporation reports the following selected financial statement information at December 31, 2010: Total Assets $110,000 Total Liabilities 65,000 Net Income 18,000 Interest Income 1,600 Interest Expense 900 Tax Expense 300 Instructions Calculate the debt to total assets and times interest earned ratios. BE 173 On January 1, 2010, Fabian Enterprises issued 9%, 10-year bonds with a face amount of $900,000 at 96. Interest is payable semiannually on June 30 and December 31. The bonds were issued for an effective interest rate of 10%. Instructions Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses effective-interest amortization. BE 174 On January 1, 2010, Halston Enterprises issued 8%, 20-year bonds with a face amount of $5,000,000 at 101. Interest is payable semiannually on June 30 and December 31. Instructions Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses straight-line amortization. Ex. 175 Banks Company is considering two alternatives to finance its purchase of a new $4,000,000 office building. (a) Issue 400,000 shares of common stock at $10 per share. (b) Issue 8%, 10-year bonds at par ($4,000,000). Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 600,000 shares of common stock outstanding prior to the new financing. Instructions Calculate each of the following for each alternative: (1) Net income. (2) Earnings per share. Ex. 176 The board of directors of Gibson Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $4,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 shares of $5 par value common stock which is selling for $40 per share on the open market. Gibson Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased. Instructions Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering. Ex. 177 United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are: 1. Issue 50,000 shares of $10 par value common stock at $50 per share. 2. Issue $2,500,000, 10%, 10-year bonds at par. It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 30% and has 100,000 shares of common stock outstanding prior to the new financing. Instructions Determine the effect on net income and earnings per share for these two methods of financing. Ex. 178 Three plans for financing a $20,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%. Plan 1 Plan 2 Plan 3 9% Bonds — — $10,000,000 6% Preferred Stock, $100 par — $10,000,000 5,000,000 Common Stock, $10 par $20,000,000 10,000,000 5,000,000 Total $20,000,000 $20,000,000 $20,000,000 It is estimated that income before interest and taxes will be $5,000,000. Instructions Determine for each plan, the expected net income and the earnings per share on common stock. Ex. 179 Taylor Corporation issued $2 million, 10-year, 6% bonds on January 1, 2010. Instructions Prepare the entry to record the sale of these bonds, assuming they were issued at (a) 98. (b) 103. Ex. 180 On January 1, 2010, Lang Corporation issued $900,000, 8%, 10-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Lang Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2010. Ex. 181 On January 1, Porter Corporation issued $600,000, 6%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Instructions Prepare journal entries to record the (a) Issuance of the bonds. (b) Payment of interest on July 1, assuming no previous accrual of interest. (c) Accrual of interest on December 31. Ex. 182 The following section is taken from Brown Corp’s balance sheet at December 31, 2009. Current liabilities Bond interest Payable ................................................ $ 90,000 Long-term liabilities Bonds Payable, 9%, due January 1, 2014 ................. 2,000,000 Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date. Instructions (a) Journalize the payment of the bond interest on January 1, 2010. (b) Assume that on January 1, 2010, after paying interest, Brown calls bonds having a face value of $800,000. The call price is 104. Record the redemption of the bonds. (c) Prepare the entry to record the payment of interest on July 1, 2010, assuming no previous accrual of interest on the remaining bonds. Ex. 183 Carpino Company issued $500,000 of bonds on January 1, 2010. Instructions (a) Prepare the journal entry to record the retirement of the bonds at maturity, assuming the bonds were issued at 100. (b) Prepare the journal entry to record the retirement of the bonds before maturity at 98. Assume the balance in Premium on Bonds Payable is $5,000. (c) Prepare the journal entry to record the conversion of the bonds into 20,000 shares of $10 par value common stock. Assume the bonds were issued at par. Ex. 184 Wood Company retired $500,000 face value, 9% bonds on June 30, 2010 at 98. The carrying value of the bonds at the redemption date was $508,000. Instructions Prepare the journal entry to record the redemption of the bonds. Ex. 185 Presented below are three independent situations: (a) Howell Corporation purchased $350,000 of its bonds on June 30, 2010, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $339,500. The bonds pay semiannual interest and the interest payment due on June 30, 2010, has been made and recorded. (b) Justice, Inc. purchased $400,000 of its bonds at 97 on June 30, 2010, and immediately retired them. The carrying value of the bonds on the retirement date was $393,000. The bonds pay semiannual interest and the interest payment due on June 30, 2010, has been made and recorded. (c) Riser Company has $80,000, 10%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 40 shares of Riser $5 par value common stock for each $1,000 par value bond. On December 31, 2010, after the bond interest has been paid, $20,000 par value of bonds were converted. The market value of Riser’s common stock was $38 per share on December 31, 2010. Instructions For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds. Ex. 186 Riley Company issued a $2,500,000, 10%, 10-year mortgage note payable to finance the construction of a building at December 31, 2010. The terms provide for semiannual installment payments of $200,608. Instructions Prepare the entry to record: (a) the mortgage loan on December 31, 2010. (b) the first installment payment. Ex. 187 Downey Corporation issues a $3,000,000, 12%, 20-year mortgage note payable on December 31, 2010, to obtain needed financing for the construction of a building addition. The terms provide for semiannual installment payments of $199,386 on June 30 and December 31 Instructions (a) Prepare the journal entries to record the mortgage loan on December 31, 2010, and the first installment payment. (b) Will the amount of principal reduction in the second installment payment be more or less than with the first installment payment? Ex. 188 Mert Company borrowed $750,000 on January 1, 2010, by issuing $750,000, 8% mortgage note payable. The terms call for semiannual installment payments of $50,000 on June 30 and December 31. Instructions (a) Prepare the journal entries to record the mortgage loan and the first two installment payments. (b) Indicate the amount of mortgage note payable to be reported as a current liability and as a long-term liability at December 31, 2010. Ex. 189 Presented below are three different aircraft lease transactions that occurred for Midwest Airways in 2010. All the leases start on January 1, 2010. In no case does Midwest receive title to the aircraft during or at the end of the lease period; nor is there a bargain purchase option. Lessor Winsor Insurance Gray Leasing FIYNN Leasing Type of property 747 Aircraft 727 Aircraft L-1011 Aircraft Yearly rental $8,508,645 $6,357,660 $2,851,861 Lease term 15 years 15 years 20 years Estimated economic life 25 years 25 years 25 years Fair market value of leased asset $79,200,000 $63,000,000 $32,000,000 Present value of lease rental payments $72,000,000 $54,000,000 $28,000,000 Instructions (a) Which of the above leases are operating leases and which are capital leases? Explain your answer. (b) How should the lease transaction with Winsor Insurance be recorded in 2010? (c) How should the lease transaction with Gray Leasing be recorded in 2010? Ex. 190 Eby Corporation entered into the following transactions: 1. On January 1, 2010 Gant Car Rental leased a car to Eby Corporation for one year. Terms of the operating lease call for monthly payments of $750. 2. On January 1, 2010, Eby Corporation entered into an agreement to lease 20 machines from Weiss Corporation. The terms of the lease agreement require an initial payment of $500,000 and then three annual rental payments of $600,000 beginning on December 31, 2010. The present value of the three rental payments is $1,492,108. The lease is a capital lease. Instructions Prepare the appropriate journal entries to be made by Eby Corporation in January related to the lease transactions. Ex. 191 On January 1, 2010, Stine Inc. entered into an agreement to lease equipment from Finley Corporation. The lease agreement requires five annual rental payments of $90,000 beginning December 31, 2010. The present value of the rental payments is $341,172. The lease transfers substantially all the benefits and risks of ownership to Stine. Instructions Prepare the entry to record the lease agreement on the books of Stine Inc. on January 1, 2010. Ex. 192 The adjusted trial balance for Payne Corporation at the end of the current year contained the following accounts: Bonds payable, 10%........................................................... $600,000 Bond interest payable......................................................... 20,000 Discount on bonds payable ................................................ 40,000 Lease liability...................................................................... 60,000 Mortgage notes payable, 9%, due 2013 ............................. 80,000 Accounts payable ............................................................... 120,000 Instructions (a) Prepare the long-term liabilities section of the balance sheet. (b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section. Ex. 193 Stover Corporation reports the following amounts in their 2010 financial statements: At December 31, 2010 For the Year 2010 Total assets $2,000,000 Total liabilities 1,140,000 Total stockholders’ equity ? Interest expense $10,000 Income tax expense 100,000 Net income 150,000 Instructions (a) Compute the December 31, 2010, balance in stockholders’ equity. (b) Compute the debt to total assets ratio at December 31, 2010. (c) Compute times interest earned for 2010. aEx. 194 Wenger Corporation is issuing $500,000 of 8%, 5-year bonds when potential bond investors want a return of 10%. Interest is payable semiannually. The present value of 1 factors are 4%, .67556 and 5%, .61391. The present value of an annuity factors are 4%, 8.1109 and 5%, 7.72173. Instructions Compute the market price (present value) of the bonds. aEx. 195 On January 1, 2010, Potter Corporation issued $800,000, 9%, 5-year bonds for $769,112. The bonds were sold to yield an effective-interest rate of 10%. Interest is paid semiannually on June 30 and December 31. The company uses the effective-interest method of amortization. Instructions (a) Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar.) (b) Prepare the journal entries that Potter Corporation would make on January 1, June 30, and December 31, 2010, related to the bond issue. aEx. 196 On June 30, 2010, Wayne, Inc. sold $3,000,000 (face value) of bonds. The bonds are dated June 30, 2010, pay interest semiannually on December 31 and June 30, and will mature on June 30, 2013. The following schedule was prepared by the accountant for 2010. Semi-Annual Interest to Interest Unamortized Bond Interest Period be Paid Expense Amortization Amount Carrying Value $75,000 $2,925,000 1 $120,000 $131,625 $11,625 63,375 1,936,625 Instructions On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.) 1. What is the stated interest rate for this bond issue? 2. What is the market interest rate for this bond issue? 3. What was the selling price of the bonds as a percentage of the face value? 4. Prepare the journal entry to record the sale of the bond issue on June 30, 2010. 5. Prepare the journal entry to record the payment of interest and amortization on December 31, 2010. aEx. 197 On January 1, 2010, Morten Corporation issued $4,000,000, 9%, 5-year bonds dated January 1, 2010, at 96. The bonds pay semiannual interest on January 1 and July 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all the journal entries that Morten Corporation would make related to this bond issue through January 1, 2011. Be sure to indicate the date on which the entries would be made. aEx. 198 Vance Company issued $600,000, 10%, 20-year bonds on January 1, 2010, at 104. Interest is payable semiannually on July 1 and January 1. Vance uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2010 related to the bond issue. aEx. 199 Jantz Company issued $500,000, 11%, 10-year bonds on December 31, 2010, for $460,000. Interest is payable semiannually on June 30 and December 31. Jantz uses the straight-line method of amortization and has a calendar year end. Instructions Prepare the appropriate journal entries on (a) December 31, 2010. (b) June 30, 2011.

Accounting_Chapter_3_main Accounting_Chapter_3_main

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Multiple Choice 1. Which of the following statements linking nature and nurture is CORRECT? 2. The focus of Lawrence Kohlberg” research was 3. An idea in Freud's thinking that has special importance to sociology is his assertion that 4. Mead place the origin of the self in 5. Thinking about how patterns of child-rearing vary by class, lower-class parents generally stress _______, while well-to-do parents typically stress _______. 6. In historical perspective, the power of the mass media in the socialization process has 7. The “graying of the United States” refers to the fact that True/False ____ _____ 8. Socialization takes place entirely in childhood. _________ 9. College is a good example of a total institution. Short-Answer 10. Why are the cases of Anna and Genie important to social scientists? 1. Studies of children raised in isolation, show that 2. Which of the following concepts refers to the lifelong social experience by which human beings develop their potential and learn culture? 3. Which of the following concepts refers to an individual person's fairly consistent pattern of acting, thinking, and feeling? 4. The social sciences, including sociology, support the claim that 5. Behavioral theory, developed by ____________, claims that most human behavior is not instinctive but learned within a social environment? 6. In the nature versus nurture debate sociologist claim that 7. The Harlows studied the effects of social isolation on rhesus monkeys and found that 8. The Harlows’ research with rhesus monkeys, as well as cases of isolated children such as Anna, leads us to conclude that 9. If you were to put together the lessons learned from the cases of Anna and Genie you would correctly conclude that 10. Our basic drives or needs as humans are reflected in Freud's concept of 11. In Freud's model of personality, which element of the personality represents a person's efforts to balance innate pleasure-seeking drives and the demands of society? 12. In Freud's model of personality, the __________ represents the presence of culture within the individual. 13. Applying Freud’s thinking to a sociological analysis of personality development, you would conclude that 14. Jean Piaget's focus was on 15. According to Piaget, at which stage of human development do individuals first see causal connections in their surroundings? 16. Jean Piaget called the level of development at which individuals first use language and other cultural symbols the 17. The focus of Lawrence Kohlberg's research was 18. Carol Gilligan extended Lawrence Kohlberg’s research, showing that 19. George Herbert Mead considered the self to be 20. George Herbert Mead placed the origin of the self in 21. According to George Herbert Mead, social experience involves 22. By “taking the role of the other,” Mead had in mind 23. When Charles Horton Cooley used the concept “looking-glass self,” he was referring to the fact that 24. According to George Herbert Mead, children learn to “take the role of the other” as they model themselves on important people in their lives, such as parents. Mead referred to these important people as 25. In George Herbert Mead’s model, which sequence correctly orders stages of developing self? 26. Mead considered the “generalized other” to be 27. George Herbert Mead would agree with only one of the following statements. Which one is it? 28. Which of the following statements comes closest to describing Erik H. Erikson’s view of socialization? 29. Critics of Erik H. Erikson’s theory of personality point out that 30. Family is important to the socialization process because 41. The elderly population of the United States has a poverty rate that is 42. What is the term sociologists give to a category of people with a common characteristic, usually their age? 43. Ageism refers to 44. In her research, Elisabeth Kübler-Ross found that deat 45. Based on the text's survey of the life-course, you might conclude that life course stages 46. People who grew up during the 1930s Great Depression would correctly be called a 47. Which of the following concepts refers to a setting where a staff tries to radically change someone’s personality through careful control of the environment? 48. According to Erving Goffman, the goal of a total institution is 49. Below is a list of traits linked to a total institution; all but one are correct. Which one is NOT correct? 50. An inmate in prison who loses the capacity for independent living is described as 51. In terms of human freedom, the chapter on socialization leads to the conclusion that 52. In Chapter 3’s “Seeing Sociology in the News” article, a father describes his daughter’s use of new computer technology and concludes that rapid innovation in communication technology is producing TRUE / FALSE QUESTIONS 53. Socialization takes place entirely in childhood. 54. John B. Watson was one of the first social scientists to claim that specific patterns of behavior are not instinctive, but learned. 55. The Harlow studies found that one month of social isolation was enough to permanently damage infant rhesus monkeys. 56. The tragic case of Anna shows how human beings can eventually overcome the effects of severe social isolation. 57. What we know of the later lives of socially isolated children squares with the finding of the Harlows in their laboratory research with rhesus monkeys. 58. Even years of social isolation in infancy may not cause permanent and irreversible developmental damage. 59. The "ego" in Freud's work represents the human being's basic drives, which are unconscious and seek immediate satisfaction. 60. A more common word for "superego" in Freud's model of personality would be "conscience." 61. In Freud's model of personality, the ego manages the opposing forces of the id and the superego. 62. According to Jean Piaget, language and other symbols are first used in the concrete operational stage. 63. Lawrence Kohlberg claimed that individuals develop the capacity for moral reasoning in stages as they grow older. 64. George Herbert Mead focused not on people’s actions so much as on their underlying intentions. 65. George Herbert Mead described how our impressions of other people form the basis of a “looking glass self.” 66. Mead’s theory of the self is based on the interaction between “nature and nurture”. 67. Mead’s concepts of the “I” and the “me” are basically the same as Freud's concepts of the “id” and the “superego.” 68. Erik H. Erikson emphasized that socialization takes across the life course. 69. Of all social institutions, mass media is the one with the greatest impact on socialization for most people. 70. Melvin Kohn demonstrated that parents of all social classes have much the same expectations of their children. 71. In our society, there is no single factor that defines young people as having reached adulthood. 72. Even during adolescence, the family continues to have a strong influence on children. 73. A peer group is a social group whose members share common interests, social position, and a similar age. 74. In simple terms, anticipatory socialization involves learning that helps people prepare for a desired position. 75. Over the course of the last century, the mass media have had less and less influence on people in the United States. 76. In the United States, school children spend about 6 and one-half hours a day in front of video screens, which is about as much time as they spend in school. 77. Childhood and all other stages of the life course are defined in much the same way in all societies. 78. As the proportion of the population in old age increases, we can expect U.S. culture to become more comfortable with the reality of death. 79. In general, low-income countries are more likely to take on the form of gerontocracy with the oldest people having the most wealth and power. 80. Compared to 1960, the poverty rate for elderly people in the United States is higher today. 81. Chapter 3’s “Seeing Sociology in the News” article explains that the latest computer technology gives today’s young people common experiences that set them off from older cohorts. 82. Industrialization brings with it a rise in the social standing of old people. 83. In her interviews with high school students, Grace Kao found that stereotypes about race and ethnicity form part of young people’s sense of self. 84. A cohort is a category of people with a common characteristic, usually their age. 85. A college is a good example of a total institution. 86. Total institutions isolate and try to resocialize inmates. SHORT-ANSWER QUESTIONS 87. Why are the cases of Anna and Genie important to social scientists? 88. What aspect of Sigmund Freud’s work has importance to the discipline of sociology? 89. Summarize Jean Piaget's contribution to our understanding of socialization. 90. What differences did Carol Gilligan find in how males and females make moral judgments? 91. What, according to George Herbert Mead, is the meaning of the “self”? According to Mead, what are the steps in the development of the self? 92. Explain Erik Erikson’s claim that socialization is a life-long process. 93. Cite several ways in which the family is central to the process of socialization. 94. Explain several contributions schooling makes to the socialization process. 95. Provide evidence in support of the conclusion that stages of the life course are socially constructed. 96. What is a gerontocracy? Is U.S. society a gerontocracy? Explain. 97. According to Erving Goffman, what key traits define a total institution? (Conceptual;) ESSAY QUESTIONS / TOPICS FOR SHORT PAPERS 98. Explain the “nature-nurture” debate. How do the ideas of Sigmund Freud and George Herbert Mead differ in this regard? 99. Summarize Freud's theory of human personality, Piaget's approach to human development, and Mead's view of the development of the self. What do all have in common? What are the main differences between them? 100. What are the major agents of socialization in the United States? What are some specific contributions to human development made by family, school, peer group, and mass media? Can these agents of socialization sometimes be in conflict? How? 101. Describe the various stages of the human life course: childhood, adolescence, adulthood, and old age. What characteristics do most people in the United States associate with each? How do we know that these stages, although linked to biological changes, are mostly a social construction? 102. Describe the importance of the mass media in the socialization process. What concerns do people raise about the influence of television and other "screen" media? What evidence can you point out to assess these concerns? 103. Based on the material in Chapter 3, address the issue of human freedom in a socially structured world. That is, to what extent do you think people are free to think and act as they wish? In answering this question, consider the theories presented in the chapter—for example, why does Mead’s theory point to greater human freedom than Freud’s theory? 104. What does it mean to be "grown up" in our society? What factors are involved in a young person being defined as an adult? What importance does social class have in this process? 105. Read through Chapter 3’s “Seeing Sociology in Everyday Life” photo essay on pages 88-89. Describe how many societies clearly mark the transition from childhood to adulthood using community rituals. How clearly does our own way of life mark this transition?

Accounting_Chapter_4_completion_statements Accounting_Chapter_4_completion_statements

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COMPLETION STATEMENTS 200. Bonds that mature at a single specified future date are called _______________ bonds, whereas bonds that mature in installments are called ________________ bonds. 201. The terms of a bond issue are set forth in a formal legal document called a bond ________________. 202. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds. 203. If bonds were issued at a premium, then the contractual interest rate was _____________ than the market interest rate. 204. Discount on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet. Premium on Bonds Payable is _______________ (from)(to) bonds payable on the balance sheet. 205. If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate. 206. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to ________________. 207. When bonds are converted into common stock and the conversion is recorded, the ________________ of the bonds is transferred to paid-in capital accounts. 208. A lease may be classified as an _______________ lease or as a ________________ lease. a209. The market price of a bond is obtained by discounting to its present value the _______________ paid at maturity, and all _____________ payments to be made over the term of the bond. a210. When there is a ________________ difference between the straight-line and effectiveinterest methods of amortization, the ________________ method is required under GAAP. a211. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method. a 212. The straight-line method of amortization allocates the same amount to _______________ in each interest period. Answers to Completion Statements 200. term, serial 207. carrying value 201. indenture 208. operating, capital 202. debenture a209. principal, interest 203. greater a210. material, effective-interest 204. deducted, added a211. straight-line 205. stated (contractual), market (effective) a212. interest expense 206. 970,000 MATCHING 213. Match the items below by entering the appropriate code letter in the space provided. A. Serial bonds G. Straight-line method of amortization B. Debenture bonds H. Bonds C. Bond indenture I. Debt to total assets ratio D. Premium on bonds payable J. Capital lease E. Discount on bonds payable K. Operating lease F. Effective-interest method of amortization L. Registered bonds _____ 1. A contractual arrangement which is in effect a purchase of property. _____ 2. A legal document that sets forth the terms of a bond issue. _____ 3. Bonds that mature in installments. _____ a4. Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds. _____ 5. Bonds issued in the name of the owner. _____ 6. A form of interest-bearing notes payable used by corporations. _____ 7. Occurs when the contractual interest rate is greater than the market interest rate. _____ 8. Unsecured bonds issued against the general credit of the borrower. _____ 9. A contractual arrangement that gives the lessee temporary use of property. _____ 10. A solvency measure that indicates the percentage of assets provided by creditors. _____ 11. Occurs when the contractual interest rate is less than the market interest rate. _____a12. Produces a periodic interest expense that is the same amount each interest period. Ans: N/A Answers to Matching 1. J 7. D 2. C 8. B 3. A 9. K a4. F 10. I 5. L 11. E 6. H a12. G SHORT-ANSWER ESSAY QUESTIONS S-A E 214 Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates. . S-A E 215 A company desires to replace its current plant equipment with new equipment that costs $10,000,000. One possibility would be for the company to issue $10,000,000 of bonds and use the proceeds to purchase the equipment. Another possibility is to acquire the use of the equipment by signing a long-term capital lease with a leasing company. Describe and compare the financial statement effects of these two alternatives. S-A E 216 When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss. S-A E 217 Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption. . S-A E 218 Kim Estes and Jeff Malone are discussing how the market price of a bond is determined. Kim believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is she right? Discuss. S-A E 219 Megan Stone is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Megan is saying? S-A E 220 (Ethics) Jeff Tanner, a 26-year-old entrepreneur, started Bells & Whistles (B&W), Inc., a firm that specializes in top-of-the-line add-ons for computer systems. The firm has a capital structure of approximately 60% debt. This was necessitated by the rapid growth of B&W, and Mr. Tanner's lack of personal funds to sustain the growth. The 60% debt amount is quite high for firms in this field, and in fact slightly exceeds the debt covenants negotiated with the bank. B&W recently received notice that the bank considers the company's debt to be excessive, and that some accelerated repayment schedule will be adopted. The notice came at a particularly bad time. B&W is in the midst of a major upgrade of its own computer system. The hardware was to have been purchased outright, financed by the seller, Mike Kerr, longtime friend of Mr. Tanner. Mr. Kerr really needs Mr. Tanner’s business. Both believe in the long-term strength of B&W. He therefore suggests to Mr. Tanner that the equipment be purchased by means of a short-term lease. Mr. Tanner could renew the lease annually. Required: 1. Is Mr. Kerr’s suggestion ethical? Explain. 2. If Mr. Tanner accepts the suggestion, is he behaving ethically? Explain. S-A E 221 (Communication) Susan Kline works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Lisa, works for Silver Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Silver's were issued at a premium. Lisa sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was— the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Silver Books. Required: Draft a short note for Susan to send to Lisa. Explain how such a result could occur.

Accounting_Chapter_4_main Accounting_Chapter_4_main

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Multiple-Choice 1. Which sociologist developed the approach called dramaturgical analysis? 2. Both statuses and roles in the United States 3. Which concept refers to the process by which people creatively shape their world as they interact? 4. Which of the following phrases was used by Goffman to refer to being embarrassed in a social situation? 5. Which of the following is an important element of non-verbal communication? 6. The English language often treats as __________ whatever has greater value, power, or significance. 7. In general, an important foundation of humor is True/False _________ 8. Being a professional baseball player is mostly an achieved status. _________ 9. In dramaturgical analysis, a restricted area is sometimes called a “front region.” Short-Answer 10. Explain the idea of socially constructed reality using examples from everyday life. 1. Harold and Sybil are lost, and despite Sybil’s insistence, Harold refuses to stop and ask for directions. This chapter-opening story shows that 2. The process by which people act and react in relation to others is called 3. Which of the following concepts defines who and what we are in relation to others? 4. At a given time, you occupy a number of statuses. Together, these statuses form your 5. Which of the following concepts refers to a social position that is received at birth or involuntarily taken on later in life? 6. Which of the following concepts refers to a social position that is assumed voluntarily and that reflects a lot of personal ability and effort? 7. Which of the following concepts refers to a status that has very great importance for social identity, often shaping a person's entire life? 8. Akbar is an honors student. In sociological terms, being an honor student is an example of which of the following? 9. Julie is a police officer who finds that wherever she goes in her small town, people seem to think of her as a cop. This is an example of which of the following concepts? 10. Sociologists use which of the following concepts to refer to the behavior people expect of someone who holds a particular status? 11. Family roles are generally more central to a person's identity 12. A role set refers to a number of roles 13. Which of the following concepts refers to conflict among roles corresponding to two or more statuses? 14. Tanya is an excellent artist and enjoys her work, but feels she cannot devote enough time to her family. She is experiencing 15. What is the term for the tension among roles connected to a single status? 16. Many surgeons choose not to operate on their own children because the personal involvement of being a parent could interfere with the professional objectivity needed by a physician. This example involves 17. Which of the following is involved when a plant supervisor wishes to be a good friend and hang out with the workers, but must also keep a personal distance to remain objective in order to assess the workers’ performance? 18. What is the term for the process by which people disengage from important social roles? 19. Rebuilding relationships with people who knew you in an earlier period of life is a challenge for someone who has experienced 20. Which concept is used to refer to the process by which people creatively shape their world as they interact? 21. Flirting is a way of seeing if someone is interested in you without risking rejection. From this perspective, flirting illustrates 22. The Thomas theorem states that 23. Harold Garfinkel’s research, called “ethnomethodology,” involves 24. The “Seeing Sociology in the News” article in Chapter 4 (“Social Interaction in Everyday Life”) deals with the social meaning people of different ages attach to 25. Which of the following is likely to play a part in the reality we construct through social interaction? 26. Who is the sociologist who developed the approach called "dramaturgical analysis"? 27. The concept “presentation of self” refers to 28. According to Erving Goffman, we engage in a __________ when we use of costumes, props, tone of voice, and gestures to convey information to others. 29. The power relationship between physician and patient is immediately evident when the patient enters the doctor’s office because 30. "Nonverbal communication" refers to 31. A more common term for nonverbal communication is 32. The careful observer can notice clues that someone is being deceptive. People give off these clues because 33. In what way do men and women typically differ in their use of space? 34. “Personal space” refers to 35. In the United States, people stand further away from one another when speaking than do people in Middle East countries. This pattern reveals differences in meaning attached to 36. According to Erving Goffman, people usually make efforts to __________ their intentions. 37. Smiling and making polite remarks to people we do not like is an example of 38. Which of the following concepts was used by Erving Goffman to refer to being embarrassed in a social situation? 39. In terms of dramaturgical analysis, helping another person to "save face," or avoid embarrassment, is Called 40. Tact is a common response in potentially embarrassing situations because 41. Which of the following are documented as emotions found all over the world? 42. Paul Ekman claims that a major function of emotions is to 43. Cross-cultural research on human emotions shows that 44. Arlie Hochschild’s research shows that many companies 45. Women often take the family name of the man they marry. In sociological terms, this is an example of how language can be used to convey 46. What did Jennifer Keys learn in her study of women’s abortion experiences? 47. The English language often treats as __________ whatever has greater value, greater power, or greater significance. 48. Deborah Tannen’s research on gender and language shows that 49. Humor is created when humans 50. Which of the following best describes a "well-told" joke? 51. The idea of "getting" a joke, according to the text, depends on 52. In general, an important foundation of humor is 53. When interacting with people whose cultural background differs from our own, we find that 54. Looking at humor from a structural-functional viewpoint, jokes 55. From a social-conflict point of view, jokes TRUE / FALSE QUESTIONS 56. People generate reality in their social interaction. 57. Social structure, including status and role, provides a guide for everyday living. 58. Sociologists use the term “status” to mean someone is important. 59. For most people, only one status figures into social identity. 60. A status set refers to all the social positions a person holds at any given time. 61. Being an elected political official is mostly an achieved status. 62. Being male or female, or being black or white, is an ascribed status. 63. The concept “master status” refers to being the best in one’s occupational field. 64. Having a physical disability may operate as a master status to the extent that people react to the physical condition as much as to the person. 65. A role set refers to all the roles attached to a single social position. 66. Typically, each status is linked to only one role. 67. Role strain refers to the conflict or incompatibility among the roles linked to two or more statuses. 68. Role conflict refers to differences between the same roles when they are performed by two different people. 69. A father who wants to be both a friend and an authority figure for his son might experience role strain. 70. The process by which people disengage from important social roles is called "role exit." 71. People who formally leave a role (such as an ex-convict) often find that their earlier identity stays with them. 72. People usually have more roles than they have statuses. 73. The idea that reality is socially constructed means that nothing is real to most people at all. 74. The Thomas theorem states that situations that are defined as real become real in their consequences. 75. Having “street smarts” really amounts to having the ability to control everyday reality. 76. Ethnomethodology is the study of how people make sense of the social world around them. 77. The reality that people build in their interaction depends only on the actors themselves and has nothing to do with the larger culture they live in. 78. W. I. Thomas is the sociologist who developed the approach known as “dramaturgical analysis.” 79. A person’s effort to foster certain impressions in the minds of others is called “presentation of self.” 80. Dramaturgical analysis treats a status as a part in a play, and a role serves as a script. 81. In dramaturgical analysis, areas of a setting with restricted access are called “front regions.” 82. Following Goffman’s approach, one might view the size of someone’s office desk as a prop that makes a statement about power. 83. Nonverbal communication is communication using body movements, gestures, and facial expressions rather than speech. 84. Most people find it hard to control all elements of their presentations of self; therefore, being a good liar is difficult. 85. Because females are socialized to be less assertive than males, they are not very sensitive to nonverbal communication. 86. People with more power typically have more personal choice about how they act in the presence of others. 87. In general, people with more power and those with less power use about the same amount of personal space. 88. Because men have more power in everyday interaction than women, they are more likely to intrude on the personal space of women. 89. In everyday conversation, women tend to maintain more eye contact than men do. 90. Dramaturgical analysis treats embarrassment as “saving face.” 91. “Idealization” refers to people trying to convince others that their actions reflect culturally ideal motives. 92. Tact is common because embarrassment causes discomfort for both the presenter and members of the audience. 93. Emotions have both a biological and cultural foundation. 94. Cross-cultural research shows that people around the world express the same emotions in the same situations. 95. Because emotions are biologically based, it is incorrect to say they are “socially constructed.” 96. Workers who deal with the public often find that their jobs demand not just certain behavior but also the display of certain emotions. 97. Jennifer Keys found that how women respond to an abortion is guided by emotional scripts or "feeling rules" that support a particular view of abortion. 98. Adding word endings such as “ette” and “ess,” which denote femininity, usually devalues the words to which they are added. 99. Deborah Tannen’s research shows that women and men share the same patterns in their communication. 100. Humor arises in situations that can be understood in only one way. 101. The same comedians perform all over the world because humor "travels well." 102. People often use jokes to “put down” others----is an example of a social-conflict perspective. SHORT-ANSWER QUESTIONS 103. Describe how status and role operate as two building blocks of everyday social interaction. 104. Explain the difference between an ascribed status and an achieved status. Give examples of statuses that are mostly ascribed as well as those that are mostly achieved. 105. Explain the concepts of status set and role set. Illustrate the concepts with examples. 106. Explain the idea of “socially constructing reality” with examples from everyday life. 107. What is the Thomas theorem? Provide an illustration of how it works. 108. Explain the basic approach called “dramaturgical analysis.” From this point of view, explain “presentation of self.” 109. What is nonverbal communication? What part does it play in everyday interaction? 110. Identify several ways in which gender affects personal performances. 111. Why do emotions have both biological and cultural roots? 112. How does the foundation of humor lie in how we construct reality? ESSAY QUESTIONS/TOPICS FOR SHORT PAPERS 113. In a short essay, identify a number of your own statuses. What roles correspond to each status? Do any operate as master statuses? How? Identify which statuses are mostly ascribed and which are mostly achieved. Use one or more examples to explain why many statuses are both ascribed and achieved. 114. Recall from your own life the experience of role exit. What are some of the benefits of becoming an “ex”? What are some of the challenges? 115. Describe how we sometimes treat a disability or a handicap as a master status. (If you have not had this experience, consider how we sometimes treat race as a master status.) What might be done to discourage this common practice? 116. Explain Erving Goffman’s ideas on the presentation of self. What are the elements of “presentations”? How, for example, does a college professor engage in a scripted presentation of self to a class? What about the professor’s office—What features of the office are used to convey information to an observer? 117. How are human emotions an expression of both human biology and human culture? How do many jobs regulate the emotions of workers? (Are college teachers expected to show any specific emotions toward their work or their students?) 118. Read Chapter 4’s “Seeing Sociology in the News” article on pages 100-101. Then, using the act of hugging as an illustration, explain how people can construct different realities based on the same patterns of behavior. 119. Look carefully at Chapter 4’s “Seeing Sociology in Everyday Life” photo essay on pages 112-13. Drawing on Goffman’s “dramaturgical analysis,” point out ways that people engage in an electronic version of “presentation of self” on their Facebook pages (or on other social networking sites).
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