Answer:
9.68 percent
Explanation:
Calculation to determine the firm's cost of equity
Using this formula
Cost of equity=[(Annual dividend×Increase in dividends×/Current price of common stock]+Dividends
Let plug in the formula
Cost of equity=[($1.22 × 1.024)/$17.15] + 0.024
Cost of equity=($1.24928/$17.15)+0.024
Cost of equity=0.0728+0.024
Cost of equity=0.0968*100
Cost of equity=9.68 percent
Therefore the firm's cost of equity is 9.68 percent
What is the present value of an investment that will pay $2,000 at the end of the year when interest is compounded annually at 5.10%
Answer:
the present value of an investment is $1,902.94
Explanation:
The computation of the present value of an investment is given below:
present value
= Future value ÷ (1 + rate of interest)^time period
=$2,000 ÷ (1+.051)^1
= $2,000 ÷ 1.051
= $1902.94
Hence, the present value of an investment is $1,902.94
The calculation of WACC involves calculating the weighted average of the required rates of return on debt and equity, where the weights equal the percentage of each type of financing in the firm's overall capital structure.
(rstd, rps, rs, rd)
_______ is the symbol that represents the required rate of return on short-term debt in the weighted average cost of capital (WACC) equation.
Co. has $2.3 million of debt, $1 million of preferred stock, and $2.2 million of common equity. What would be its weight on debt?
a. 0.42
b. 0.18
c. 0.40
d. 0.16
Answer:
a. 0.42
Explanation:
Calculation to determine What would be its weight on debt?
First step is to calculate the Total firm capital
Total firm capital= $2.3 + $1 + $2.2
Total firm capital= 5.50 million.
Now let determine the weight on debt using this formula
Weight on debt= Debt in the firm/ Total firm capital
Let plug in the formula
Weight on debt = $2.3 million/ 5.50 million
Weight on debt = 0.4182.
Weight on debt=0.42 (Approximately)
Therefore What would be its weight on debt is 0.42
In a standard cost accounting system, the entry to record purchase of raw materials on account for $13500 when the standard cost is $12620 includes:______.
a. debit to Raw Materials Inventory for 12,750, debit to Materials Price Variance for $750 and credit to Accounts Payable for $13,500.
B. debit to Materials Price Variance for S7S0 and credit to Accounts Payable for $750.
c. debit to Raw Materials Inventory for $13,500 and credit to Accounts Payable of $13,500.
d. debit to Raw Materials Inventory for $12,750 and credit to Accounts Payable of $12,750.
Answer:
a. Debit to raw material inventory for $12,750, debit to material price variance $750 and credit to account payable for $13,500.
Explanation:
Date Journal Entry Debit Credit
Raw Material Inventory $12,750
Material Price Variance $750
Accounts Payable $13,500
New educational study has proven that the practice of writing, erasing, and rewriting improves students' ability to process information, leading parents to steer away from pen use in favor of pencils.
a. True
b. False
Delta Screen Corporation is currently operating at 60% of capacity and producing 6,000 screens annually. The normal selling price is $750 per screen. They recently received an offer from a company in Germany to purchase 2,000 screens for $500 per unit. Delta has not previously sold products in Germany. Budgeted production costs for 6,000 and 8,000 screens follow:Units Produced 6,000 8,000 Direct Materials Cost $ 750,000 $ 1,000,000Direct Labor Cost 750,000 1,000,000Variable Overhead 900,000 1,200,000 Fixed Overhead 1,200,000 1,200,00 Total Cost 3,600,000 4,400,000Full Cost per Unit 600 550Delta’s marketing manager believes that although the price offered by the German customer is lower than current price, the order should be accepted to gain a foothold in the German market. The production manager, however, believes that the order should be rejected because the unit cost is higher than the price offered.If the president of Delta were to call on you to resolve the difference in opinion, what would you recommend? Explain.What is the minimum price for the special order if Delta is operating at full capacity?
Answer:
a. I would recommend the the special order should be accepted.
b. The minimum price for the special order is the current selling price of $750.
Explanation:
a. If the president of Delta were to call on you to resolve the difference in opinion, what would you recommend?
Because the existing data's format and findings are deceiving, I would suggest to the president to let us perform a differential analysis before making a recommendation.
Note: See the attached excel file for a analysis of accepting the order.
In the attached excel file, the following calculation is done:
Special order revenue = Difference revenue = Units of special order * Special order price per unit = 2,000 * $500 = $1,000,000
Revenue with the special order = Revenue without the special order + Special order revenue = $4,500,000 + $1,000,000 = $4,500,000
From the differential analysis in the attached excel, it can be observed that accepting the order will increase profit by $200,000.
Therefore, I would recommend the the special order should be accepted.
b. What is the minimum price for the special order if Delta is operating at full capacity?
Since other sales opportunities has be forgone if the special order is accepted if Delta is operating at full capacity, the minimum price for the special order must be or is the current selling price of $750.
On the basis of the following information taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for the month ended September 30, journalize the closing entries for Perez Roofing Company.
Perez Roofing Company
Adjusted Trial Balance
September 30
Account Title Debit Credit
Cash 22,500
Accounts Receivable 3,575
Office Supplies 2,850
Repair Parts 3,785
Machinery 17,750
Accumulated Depreciation 3,250
Accounts Payable 1,150
Notes Payable 6,500
Common Stock 1,500
Retained Earnings 1,000
Dividends 1,750
Service Revenue 47,200
Wages Expense 4,840
Office Supplies Expense 1,275
Repair Parts Expense 925
Depreciation Expense 1,350
60,600 60,600
Answer:
Perez Roofing Company
Closing Journal Entries:
September 30:
Debit Service Revenue $47,200
Credit Income Summary $47,200
To close service revenue to income summary.
Debit Income Summary $8,390
Credit:
Wages Expense $4,840
Office Supplies Expense $1,275
Repair Parts Expense $925
Depreciation Expense $1,350
To close expenses to income summary.
Debit Income summary $38,810
Credit Retained Earnings $38,810
To close income summary to Retained Earnings.
Debit Retained Earnings $1,750
Credit Dividends $1,750
To close dividends to Retained Earnings.
Explanation:
a) Data and Calculations:
Perez Roofing Company
Adjusted Trial Balance
September 30
Account Title Debit Credit
Cash 22,500
Accounts Receivable 3,575
Office Supplies 2,850
Repair Parts 3,785
Machinery 17,750
Accumulated Depreciation 3,250
Accounts Payable 1,150
Notes Payable 6,500
Common Stock 1,500
Retained Earnings 1,000
Dividends 1,750
Service Revenue 47,200
Wages Expense 4,840
Office Supplies Expense 1,275
Repair Parts Expense 925
Depreciation Expense 1,350
60,600 60,600
Closing Entries:
Service Revenue $47,200
Wages Expense $4,840
Office Supplies Expense $1,275
Repair Parts Expense $925
Depreciation Expense $1,350
Dividends $1,750
Cross-training occurs: Group of answer choices when employers need to enhance the effectiveness of training by reducing employees' job duties. when e-learning is used as the primary mode for delivering the content of a training program. when the training takes place outside the employing organization. when people are trained to do more than one job.
Answer:
When people are trained to do more than one job
Explanation:
Cross-training
This is simply defined as a type of training usually in diverse areas so as to improve the overall performance
It uses the good qualities or effectiveness of each training method and combining them to remove the limitations of each method.The origin of cross-training is the said to be triathlon which came about in the 1970s.
Its aims specifically is to combine exercise in which five components of fitness cardiorespiratory endurance, muscular strength, muscular endurance, flexibility, body composition.
Cross training uses more than one type of training such as
•Fartlek training on Tuesdays
• Circuit training on Thursdays
• Weight training on Saturdays
Advantages of Cross training
1. It is very good if an individual is involved.
2. It has more than one activity
3. It is an activity that is made up of different types of events etc.
Balmforth Products, Inc. makes and sells a single product called a Bik. It takes three yards of Material A to make one Bik. Budgeted production of Biks for the next five months is as follows:
February 14,000 units
March 15,500 units
April 11,900 units
May 12,600 units
June 14,500 units
The company wants to maintain monthly ending inventories of material A equal to 10% of the following month's production needs. On March 31, this target had not been met since only 1,500 yards of material A were on hand. The cost of Material A is $0.80 per yard. The company wants to prepare a Direct Materials Purchases Budget. The desired ending inventory for June is:____.
Answer:
the desired ending inventory for JUne is 4,350 yards
Explanation:
the computation of the desired ending inventory for JUne is shown below;
= June production × given percentage × number of yards taken
= 14,500 units × 10% × 3 yards
= 4,350 yards
Hence, the desired ending inventory for JUne is 4,350 yards
The same should be considered and relevant
On October 1, Robertson Company sold merchandise in the amount of $5,800 to Alberts, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the periodic inventory system. On October 4, Alberts returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Robertson must make on October 4 is:_____.
a. Sales returns and allowances...500
Accounts receivable...500
Merchandise Inventory...350
Cost of goods sold...350
b. Sales return and allowances...500
Accounts receivable...500
c. Accounts receivable...500
Sales returns and allowances...500
d. Accounts receivable...500
Sales returns and allowances...500
Cost of goods sold...350
Merchandise inventory...350
e. Sales returns and allowances...350
Accounts receivable...350
Answer:
b. Sales return and allowances...500, Accounts receivable...500
Explanation:
Date Accounts & Explanation Debit Credit
Oct 4 Sales return and allowance $500
Account receivable $500
(To record sales return and allowance)
SafeRide, Inc. produces air bag systems that it sells to North American automobile manufacturers. Although the company has a capacity of 300,000 units per year, it is currently producing at an annual rate of 180,000 units. SafeRide, Inc. has received an order from a German manufacturer to purchase 60,000 units at $9.00 each. Budgeted costs for 180,000 and 240,000 units are as follows: 180,000 Units 240,000 UnitsManufacturing costs Direct materials $450,000 $600,000Direct labor 315,000 420,000Factory overhead 1,215,000 1,260,000Total 1,980,000 2,280,000Selling and administrative 765,000 780,000Total $2,745,000 $3,060,000Costs per unit Manufacturing $11.00 $9.50Selling and administrative 4.25 3.25Total $15.25 $12.75Sales to North American manufacturers are priced at $20 per unit, but the sales manager believes the company should aggressively seek the German business even if it results in a loss of $3.75 per unit. She believes obtaining this order would open up several new markets for the company's product. The general manager commented that the company cannot tighten its belt to absorb the $225,000 loss ($3.75 × 60,000) it would incur if the order is accepted.(a) Determine the finanicial implications of accepting the order.(b) How would your analysis differ if the company were operating at capacity? Determine the advantage or disadvantage of accepting the order under full-capacity circumstances.
Answer:
SafeRide, Inc.
a. The financial implications of accepting the order are that total production cost will increase by $315,000 with a corresponding increase in sales revenue of $540,000, and an increase in net income by $225,000.
b. Under full capacity, the total production cost will increase by $1,485,000 for adding additional facilities while the sales revenue would increase by $540,000, resulting to a loss of $945,000.
c. Under full-capacity circumstances, there is a financing disadvantage of accepting the order because the order will entail additional capacity and facilities, resulting to a loss of $945,000.
Explanation:
Annual production capacity = 300,000 units
Current production capacity = 180,000 units
Special order from a German manufacturer = 60,000 units
Special order price per unit = $9.00
Budgeted Costs For 180,000 Units 240,000 Units Difference 60,000
Manufacturing costs
Direct materials $450,000 $600,000 $150,000
Direct labor 315,000 420,000 105,000
Factory overhead 1,215,000 1,260,000 45,000
Total 1,980,000 2,280,000 $300,000
Selling and administrative 765,000 780,000 15,000
Total $2,745,000 $3,060,000 $315,000
Costs per unit
Manufacturing $11.00 $9.50
Selling and administrative 4.25 3.25
Total $15.25 $12.75
Selling price to North American manufacturers = $20 per unit
Financial implications of accepting the order:
Manufacturing costs
Direct materials $150,000
Direct labor 105,000
Factory overhead 45,000
Total $300,000
Selling and administrative 15,000
Total $315,000
Total cost per unit = $5.25 ($315,000/60,000)
Total manufacturing cost per unit = $5 ($300,000/60,000)
Increase in net income from accepting the order = $225,000 ($9.00 - $5.25) * 60,000
Manufacturing costs
Direct materials $150,000 (variable)
Direct labor 105,000 (variable)
Factory overhead 1,215,000
Total $1,470,000
Selling and administrative 15,000 (assumed to be variable)
Total $1,485,000
Unit cost per additional unit = $24.75
Lisa Company had 100 units in beginning inventory at a total cost of $10,000. The company purchased 200 units at a total cost of $26,000. At the end of the year, Lisa had 85 units in ending inventory.
Compute the cost of the ending inventory and the cost of goods sold under FIFO, LIFO, and average-cost. (Round average-cost per unit and final answers to 0 decimal places, e.g. 1,250.)
The cost of the ending inventory
$ FIFO
$ LIFO
$ Average-cost
The cost of goods sold
$ FIFO
$ LIFO
$ Average-cost
Answer:
Lisa Company
FIFO LIFO Average-cost
The cost of the ending inventory $11,050 $8,500 $10,200
The cost of goods sold $24,950 $27,500 $25,800
Explanation:
a) Data and Calculations:
Beginning inventory 100 units $10,000 $100
Purchase of 200 units 26,000 $130
Total units available for sale = 300 $36,000
Ending inventory - 85 units
Units sold = 215 units
Weighted-average cost per unit = $120 ($36,000/300)
FIFO:
Cost of goods sold = $24,950 ($36,000 - $11,050)
Ending inventory = $11,050 (85 * $130)
LIFO:
Cost of goods sold = $27,500 ($36,000 - $8,500)
Ending inventory = $8,500 (85 * $100)
Weighted-average:
Cost of goods sold = $25,800 (215 * $120)
Ending inventory = $10,200 (85 * $120)
The cost of land includes all of the following except:___.
a. cost of leveling and grading.
b. payments to clear liens.
c. purchase price.
d. cost of fencing and lighting.
Answer:
The answer is D.
Explanation:
The correct option is D. -The cost of fencing and lighting is not part of the cost of land. Why? - Because this is the cost to improve land.
Option A is wrong. Cost of levelling and grading is part of the cost of land
Option C is wrong. Purchase price is the main cost in the determining the cost of land
Option D is also wrong
Black Acres Apartment, Inc needs to compute taxable income (TI) for the preceding year and wants your assistance. The effective gross income (EGI) was $52,000; operating expenses were $19,000; $2,000 was put into a fund for future replacement of stoves and refrigerators; debt service was $26,662, of which $25,126 was interest; and the deprecation deduction was $17,000. Compute the taxable income from operations:
Answer:
($9,126)
Explanation:
Computation for the taxable income from operations:
Effective Gross Income $52,000
Less: Operating Expenses($19,000)
Less: Capital Expenditures($2,000)
Net Operating Income $31,000
($52,000-$19,000-$2,000)
Add: CAPX $2,000
Less: Interest on Debt Service($25,126)
Less: Tax Deprecation($17,000)
Taxable Income (Loss)$(9,126)
($31,000+$2,000-$25,126-$17,000)
Therefore the taxable income from operations: is $(9,126)
A company is planning to purchase a machine that will cost $ 28,800 with a six - year life and no salvage value . The company uses straight deprecation The company expects to sell the machine's output of 3.000 units evenly throughout each year A projected income statement for each year of the asset's life appears below . What is the accounting rate of return for this machine
Answer:
the accounting rate of return is 89.44%
Explanation:
The computation of the accounting rate of return is shown below:
accounting rate of return is
= net income ÷ average investment
= $12,880 ÷ ($28,800 ÷ 2)
= 89.44%
Hence, the accounting rate of return is 89.44%
The same is to be considered and relevant
1) Please give an example of a market that comes close to being considered perfectly competitive.2) What does it mean when firms in a perfectly competitive market earn $0 in economic profits?
Answer:
the agricultural market e.g market for oranges
2. A firm earns zero economic profit when accounting profit equals implicit cost.
it means that they only earn accounting profit
Explanation:
A perfect competition is characterized by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.
In the long run, firms earn zero economic profit. If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.
Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.
In an agricultural market e.g. market for oranges, the goods are identical and the prices are the same.
A firm earns economic profit when accounting profit equals implicit cost. So, it only earns accounting profit
The following units of a particular item were available for sale during the calendar year:
Jan. 1 Inventory 4,000 units at $40
Apr. 19 Sale 2,500 units
June 30 Purchase 4,500 units at $44
Sept. 2 Sale 5,000 units
Nov. 15 Purchase 2,000 units at $46
The firm maintains a perpetual inventory system. Determine the cost of goods sold for each sale and the inventory balance after each sale, assuming the last-in, first-out method.
Answer:
The cost of goods sold for eachs ale and the inventory balance after each sale, assuming the LIFO (last-in, first-out) method:
Cost of goods sold Ending Inventory
Apr. 19 Sale $100,000 $60,000
Sept. 2 Sale $218,000 $40,000
Explanation:
a) Data and Calculations:
Date Description Units Unit Cost Total Balance
Jan. 1 Inventory 4,000 $40 $160,000
Apr. 19 Sale (2,500) (100,000) $60,000
June 30 Purchase 4,500 $44 198,000 258,000
Sept. 2 Sale (5,000) (218,000) 40,000
Nov. 15 Purchase 2,000 $46 92,000 132,000
Cost of goods sold: Ending Inventory
April 19: = 2,500 * $40 = $100,000 = 1,500 * $40 = $60,000
Sept 2: = 4,500 * $44 + 500 * $40 = 1,000 * $40 = $40,000
= $198,000 + $20,000
= $218,000
You are analyzing ABC Company, a computer manufacturer. You notice that inventory turnover this year is significantly lower than in prior years. You also notice that accounts receivable turnover is significantly lower this year when compared to previous years. Provide three explanations that would be consistent with your observation for inventory turnover and include an explanation of whether these would be of concern to you, as well as what the effect might be on the next period's financial results. In addition, provide three explanations that would be consistent with your observation of the accounts receivable turnover, and explain whether these would be of concern to you.
Answer:
ABC Company
1. Observation: Current year's inventory turnover is significantly lower than those of previous years.
Explanations:
1. Lower inventory turnover implies weaker sales for the current period than those of previous years.
2. Lower inventory turnover results from excessive inventory, which increases storage costs and interest expenses.
3. The ratio may also indicate that the demand for the product is declining rapidly. Many reasons can be adduced for this situation. Little marketing efforts, bad product, and lack of product competitiveness.
a) The formula for computing the inventory turnover equals Cost of goods sold/Average Inventory. The ratio shows the number of times goods are sold in a period. When goods are sold more frequently, sales activities increase, including revenue and profit.
2. Observation: Also current year's accounts receivable turnover is significantly lower than in previous years.
Explanations:
1. Billing inefficiency can contribute to lower accounts receivable turnover.
2. Poor credit policy may give rise to inefficient collection process, excessive bad debts, long credit days, bad customers, and lack of incentives to customers to settle their invoices.
3. Lastly, lower accounts receivable turnover may point to declining demand of the product by customers.
b) The formula for calculating the accounts receivable turnover is Net Credit Sales divided by Average receivables. The ratio determines the effectiveness of the company's credit policy.
why do you think that the npv method choosen by you is the most suitable method in ecaluating the proposed investment?
Answer:
Hind Petrochemicals Company
The reason that the NPV method is the most suitable method in evaluating the proposed investment is that
the NPV reduces all the cash outflows and inflows to their present value to assess their relative values vis-a-vis the time value of money.
Explanation:
NPV, therefore, creates a common denominator for project evaluation. If the cash outflows in their present values are more than the cash inflows in their present values, then Hind may need to reconsider its decision to buy the refineries from the government. Using NPV enables Hind Petrochemicals to compute the revenues and costs in their present values and cash flow forms.
What type of business would publish a new product marketing promotion in the local newspaper, online, and in stores
Answer: c. business-to-consumer
Explanation:
A company that is trying to sell to consumers directly would be trying to market its goods to those same consumers. To do so they would use various media such as local newspapers, online and in store marketing because this is where they know that they would find consumers.
The business in this scenario is doing this so it must be a business to consumer type company. Companies targeting other businesses would not advertise like this but through official channels with other companies directly.
Lucy has been the sole shareholder of a calendar year S corporation since 1980. At the end of 2011, Lucy's stock basis is $23,500, and she receives a distribution of $25,000. Corporate level accounts are computed as follows.
AAA 7,000
PTI 11,000
Accumulated E&P 600
How much capital gain, if any, will Lucy have?
a. $600
b. $7,000
c. $6,400
d. $900
e. None of the above
Answer: d. $900
Explanation:
Capital gain = Total distribution - AAA as this isn't taxed - Accumulated E&P - PTI which isn't taxed either - Stock basis
Stock basis = Stock basis - AAA - PTI
= 23,500 - 7,000 - 11,000
= $5,500
Capital Gain = 25,000 - 7,000 - 600 - 11,000 - 5,500
= $900
g In the global stage of a firm's globalization, ________. A. the need for training is high B. training is focused on local culture and interpersonal skills C. the need for training is virtually nonexistent D. host-country nationals are trained to understand parent-country products and policies
Answer:
D
Explanation:
The global stage represents the understanding of the products and policies mainly to evaluate the best possible alternative for manufacturing in the home or host country. It emphasizes evaluating the most beneficial strategy to produce goods, whether domestic or global produced.
Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,225,000. The project is expected to generate the following net cash flows:
Year Cash Flow
Year 1 $275,000
Year 2 $475,000
Year 3 $425,000
Year 4 $400,000
Blue Hamster Manufacturing Inc.'s weighted average cost of capital is 7%, and project Beta has the same risk as the firm's average project. Based on the cash flows, what is project Beta's NPV?
Answer and Explanation:
The computation of the net present value is shown below:
Year Cash flows Discount factor at 7% Present value
0 -$3,225,000 1 -$3,225,000
1 $275,000 0.934579439 $257,009.3458
2 $475,000 0.873438728 $414,883.3959
3 $425,000 0.816297877 $346,926.5977
4 $400,000 0.762895212 $305,158.0848
Net present value -$1,901,022.576
Why is it important to test sending an electronic resume before sending it to an employer?
Answer:
To double check the formatting
Explanation:
You do this in order to double-check the formatting before the electronic resume get sent out to the employer. When the resumes is converted to this format, the text In it could be confusing to someone reading or it could be difficult to read. the best thing for you to do is to check it properly to see how the resume appears before you send it out
“Every individual employee in an organization plays a role in controlling work activities.” Do you agree with this statement, or do you think control is something that only managers are responsible for? Explain.
umm...
Explanation:
Yes, Every individual employee plays a role in controlling the quality of goods and services produced by their company, and not just the managers. This is true particularly in organizations where employees have been empowered by management.
Based on the statement that “Every individual employee in an organization plays a role in controlling work activities.”, my thoughts on it are:
I agree with the statementAccording to the given question, we are asked to share our thoughts about the given statement which says that “Every individual employee in an organization plays a role in controlling work activities.”
As a result of this, we can see that a work activity are anything which is done during work hours to produce a good, make sales or things which serve the objective of the company.
With this in mind, while it is the manager's job to oversee the affairs of the workers, the workers also have a responsibility to play their role properly so that the company would function effectively.
Read more here:
https://brainly.com/question/17551436
If a property will produce net cash flow that grows at a rate of 1.5% per year in perpetuity, and the opportunity cost of capital is 12%, then what is the "cap rate" (net cash flow / property value) for the property?
(a) 8%.
(b) 10%.
(c) 10.5%.
(d) 12%.
Answer:
(c) 10.5%.
Explanation:
Calculation to determine what is the "cap rate
Using this formula
x 1/r-g
Let plug in the formula
1/12-1.5
Ellis Company issues 6.5%, five-year bonds dated January 1, 2019, with a $250,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $255,333. The annual market rate is 6% on the issue date. Required
1. Compute the total bond interest expense over the bonds’ life.
2. Prepare an effective interest amortization table for the bonds’ life.
3. Prepare the journal entries to record the first two interest payments.
Answer:
Hence the answer is given as follows,
Explanation:
Financial statements are inexorably moving to a model where all assets and liabilities will be measured on the basis of fair value rather than historical cost.
Required:
a. Discuss the conceptual differences between historical cost and fair value.
b. Discuss the merits and demerits of the two alternative measurement models.
c. What types of assets (or liabilities) more readily lend themselves to fair value measurements? Can we visualize a scenario where all assets are measured using fair value?
d. What are the likely effects of adopting the fair value model on reported income?
Answer:
Part a
historical cost = this is when we carry assets and liabilities at cost less accumulated depreciation or amortization.
fair value = this is when we carry assets and liabilities at amount that they could be exchanged for at arms length between market participants
Part b
Historical Cost
Merits : Value are easy to obtain since they are generated internally
Demerits : Is not very accurate.
Fair Value
Merits : Accurate method as it reflects market situation
Demerit : Costly as data and information is obtained externally
Part c
Assets : Investment Property and Financial assets measured through Profit and Loss
Liabilities : Bonds
Part d
Income is shown more accurately and eliminates biases form estimates.
Explanation:
Historical Method carries assets and liabilities at cost less accumulated depreciation or amortization while Fair Value Model carries assets and liabilities at amount that they could be exchanged for at arms length between market participants
Part 1
a) Well done! From 2007 Q4 to 2009 Q2, real GDP fell from $15,762 to $15,134.1, or by -3.58%.
b) That's right! The deflator rose from 93.15 to 94.84, or 182%. If you put 1.74%, that's an approximation.
Part 2. Good! In each of those quarters, real GDP was lower than in the previous quarter.
Part 3. You had the right idea, but you assumed that real GDP grow at 3% for only one year
By the end of 2009, the economy had recovered slightly; however, the economy was still smaller than it was two years prior. From 2007 to 2009, real GDP had fallen from $15,762 billion to $15,356 billion. How deep was the recession?
Suppose that the long-run growth trend of real GDP was 3% per year. If the economy had grown at 3% per year since 2007, there was a shortfall of_____billion at the end of 2009.
Answer: $1,365.91
Explanation:
Shortfall = Expected GDP - Actual GDP
Expected GDP in 2009 is based on the premise that the economy has grown by 3% since 2007.
Expected GDP in 2009 will therefore be;
= 15,762 * ( 1 + 3%)²
= $16,721.91
Shortfall = 16,721.91 - 15,356
= $1,365.91
1. Sharon, a newly engaged woman, saw an advertisement in a bridal magazine for a beautiful pearl necklace priced at $69.99 from Precious Jewelry. She thought the necklace would be a wonderful present for her bridesmaids, so she ordered 5 necklaces from Precious Jewelry. After a few weeks, Sharon received a letter, along with her returned check from Precious Jewelry. The letter stated that the jeweler was sorry they could not fill her order because they had been overwhelmed with so many requests that their supply of necklaces ran out very quickly.
a. List the 3 elements of an offer and describe each (in your own words).
b. Did Precious Jewelry make an offer when they placed the ad in the magazine? Did Sharon make an offer when she placed the order? Why or why not?
c. What will be the likely outcome if Sharon sues Precious Jewelry to force them to fill her order? Explain your answer.
Answer:
a. The three elements which make an offer valid are communication, commitment, and definite terms. The communication of an offer happens between the offeror and the offeree and not with the general public, as depicted by the ad. Commitment in an offer requires that Sharon and Precious Jewelry are identified as the involved parties and are committed to enter a valid contract. Definite terms require no ambiguity.
b. Precious Jewelry did not make an offer when it placed the ad in the magazine. The ad was an invitation to treat. Sharon initiated the offer when she ordered for the jewelries. At this point, Precious Jewelry could accept or reject the offer, depending on its capacity.
c. If Sharon sues Precious Jewelry to force it to fill her order, she does not have the good standing required to enforce specific performance of a contract because there is no basis for the existence of a contract between her and Precious Jewelry. Moreover, Sharon’s offer was never accepted by Precious Jewelry and there was no consideration.
Explanation:
A valid contract will exist between Sharon and Precious Jewelry when the five elements of a contract are present. These include valid offer, acceptance, mutual consent (or assent), consideration, and legality (including the capacity of the contracting parties).
Ehler Corporation sells rock-climbing products and also operates an indoor climbing facility for climbing enthusiasts. During the last part of 2017, Ehler had the following transactions related to notes payable.
Sept. 1
Issued a $12,000 note to Pippen to purchase inventory. The 3-month note payable bears interest of 6% and is due December 1. (Ehler uses a perpetual inventory system.)
Sept.
30 Recorded accrued interest for the Pippen note.
Oct.
1 Issued a $16,500, 8%, 4-month note to Prime Bank to finance the purchase of a new climbing wall for advanced climbers. The note is due February 1.
Oct.
31 Recorded accrued interest for the Pippen note and the Prime Bank note.
Nov.
1 Issued a $26,000 note and paid $8,000 cash to purchase a vehicle to transport clients to nearby climbing sites as part of a new series of climbing classes. This note bears interest of 6% and matures in 12 months.
Nov.
30 Recorded accrued interest for the Pippen note, the Prime Bank note, and the vehicle note.
Dec.
1 Paid principal and interest on the Pippen note.
Dec.
31 Recorded accrued interest for the Prime Bank note and the vehicle note.
Instructions
(a) Prepare journal entries for the transactions noted above.
(b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts. (Use T-accounts.)
Interest Payable $590
(c) Show the balance sheet presentation of notes payable and interest payable at December 31.
(d) How much interest expense relating to notes payable did Ehler incur during the year?
Answer:
Ehler Corporation
a) Journal Entries:
Sept. 1 Debit Inventory $12,000
Credit 6%, 3-month Notes Payable (Pippen) $12,000)
To record issuance of note to purchase inventory.
Sept. 30 Debit Interest expense $60
Credit Interest Payable $60
To accrue interest expense ($12,000 * 6% * 1/12).
Oct. 1 Debit Climbing Wall $16,500
Credit 8%, 4-month Note Payable (Prime Bank) $16,500
To record issuance of note payable to purchase climbing wall.
Oct. 31 Debit Interest expense $170
Credit Interest payable $170
To accrue interest expense ($60 + $16,500 * 8% * 1/12).
Nov. 1 Debit Vehicle $26,000
Credit Cash $8,000
Credit 6%, 12-month Note Payable $18,000
To record the purchase of a new vehicle for climbers.
Nov. 30 Debit Interest expense $260
Credit Interest payable $260
To accrue interest expense ($170 + $18,000 * 6% * 1/12).
Dec. 1 Debit 6% Notes Payable (Pippen) $12,000)
Debit Interest payable $180
Credit Cash $12,180
To record the payment of principal and interests.
Dec. 31 Debit Interest expense $200
Credit Interest payable $200
To accrue interest expense ($110 + $90)
b) T-accounts:
Notes Payable
Date Account Titles Debit Credit
Sept. 1 Inventory $12,000
Oct. 1 Climbing Wall 16,500
Nov. 1 Vehicle 18,000
Dec. 1 Cash $12,000
Dec. 31 Balance 34,500
Interest Payable
Date Account Titles Debit Credit
Sept. 30 Interest expense $60
Oct. 31 Interest expense 170
Nov. 30 Interest expense 260
Dec. 1 Cash $180
Dec. 31 Interest expense 200
Dec. 31 Balance $510
Interest Expense
Date Account Titles Debit Credit
Sept. 30 Interest payable $60
Oct. 31 Interest payable 170
Nov. 30 Interest payable 260
Dec. 31 Interest payable 200
Dec. 31 Income summary $690
c) Balance Sheet:
Current liabilities:
Interest payable $510
Notes payable $34,500
d) Total interest expense = $690
Explanation:
a) Data and Analysis:
Sept. 1 Inventory $12,000 6% Notes Payable (Pippen) $12,000) to purchase inventory. The 3-month note payable
Sept. 30 Interest expense $60 Interest payable $60 ($12,000 * 6% * 1/12)
Oct. 1 Climbing Wall $16,500 8%, 4-month Note Payable (Prime Bank) $16,500
Oct. 31 Interest expense $170 Interest payable $170 ($60 + $16,500 * 8% * 1/12)
Nov. 1 Vehicle $26,000 Cash $8,000 6%, 12-month Note Payable $18,000
Nov. 30 Interest expense $260 Interest payable $260 ($170 + $18,000 * 6% * 1/12)
Dec. 1 6% Notes Payable (Pippen) $12,000) Interest payable $180 Cash $12,180
Dec. 31 Interest expense $200 Interest payable $200