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Financial Accounting an introduction to concepts, methods and uses 13th Edition Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis - Solutions
Lilly Painting Company is considering whether to purchase a new spray paint machine that costs $4,000. The machine is expected to save labor, increasing net income by $600 per year. The effective life of the machine is 15 years according to the manufacturer’s estimate.Requireda. Determine the
Computing the payback period and unadjusted rate of return for the same investment opportunity Foy Rentals can purchase a van that costs $60,000; it has an expected useful life of three years and no salvage value. Foy uses straight-line depreciation. Expected revenue is $30,000 per year. Assume
Using present value techniques to evaluate alternative investment opportunities Fast Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common
Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities Louis Gallo owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr.
Using net present value and internal rate of return to evaluate investment opportunities Veronica Tanner, the president of Tanner Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one of them. Project A is to purchase a
Using net present value and payback period to evaluate investment opportunities Bruce Graham saved $250,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the
Effects of straight-line versus accelerated depreciation on an investment decision Zito Electronics is considering investing in manufacturing equipment expected to cost $184,000. The equipment has an estimated useful life of four years and a salvage value of $24,000. It is expected to produce
Applying the net present value approach with and without tax considerations Paxton Kingsley, the chief executive officer of Kingsley Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $150,000 cash at the beginning of the
Comparing internal rate of return with unadjusted rate of return Walker Auto Repair, Inc., is evaluating a project to purchase equipment that will not only expand the company’s capacity but also improve the quality of its repair services. The board of directors requires all capital investments
Ernest Jones is reviewing his company's investment in a cement plant. The company paid $15,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its
Identifying cash inflows and outflowsRequiredBarry Nance is considering whether to invest in a dump truck. Mr. Nance would hire a driver and use the truck to haul trash for customers. He wants to use present value techniques to evaluate the investment opportunity. List sources of potential cash
Determining the present value of a lump-sum future cash receipt One year from today Bernice Smyth is scheduled to receive a $60,000 payment from a trust fund her father established. She wants to buy a car today but does not have the money. A friend has agreed to give Bernice the present value of
Determining the present value of a lump-sum future cash receipt Cornelius Toran has a terminal illness. His doctors have estimated his remaining life expectancy as three years. Cornelius has a $1,000,000 life insurance policy but no close relative to list as the beneficiary. He is considering
Determining the present value of an annuity Julia Rainy is considering whether to install a drink machine at the gas station she owns. Julia is convinced that providing a drink machine at the station would increase customer convenience. However, she is not convinced that buying the machine would be
Rafael Ortega, manager of the Pena Music Hall, is considering the opportunity to expand the company’s concession revenues. Specifically, she is considering whether to install a popcorn machine. Based on market research, she believes that the machine could produce incremental cash inflows of
Determining the net present value Howard Parmer has decided to start a small delivery business to help support himself while attending school. Mr. Parmer expects demand for delivery services to grow steadily as customers discover their availability. Annual cash outflows are expected to increase
Two alternative investment opportunities are available to Claude Reyna, president of Reyna Enterprises. For the first alternative, the present value of cash inflows is $133,000, and the present value of cash outflows is $127,000. For the second alternative, the present value of cash inflows is
Sam Eatmon, CFO of Chaiston Enterprises, is evaluating an opportunity to invest in additional manufacturing equipment that will enable the company to increase its net cash inflows by $150,000 per year. The equipment costs $448,591.80. It is expected to have a five-year useful life and a zero
Using the internal rate of return to compare investment opportunities Yvonne Tower has two alternative investment opportunities to evaluate. The first opportunity would cost $149,512.23 and generate expected cash inflows of $21,000 per year for 17 years. The second opportunity would cost
Determining a cash flow annuity with income tax considerations Jay Welch is considering whether to invest in a computer game machine that he would place in a hotel his brother owns. The machine would cost $14,000 and has an expected useful life of three years and a salvage value of $2,000. Mr.
Four years ago Jeanne Nolen decided to invest in a project. At that time she had projected annual net cash inflows would be $54,000. Over its expected four-year useful life, the project had produced significantly higher cash inflows than anticipated. The actual average annual cash inflow from the
The management team at Rawden Manufacturing Company has decided to modernize the manufacturing facility. The company can replace an existing, outdated machine with one of two technologically advanced machines. One replacement machine would cost $50,000. Management estimates that it would reduce
Determining the payback period with uneven cash flows Cascade Snowmobile Company is considering whether to invest in a particular new snowmobile model. The model is top-of-the-line equipment for which Cascade expects high demand during the first year it is available for rent. However, as the
Determining the unadjusted rate of return Intercity Shuttle Service, Inc., is considering whether to purchase an additional shuttle van. The van would cost $36,000 and have a zero salvage value. It would enable the company to increase net income by $6,030 per year. The manufacturer estimates the
Computing the payback period and unadjusted rate of return for the same investment opportunity Gunter Marina (Guntersville) rents pontoon boats to customers. It has the opportunity to purchase an additional pontoon boat for $30,000; it has an expected useful life of four years and no salvage
Using present value techniques to evaluate alternative investment opportunities Porter Automobile Repair, Inc., currently has three repair shops in Boston. Vincent Porter, the president and chief executive officer, is facing a pleasant dilemma: the business has continued to grow rapidly and major
Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities Jessica and Victor Services is planning a new business venture. With $100,000 of available funds to invest, it is investigating two options. One is to acquire an exclusive contract to operate
Using net present value and internal rate of return to evaluate investment opportunities Kerry Wood’s rich uncle gave him $60,000 cash as a gift for his 40th birthday. Unlike his spoiled cousins who spend money carelessly, Mr. Wood wants to invest the money for his future retirement. After an
Using net present value and payback period to evaluate investment opportunities Margaret Hubbard just won a lottery and received a cash award of $800,000 net of tax. She is 61 years old and would like to retire in four years. Weighing this important fact, she has found two possible investments,
Effects of straight-line versus accelerated depreciation on an investment decision Pacific Steel Company decided to spend $160,000 to purchase new state-of-the-art equipment for its manufacturing plant. The equipment has a five-year useful life and a salvage value of $40,000. It is expected to
Applying the net present value approach with and without tax considerations Luther Currie, the president of Luther's Moving Services, Inc., is planning to spend $625,000 for new trucks. He expects the trucks to increase the company's cash inflow as follows.The company's policy stipulates that all
Comparing internal rate of return with unadjusted rate of return Ledlow Corporation faces stiff market competition. Top management is considering the replacement of its current production facility. The board of directors requires all capital investments to meet or exceed a 9 percent rate of
Max Baldwin is wondering whether he made the right decision four years ago. As the president of Baldwin Health Care Services, he acquired a hospital specializing in elder care with an initial cash investment of $2,800,000. Mr. Baldwin would like to know whether the hospital's financial performance
Karen and Steve Catrow want to replace the windows in the older house they purchased recently. The company they have talked to about doing the work claims that new windows will reduce the couple’s heating and cooling costs by around 30 percent. The Catrows have heard from real estate agents that
Espada Real Estate Investment Company (EREIC) purchases new apartment complexes, establishes a stable group of residents, and then sells the complexes to apartment management companies. The average holding time is three years. EREIC is currently investigating two alternatives.1. EREIC can purchase
Capital Expenditures at the Archer Daniels Midland Company Obtain Archer Daniels Midland Company’s (ADM) Form 10-Ks for the fiscal year ending on June 30, 2006 and 2009. To obtain the Form 10-Ks you can use either the EDGAR system following the instructions in Appendix A, or it can be found
Limitations of capital investment techniques Webb Publishing Company is evaluating two investment opportunities. One is to purchase an Internet company with the capacity to open new marketing channels through which Webb can sell its books. This opportunity offers a high potential for growth but
Gaines Company recently initiated a postaudit program. To motivate employees to take the program seriously, Gaines established a bonus program. Managers receive a bonus equal to 10 percent of the amount by which actual net present value exceeds the projected net present value. Victor Holt, manager
Kilby Company is considering the purchase of new automated manufacturing equipment that would cost $150,000. The equipment would save $42,500 in labor costs per year over its six-year life. At the end of the fourth year, the equipment would require an overhaul that would cost $25,000. The equipment
ASAP Delivery is a small company that transports business packages between San Francisco and Los Angeles. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. ASAP
Magnificent Modems, Inc. (MMI), has several capital investment opportunities. The term, expected annual cash inflows, and the cost of each opportunity are outlined in the following table. MMI has established a desired rate of return of 16 percent for these investment opportunities.Requireda.
A firm that makes expenditures to self-construct a building treats the expenditures as an asset. When that same firm makes research and development expenditures to create a new patented technology, it must treat the expenditures as an expense. When that same firm makes expenditures to create
A pharmaceutical firm that makes expenditures to research new drugs must treat the expenditures as an expense. If that same pharmaceutical firm acquires a patent for a new drug from its creator, it must treat the expenditure as an asset. If that same pharmaceutical firm acquires another firm with
a. What is the effect of capitalizing interest on reported net income summed over all the periods of the life of a gin self-constructed asset, from building through use until eventual retirement? Contrast with a policy of expensing interest as incurred.b. Consider a company engaging in increasing
Contrast the terms finite life, infinite life, and indefinite life as they apply to depreciation of tangible long-lived assets and amortization of intangible assets.
When PepsiCo (see Exhibit 9.2) acquires another firm, it allocates a portion of the purchase price to brand names, some of which it amortizes and some of which it does not amortize. How does PepsiCo likely justify this different treatment of brandnames?
An airline has depreciated its new aircraft in the past over 25 years. New fuel usage and safety standards indicate that a shorter useful life is now appropriate for all of its existing aircraft. Depending on the circumstances, the airline might (a) spread the undepreciated cost of the aircraft
A firm expects to use a delivery truck for five years. At the end of three years, the transmission wears out and requires replacement at a cost of $4,000. The firm argues that it should capitalize the expenditure because without it the useful life is zero and with it the useful life will be another
Relate the concept of return of capital to the criterion under U.S. GAAP for deciding whether an impairment loss on long-lived assets other than nonamortized intangibles has occurred.
Why does the cash recoverability criterion apply to impairment losses on amortized intangibles but not on nonamortized intangibles under U.S. GAAF?
The text states, “The use of undiscounted, instead of discounted, cash flows [for identifying asset impairment losses on depreciable and amortizable long-lived assets under U.S. GAAP] seems theoretically unsound.” Explain this statement.
Competition among acquiring firms to make a corporate acquisition may result in the successful firm paying more than the fair value of another firm. The acquiring firm will allocate the excess purchase price to goodwill, along with amounts attributable to unidentifiable intangible benefits. Because
Calculating acquisition costs of long-lived assets. Outback Steakhouse opened a new restaurant on the site of an existing building. It paid the owner $260,000 for the land and building, of which it attributes $52,000 to the land and $208,000 to the building. Outback incurred legal costs of $12,600
Classifying expenditure as assets or expense. For each of the following expenditures or acquisitions, indicate the type of account debited. Classify the account as (1) Asset other than product cost, (2) Product cost (Work-in-Process Inventory), or (3) Expense. If the account debited is an asset
Cost of self-constructed assets. Assume that Bolton Company purchased a plot of the land for $90,000 as a factory site. A small office building sits on the plot, conservatively appraised at $20,000. The company plans to use the office building after making some modifications and renovations (item
Cost of self-developed product. Duck Vehicle Manufacturing Company incurs various costs in developing a new, amphibious vehicle for use in provision tours on land and water. Indicate the accounting treatment for each of the following expenditures.(1) Salaries of Company Engineers to Design the New
Calculating interest capitalized during construction. Bulls Eye Stores constructed new stores during the current year. The average balance in the Construction-in-Process account excluding the current year’s capitalized interest costs was $3,400,000. Bulls Eye Stores engaged in borrowing directly
Amount of interest capitalized during construction. Nexor, a steel manufacturer, self-constructs a new manufacturing facility in Vermont. At the start of 2008, the Construction-in-Process account had a balance of $30 million. Construction activity occurred uniformly throughout the year. At the end
Calculations for various depredation methods. Alcoa acquires a machine for $88,800. It expects the machine to last six years and to operate for 30,000 hours during that time. Estimated salvage value is $4,800 at the end of the machine’s useful life. Calculate the depreciation charge for each of
Calculations for various depredation methods. On January 1, 2008, Luck Delivery Company acquired a new truck for $30,000. It estimated the truck to have a useful life of five years and no salvage value. The company closes its books annually on December 31. Indicate the amount of the depreciation
Change in depreciable life and salvage va1ue. Thompson Financial acquired a computer on January 1, 2006, for $10,000,000. The computer had an estimated useful life of six years and $1,000,000 estimated salvage value. The firm uses the straight-line depreciation method. On January 1, 2008, Thompson
Journal entries for revising estimate of life. Give the journal entries for the following selected transactions of Florida Manufacturing Corporation. The company uses the straight-line method of calculating depreciation and reports on a December 31 year end.a. The firm purchases a cutting machine
Distinguishing repairs Versus betterments. Disney World experienced damage from a tornado at Space Mountain, one of its most popular attractions. It paid $30,200 to replace steel reinforcements to the structure damaged by the tornado, $86,100 for a new roof torn off by the tornado, $26,900 for a
Computing the amount of an impairment loss on tangible long-lived assets. Wildwood Properties owns an apartment building that has a carrying value of $15,000,000 on January 1, 2008. The highway department has decided to construct a new highway near the building, which substantially decreases its
Computing the amount of impairment loss. Tillis Corporation acquired the assets of Kieran Corporation (Kieran) on January 1, 2006, for $2,400,000. On this date the fair values of the assets of Kieran were as follows: land, $400,000; building, $600,000; equipment, $900,000. On June 15, 2008, a
Computing the gain or loss on sale of equipment. Fedup Express acquired a delivery truck on January 1, 2004, for $48,000. It estimated that the truck would have a six-year useful life and $6,000 salvage value. Fedup Express uses the straight-line depreciation method. On July 1, 2008, Fedup Express
Working backward to derive proceeds from disposition of plant assets. The balance sheets of Wilcox Corporation at the beginning and end of the year contained the following data:During the year, Wilcox Corporation sold machinery and equipment at a gain of $4,000. It purchased new machinery and
Journal entries to correct accounting errors. Give correcting entries for the following situations. In each case, the firm uses the straight-line method of depreciation and closes its books annually on December 31. Recognize all gains and losses currently.a. A firm purchased a computer for $3,000
Recording transactions involving tangible and intangible assets. Present journal entries for each of the following transactions of Moon Macro systems:(a) Acquired computers costing $400,000 and computer software costing $40,000 on January 1, 2006. Moon expects the computers to have a service life
Effect on net income of changes in estimates for depreciable assets. American Airlines has $3 billion of assets, including airplanes costing $2.5 billion with net carrying value of $1.6 billion. It earns net income equal to approximately 6% of total assets. American Airlines depreciates its
Recognizing and measuring impairment losses. Give the journal entry to recognize an impairment loss. if appropriate, in each of the following cases under U.S. GAAR If a loss does not qualify as an impairment loss, explain the reason, and indicate the appropriate accounting.a. Commercial Realty
Expensing versus capitalizing research and development costs. Pfizer, a pharmaceutical company, plans to spend $90 million on research and development (R&D) at the beginning of each of the neat several years to develop new drugs. As a result of the R&D expenditure for a given year, it expects
Interpreting disclosures regarding long-lived assets. Exhibit 9.6 presents a partial balance sheet for General Mills Inc., a consumer foods processing company, for its fiscal years ending May 28, 2006, and May 27, 2007.a. General Mills is not in the business of developing computer software. Why
Interpreting disclosures regarding long-lived assets. Exhibit 9.7 presents a partial balance sheet for Amgen Inc., a creator and manufacturer of biotechnology pharmaceutical products, for December 31, 2006 and 2007.a. Does Amgen likely recognize depreciation on the amount in the Construction in
Interpreting disclosures regarding long-lived assets Exhibit 9.8 presents a partial balance sheet for Hewlett-Packard Company (HP). a creator and manufacturer of computer hardware and software and related services, for its fiscal years ending October 31, 2006 and 2007.a. HP uses the straight-line
Valuation of brand name. When an acquiring firm purchases another firm with established brand names, it will likely allocate a portion of the purchase price to the brand names. Measuring the fair value of a brand name involves estimating the likely net cash flows from the branded product over the
Using amortized cost based on the historical market interest rate to account for bonds in periods subsequent to their initial issuance provides a carrying value for bonds that is consistent with using historical, or acquisition, cost measurements for assets.” Explain.
Applying the effective interest method using the historical market interest rate gives a constant amount of interest expense on bonds each period.” Do you agree? If not, how would you change the statement to make it accurate?
A firm issues two bonds with identical issue prices, market-required yields, and final maturity dates. One bond is a semiannual coupon bond, and the other bond is a serial bond. Will the total interest expense over the life of these two bonds be the same or different? Explain.
Firm A issues $1,000,000 face value. 9% semiannual coupon bonds at a price to yield 8% compounded semiannually. Firm B issues $1,000,000 face value, 7% semiannual coupon bonds at a price to yield 8% compounded semiannually. Both bond issues mature in 20 years. Will these firms receive the same
The total effect on income before income taxes over the life of a bond that a firm repays at maturity will be the same whether the firm accounts for the bond using amortized cost measurement based on the historical market interest rate or fair value measurement based on the current market interest
Refer to question 6. Would your answer differ if the firm repaid the bond prior to maturity?
Why is the identification of the entity in a lease transaction that enjoys the benefits and incurs the risk of the leased asset important in accounting for the lease?
A retailer leases space in a shopping center on a ten-year lease. The lessee pays a small fixed amount per month plus 10% of sales for the previous month. The retailer will likely treat this lease as an operating lease and not a capital lease. Why?
A trucking company leases a hauling rig from the manufacturer for a three-year period. The trucking company pays a monthly rental and guarantees a certain minimum resale value of the rig at the end of the three years. The trucking company will likely treat this lease as a capital lease and not an
In what ways is the economic substance of a lessee’s capital lease similar to, and different from, that of purchasing the equipment using the proceeds of a loan repayable in installments?
The lessor recognizes the same amount of income (revenue minus expenses) over the term of a lease as the lessee recognizes as expenses. Do you agree or disagree? Explain.
If permitted, a lessee generally prefers to account for leases using the operating leases method for financial reporting and the capital lease method for tax reporting. Explain.
If permitted, a lessor generally prefers to account for leases using the capital lease method for financial reporting and the operating lease method for tax reporting. Explain.
Amortization schedule for note where stated interest rate differs from historical market rate of interest. Hager Company acquires a computer from Volusia Computer Company. The cash price (fair value) of the computer is $37,938 Hager Company gives a three-year, interest-bearing note with a maturity
Computing the issue price of bonds. Compute the issue price of each of the following bonds.a. $10,000,000 face value, zero coupon bonds due in 20 years, priced on the market to yield 8% compounded semiannually.b. $10,000,000 face value, serial bonds repayable in equal installments of $500,000,
Computing the issue price of bonds. Compute the issue price of each of the following bonds.a. $1,000,000 face value, zero coupon bonds due in 20 years, priced on the market to yield 10% compounded semiannually.b. $1,000,000 face value, serial bonds repayable in equal semiannual installments of
Amortization schedule for bands. On January 1 of the current year, Womack Company issues 10% semiannual coupon bonds maturing five years from the date of issue. The firm issues the bonds to yield 8% compounded semiannually. The bonds have a face value of $100,000.a. Compute the initial issue
Amortization schedule for bonds. On January 1, 2008, Seward Corporation issues $100,000 face value, 8% semiannual coupon bonds maturing three years from the date of issue. The coupons, dated for June 30 and December 31 of each year, each promise 4% of the face value, 8% total for a year. The firm
Accounting for bonds using amortized cost measurement based on the historical market interest rate. O’Brien Corporation issues $8,000,000 face value, 8% semiannual coupon bonds maturing in 20 years. The market initially prices these bonds to yield 6% compounded semiannually O’Brien Corporation
Accounting for bonds using amortized cost measurement based on the historical market interest rate. Robinson Company issues $5,000,000 face value, 8% semiannual coupon bonds maturing in 10 years. The market initially prices these bonds to yield 10% compounded semiannually. Robinson Company accounts
Accounting for bonds using amortized cost measurement based on the historical market interest rate. Several years ago, Huergo Dooley Corporation (HDC) issued $2,000,000 face value, 8% semiannual coupon bonds on the market initially priced to yield 10% compounded semiannually. The bonds require HDC
According for bonds using the fair a1ue option based on the current market interest rate. Stroud Corporation issues $10,000,000 face value, 10-year, 6% semiannual coupon bonds on January 1, 2008. The bonds require coupon payments on June 30 and December 31 of each year. The market initially priced
Accounting for bonds using the fair value option basedd on the current market interest rate. Restin Corporation issues $20,000,000 face value, 10 year, 8% semiannual coupon bonds on January 1, 2008. The bonds promise coupon payments on June 30 and December 31 of each year. The market initially
Applying the capital lease criteria. Boeing manufactures a jet aircraft at a cost of $50 million. The usual selling price for this aircraft is $60 million, and its typical useful life is 25 years. American Airlines desires to lease this aircraft from Boeing. The parties contemplate the following
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