Questions and Answers of An Introduction To Accounting 1st

Compute the present value of a bond whose face value is $1,000.00, due in four years, with annual interest payments of $120 each. Money is worth 12 percent annually.
Assume a ten-year bond and the effective market interest rate is 0.14.$1,000.00 × 0.26974 = $269.74.
Which of the following costs would be properly includable in the inventory of a retailing firm?a. Advertising costs.b. Gross invoice cost of merchandise purchased (discount was available but not
Which of the following costs would be properly includable in the inventory of a manufacturing firm?a. Direct labor cost.b. Salaries of shop foremen.c. Sales representatives’ salaries.d. Salary
Assume that the Sample Company is using a LIFO procedure. Compute the cost of goods sold and the ending inventory.
For each of the following products, describe the physical flow that one might normally expect the products to follow through a firm.a. Bakery products.b. Nails in a bin.c. Bottled
Assume that the Sample Company is using a weighted average cost procedure. Compute the cost of goods sold and the ending inventory.
Discuss the procedure of “cost-or-market, whichever is lower” in light of the basic accounting assumptions of consistency, conservatism, and objectivity.
At the end of the calendar year, the Sample Company’s raw material inventory sheet showed the following items. Using “cost-or-market, whichever is lower,” determine the dollar amount of raw
Assume that a company must use the same inventory flow assumption consistently from year to year. Which flow assumption would generally result in the highest reported income during an extended period
The Ithaca Gas Company has a problem arising from the seasonal nature of its product. People use more gas in the winter to heat their homes and to cook. This creates the problem of peak loads. The
The Rusty Steel Company shifted to the LIFO method of accounting for inventory in 1929. At that time, the inventory of Type A-1 steel plate was 1,000 tons, with a cost of $100 per ton.In 1932, the
The D. Jones Ship Company received an order on July 1, 2010, to build a 110,000-ton tanker. The costs connected with obtaining the sale were $20,000, and these were all incurred in 2010. It is
During the month of April, the Jansen Manufacturing Company’s Raw Materials account was debited for $511,000. A review of the entries to the account disclosed the composition of the debits to be as
Consider the two following situations and determine the disposition of the cost of warehousing.a. The ABC Company purchased a truckload of mink coats. Demand was not as strong as expected and, rather
From the following data, determine the inventory valuation by applying the rule of cost-or-market, whichever is lower. Commodity A B с D Quantity 100 400 500 700 Unit Cost $1.15 2.40 4.00 3.45 Unit
The Winchester Store shows the following information relating to Commodity A, which it handles.Inventory, January 1: 100 units @ $6.50 Purchases for January: 400 units @ $7.00 Inventory, January
During the month of January, the James Manufacturing Company’s Raw The company follows a procedure of crediting a Purchase Discount Revenue account when purchase discounts are taken or lost. Terms
During the month of June, Sample Company sold 350 units. The following information is given on purchases.Compute the cost of goods sold and ending inventory, using:a. FIFO.b. LIFO.c. Average Costs.
The Blue Front Store shows the following information relating to Commodity A, which it handles.Inventory, January 1: 100 units @ $5.00Purchases, January 300 units @ $6.00Inventory, January 31: 200
The Inflate Company has 100 units of inventory that cost $5.00 per unit. It sells the 100 units for $7.00 per unit and replaces them at a cost of $6.50 per unit.a. Determine the income,
Assume the market value at the end of the period (replacement cost) is $8. How might you bring this information into the reporting?
“Higher depreciation accruals have reduced the need of corporations to borrow.”Comment on this statement.
A fixed asset with a book value of $10,000 is sold for $12,000 cash.a. What is the gain or loss recognized?b. What amount of cash is generated by the transaction?c. What adjustment must be made to
A leading business periodical stated that “the two primary sources of funds for corporate expansion are retained earnings and the allowance for depreciation.”Comment on this statement.
A fixed asset with a book value of $10,000 is sold for $8,000 cash.a. What is the gain or loss recognized?b. What current assets are generated by the transaction?c. What adjustment must be made to
There are two major categories of transactions that do not affect the funds flow, yet may have a profound impact on the operations of a company and may even affect the company’s need for financing.
The No-Ash Coal Company recorded the following transactions. Indicate how each would be treated on a statement of changes in financial position, assuming that funds are defined as the cash balance.
How does the presence of bond premium affect the computation of the cash from operations?
Explain how the gain or loss on the sale of fixed assets should be treated in computing the cash from operations.
Shown are comparative balance sheets and an income statement for the Roberts Company. Prepare a cash flow statement for the year ended December 31, 20X2.∗ Represents 10,000 shares outstanding on
Assume the following facts apply to Bernake Corporation (tc = 0.35): E = $195, X= $390, M0 = 20, Interest = $90.a. What is the value of the corporation using earnings to stockholders (E)?b. Assume
During the year 20X2, the Foster Company purchased buildings that cost a total of $3,400,000.The Buildings account and the related Accumulated Depreciation were shown in the comparative balance
A dividend of $10,000 will decrease — if it has been paid.
For each account that follows,(a) List its normal balance (debit or credit); (b) Identify it as a balance sheet or temporary account; (c) Classify it as a current asset, noncurrent asset, current
Assume that the 12-percent $1,000 bond described in the previous example was issued at an effective rate of 15 percent. Determine the price at which it would be issued.
Assume that the ABC Company is earning $2 currently, is paying an $0.80 dividend, and will continue to have a 40-percent dividend payout policy in the future. All reinvested funds will earn 0.08. The
On a “per dollar of potential dividend per period” basis, calculate the advantage of (a) deferring one period and (b) deferring one period and taxing at capital gain rather than ordinary rate if
Suppose that you did not know the tax situation of the holders of your common stock, but were able to ascertain that the average personal tax rate was about 40 percent. Assume that the cost of equity
It has been argued that it makes no difference whether a firm pays dividends or retains the earnings, since the value to the stockholders is the same for both.For example, assuming a 0.4 tax rate and
In discussing a policy of issuing annual stock dividends, a corporate public utility manager stated:“The stock dividend plan has done a good job for us, helping to finance our expansion,
The ABC Company could pay out all of its earnings as dividends; however, it wants to choose between a policy of paying out dividends as the income is earned (now and for the next three years) or
The Tax Court decided several years ago that increases in the value of endowment policies under certain circumstances are income. The court drew a distinction between endowment policies and other
The Big Oil Company’s treasurer explained his company’s dividend policy (a low dividend compared to earnings) by stating that “the stockholders did nothing to earn the money” and that “if
A public utility announced a new plan whereby the full amount of earnings would be paid to the stockholders, the current cash dividend per sharewould be kept constant, and the remainder of the
Jane Doe (zero tax) expects ABC Company to begin paying dividends on an annual basis at the end of two years. She expects the first annual dividend to be one dollar and further expects dividends to
a. If an investor can earn 0.08 by investing in tax-exempt bonds, a corporation investing in comparable risk investments would have to earn what minimum return(s) after corporate tax to justify
Company XYZ has found itself with $5 million of unneeded cash, and the firm’s president has indicated that he will suggest the board of directors declare an “extra” dividend of $5 per share on
(a) The corporate tax rate is 0.35. Complete the following table.(b) The after-tax weighted average cost of capital (0.45 debt, 0.15 preferred stock, 0.40 common stock) is(c) An investor buying a
The ABC Company has earned $10. It is thinking of paying a cash dividend of $10 per share. Its stockholders would be taxed at a 0.55 rate on ordinary income and 0.20 on capital gains. The
Investors can earn 0.12 after personal tax (e.g., investing in tax-exempt bonds). Their marginal tax rate on ordinary income is 0.55.a. What return (after corporate tax) does a corporation have to
The tax rate for the Gas Corporation is 0.35. The following table has been prepared for the president of the firm.a. Compute the weighted average after-tax cost of capital of the firm, with the given
For a company with zero debt, the cost of the first dollar of debt is 0.10, and the cost of common stock is 0.18 (these are returns required by investors).We have determined that the cost of debt
Assume that a firm has earned $100 of before-tax income. The corporate tax rate is 35 percent.a. If the security used to finance the investment is $1,000 of 10 percent debt, the firm holding the debt
a. Assuming 0.5 common stock, 0.4 debt, and 0.1 preferred stock, the after-tax WACC of the firm is ____________________.b. A zero-tax investor holding the proportion of securities given in (a) would
Assume a 0.35 tax rate. To pay 0.10 to investors, a company must earn what return (before tax) if the security is:a. Debt?b. Preferred stock?c. Common stock?What after-tax internal rate of return
The following facts apply to the XYZ Company:Bonds can be issued to yield 0.10.Preferred stock can be issued to yield 0.08.Common stock can be issued with an expected yield to stockholders of
Assume that a company borrows at a cost of 0.14. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if:a. 100 percent debt is used?b. 100 percent common stock
Assume that the return on tax-exempt securities is 0.09 and that tp = 0.3, tg = 0.20, and tc = 0.35, where tg is the rate on capital gains, tc is the corporate tax rate, and tp is the personal tax
Assume that the ki curve is correctly drawn. Comment on the following statements or complete them. (There are zero taxes.)a. The ke curve may be below the ki curve at some point.b. The weighted
Assume the M&M zero-tax model, where k0 = 0.14 and ki = 0.10 for all capital structures (both k0 and ki are constants).a. Give the equation for ke.b. What is the value of ke if B = $4 million and S =
Assume that tax-exempt bonds are being issued at a cost of 0.12 and riskequivalent taxables at 0.18.a. Consistent with the above returns, what is the personal tax rate of the marginal investor?b. An
A firm has $10 million of assets to be financed with $6 million debt and $4 million of equity. You have $2 million to invest in the firm. There are zero taxes.How would you invest so that your
A firm is being organized that requires an initial investment of $20 million. You have $200,000 and will buy 0.01 of the common stock if the firm is 100 percent financed with common stock. The use of
Assume that the A Corporation can obtain a 10-year noncancellable lease of $12,500 per year for an asset that it wants. The lease payment is due at the end of each year. The asset will have zero
Assume that for a public utility the following facts and estimates apply and are accepted:The rate commission thinks that the capital structure should be B/V = 0.6 and has made the following
The tax rate for The Ithaca Corporation is 0.4. The following table has been prepared for the president of the firm.Only bond interest is deductible for income taxes. The firm has a capital structure
The planning team of the ABC Insurance Company is trying to organize the capital structure of an acquisition. Both firms are paying income taxes. You are given the choice of two capital
Encircle one numeral for the correct statement.a. If with a substitution of debt for common stock the costs of both common stock and debt increase, then the WACC will (1) Increase.(2) Decrease.(3)
The earnings of firms X and Y are identically distributed (they are the same firm except for capital structure). Other facts are:The cost of the debt is 0.10.a. Assume that you are going to invest
a. The ABC Company has a simple capital structure. Management wants to substitute $100 million of 0.12 debt for common stock. What effect will the change have on the value of the firm to a zero-tax
The ABC Insurance Co. follows a policy of buying the same percentage of common stock as debt. That is, if it buys 0.20 of a company’s debt, it will buy 0.20 of the company’s common stock.The
Assume that a company borrows at a cost of 0.09. Its tax rate is 0.35. What is the minimum cost of capital for a certain cash flow if:a. 100-percent debt is used?b. 100-percent common stock is used
Assume zero taxes. Equipment can be leased at $10,000 per year (first payment one year hence) for ten years or purchased at a cost of $64,177. The company has a weighted average cost of capital of 15
If the bank was willing to lend funds at 9 percent, should the company buy or lease?Data from problem 1Assume zero taxes. Equipment can be leased at $10,000 per year (first payment one year hence)
Now assume a marginal tax rate of 0.4. Assume that the funds can be obtained for 0.10 at a bank. The company uses sum-of-the-years’ digits depreciation for taxes.Should the firm buy or lease?
If the company pays $64,177 for the equipment, it will save $10,000 a year on lease payments for ten years.What internal rate of return will it earn on its “investment”?
Assume that there is a 0.4 marginal tax rate. An asset with a life of three years can be bought for $25,313 or leased for $10,000 per year. Funds can be borrowed at a cost of 0.09 (payments of
Now assume a marginal tax rate of 0.4 and that a loan can be obtained from the bank at a cost of 9 percent.Should the firm buy or lease? Using 0.054, the present value of depreciation is 0.811. Use
Assume that the lease payments of $10,000 start immediately and that they are paid at the end of each year. There are 10 payments. Compute the present value of leasing; compare the present value with
What factors might make a lessor’s expected cost of acquiring and disposing of equipment less than the lessee’s expected cost?
a. Include the borrowing cash flows in the buy analysis. Assume equal payments of debt. How does this change the net cost?b. Assume that the net cost of buying was computed using the cost of capital
Consider the following investment:If debt can be obtained at a cost of 5 percent, determine the net present value of the equity cash flows discounted at 15 percent if:a. No debt is used to finance
Why are leasing companies (lessors) so highly levered?
Suppose that $100,000 is borrowed at 8 percent and is to be repaid in three equal annual installments. Prepare a debt amortization table and show that the net present value of the after-tax cash
MBI has offered to sell or lease computing equipment to Cornell University that has an expected life of three years. If purchased, the initial cost would be $2 million. If leased, the annual lease
A corporation has earned $100 (before tax) and is paying the after-tax residual to its stockholders. AssumeThe tax rate on all securities is 0.4, but there is a 0.70 dividend-received deduction for
Assume that there is a corporate investor wanting to invest $10 million in your firm. Debt or preferred stock can be issued at a cost of 0.10. The firm needs $10 million of capital. Assume a 0.4
How much does a corporate investor net out (after tax) from $100 of interest? From $100 of preferred stock dividends?
What are the risks to a corporate investor buying preferred stock?
If callable preferred stock is issued at a price of $100 and promises to pay $9 per annum, what is the cost (as a percentage) of the issue after tax to the issuing firm if the call provision is
Describe the economic consequences of a corporation issuing 0.08 debt to finance an investment of $1 million in 0.08 preferred stock. The corporate tax rate is 0.4.
As of the end of December, the current liabilities of the Large Steel Company are $800 million and its liquid assets are $600 million. The funds generated by operations in the past year were $1
Assume a 0.4 tax rate. To pay 0.10, a company must earn what percentage return (before tax) if the security is:a. Debt?b. Preferred stock?c. Common stock?
The following information applies to the ABC Company for the coming year:What before-tax cash flow has to be earned to meet the debt requirements in the coming year? Earnings before interest and
The following facts apply to two companies for the year ending December 31 of the same year:No long-term debt (principal) payments are due for either firm for 10 years.Before evaluating the liquidity
The basic defensive interval (BDI) is defined as:The defensive assets include those assets that can readily be turned into cash (liquid assets) such as cash, marketable securities, and accounts
Why is EBIT generally used in the interest coverage ratio rather than income after taxes?
Does the use of inventory necessarily affect the amount of cash that is held by a corporation?
The Large Steel Company also has $1 billion of long-term debt in addition to the $800 million of current liabilities.How many days of funds generation would be needed to pay the amount of total

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