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Accounting

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Case Citation:

  • Casey J. McNellis (2018) Dynamic Divestures: A Codification Exercise on the Reporting of Discontinued Operations. Issues in Accounting Education: February 2018, Vol. 33, No. 1, pp. 53-63.

    Instructions:

    • Read the case study and prepare answers to the questions at the end of the case for ZD Consulting Services only.
    • APA style formatting is required.
    • Approximate length of the memo using APA style is 3 pages.

Resources:

  • Writing a Research Paper: https://owl.english.purdue.edu/owl/resource/658/01/
  • APA: https://owl.english.purdue.edu/owl/section/2/10/
  • Developing your graduate level writing skills: https://owl.english.purdue.edu/owl/section/1/2/
  • What Constitutes Graduate Level Writing; source unknown. In LEO, Content, Week 9.

ACCOUNTING

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ACCOUNTING

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QUESTION 1

  1. Which of the following statements is FALSE?
In a perpetual inventory system, the “cash register” at the store is a computer terminal that records sales and updates inventory records.
Even in a perpetual inventory system, a business must count inventory at least one a year.
Restaurants and small retail stores often use the periodic inventory system.
In a periodic inventory system, merchandise inventory and purchasing systems are integrated with the records for Accounts Receivable and Sales Revenue.

5 points   

QUESTION 2

  1. Which of the following is true of freight in?
It is an administrative expense.
It is a selling expense.
It is the transportation cost on purchases.
It is the transportation cost on sales.

5 points   

QUESTION 3

  1. Merchandise inventory accounting systems can be broadly categorized into two types. They are __________.
FIFO and LIFO
perpetual and periodic
wholesale and retail
manufacturer and producer

5 points   

QUESTION 4

  1. Which of the following is subtracted from net sales revenue to arrive at gross profit on a multi-step income statement?
Cost of goods available for sale

 
Cost of goods sold

 
Sales discounts and sales returns and allowances
Operating expenses

5 points   

QUESTION 5

  1. A company that uses the perpetual inventory system purchases inventory for $61,000 on account, with terms of 3/10, n/30. Which of the following is the journal entry to record the payment made within 10 days?
A debit to Accounts Payable for $61,000, a credit to Cash for $59,170, and a debit to Merchandise Inventory for $1,830
A debit to Accounts Payable for $61,000, a credit to Merchandise Inventory for $1,830, and a credit to Cash for $59,170
A debit to Merchandise Inventory for $1,830, a debit to Accounts Payable for $61,000, and a credit to Cash for $62,830
A debit to Accounts Payable for $59,170, a debit to Merchandise Inventory for $1,830, and a credit to Cash for $61,000

5 points   

QUESTION 6

  1. What does “2/10” mean, with respect to “credit terms of 2/10, n/30”?
A discount of 2 percent will be allowed if the invoice is paid within 10 days of the invoice date.
Interest of 2 percent will be charged if the invoice is paid after 10 days from the date on the invoice.
A discount of 10 percent will be allowed if the invoice is paid within two days of the invoice date.
Interest of 10 percent will be charged if invoice is paid after two days.

5 points   

QUESTION 7

  1. The term “freight out” refers to __________.
transportation costs on purchases
cost of inventory purchased
costs that are not actually paid in cash
transportation costs on sales

5 points   

QUESTION 8

  1. If goods are sold on terms free on board (FOB) shipping point, the __________.
seller normally pays the transportation costs
buyer normally pays the transportation costs
buyer and the seller split the transportation costs
shipping company bears the transportation cost

5 points   

QUESTION 9

  1. Changing from the LIFO (Last-In, First-Out) to the specific identification method of valuing inventory ignores the principle of __________.
conservatism
consistency
disclosure
materiality

5 points   

QUESTION 10

  1. A company decides to ignore a very small error in its inventory balance. This is an example of the application of the __________.
conservatism
materiality concept
disclosure principle
consistency principle

5 points   

QUESTION 11

  1. A company purchased 400 units for $20 each on January 31. It purchased 520 units for $26 each on February 28. It sold a total of 560 units for $40 each from March 1 through December 31. What is the amount of ending inventory on December 31 if the company uses the first-in, first-out (FIFO) inventory costing method? (Assume that the company uses a perpetual inventory system.)
$9,360
$4,960
$7,200
$2,240

5 points   

QUESTION 12

  1. Which of the following is the correct formula to calculate weighted-average unit cost for merchandise inventory?
Weighted-average unit cost = Cost of goods available for sale + Number of units available
Weighted-average unit cost = Cost of goods available for sale × Number of units available
Weighted-average unit cost = Cost of goods available for sale – Number of units available
Weighted-average unit cost = Cost of goods available for sale / Number of units available

5 points   

QUESTION 13

  1. Blanchard, Inc. provided the following for 2017:

 

Cost of Goods Sold (Cost of sales)     $1,200,000
Beginning Merchandise Inventory 325,000
Ending Merchandise Inventory 625,000

 

Calculate the company’s inventory turnover ratio for the year. (Round your answer to two decimal places.)

3.69 times per year
2.53 times per year
1.92 times per year
1.26 times per year

5 points   

QUESTION 14

  1. Under the weighted-average method for inventory costing, the cost per unit is determined by __________.
dividing the cost of goods available for sale by the number of units available
dividing the cost of goods available for sale by the number of units in beginning inventory
multiplying the number of units purchased with the weighted-average cost
multiplying the cost of goods available for sale by the ending weighted-average cost of the previous accounting period

5 points   

QUESTION 15

  1. A company purchased 100 units for $30 each on January 31. It purchased 400 units for $20 each on February 28. It sold a total of 470 units for $110 each from March 1 through December 31. If the company uses the last-in, first-out inventory costing method, calculate the amount of ending inventory on December 31. (Assume that the company uses a perpetual inventory system.)
$600
$2,400
$900
$30

5 points   

QUESTION 16

  1. Misty, Inc. had 24,000 units of ending inventory that were recorded at the cost of $8.00 per unit using the FIFO method. The current replacement cost is $4.50 per unit. Which of the following amounts would be reported as Ending Merchandise Inventory on the balance sheet using the lower-of-cost-or-market rule?
$192,000
$300,000
$216,000
$108,000

5 points   

QUESTION 17

  1. Which of the following is the correct formula to calculate inventory turnover?
Inventory turnover = Cost of goods sold / Average merchandise inventory
Inventory turnover = Cost of goods sold × Average merchandise inventory
Inventory turnover = Cost of goods sold + Average merchandise inventory
Inventory turnover = Cost of goods sold – Average merchandise inventory

5 points   

QUESTION 18

  1. The ending merchandise inventory for the current year is overstated by $25,000. What effect will this error have on the following year’s net income?
The net income will be overstated by $50,000.
The net income will be overstated by $25,000.
The net income will be understated by $25,000.
The net income will be understated by $50,000.

5 points   

QUESTION 19

  1. A company that uses the perpetual inventory system purchased 500 pallets of industrial soap for $10,000 and paid $750 for the freight-in. The company sold the whole lot to a supermarket chain for $14,000 on account. The company uses the specific-identification method of inventory costing. Which of the following entries correctly records the cost of goods sold?
Cost of Goods Sold     10,750  
    Merchandise Inventory       10,750
Merchandise Inventory     10,750  
    Cost of Goods Sold       10,750
Cost of Goods Sold     10,000  
    Sales Revenue       10,000
Cost of Goods Sold     10,000  
    Merchandise Inventory       10,000

5 points   

QUESTION 20

  1. A company that uses the perpetual inventory system sold goods for $2,500 to a customer on account. The company had purchased the inventory for $500. Which of the following journal entries correctly records the cost of goods sold?
Cost of Goods Sold         500  
    Sales Revenue           500
Merchandise Inventory         500  
    Cost of Goods Sold           500
Cost of Goods Sold         500  
    Merchandise Inventory           500
Accounts Receivable         500  
    Sales Revenue           500

5 points   

 

ACCOUNTING

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ACCOUNTING

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CHAPTER 7

  1. A higher savings rate will affect the steady state level of income. This is because as savings rate increases, capital stock accumulates and that increases the steady state output. Therefore, steady state income also increases.

The rate of growth however will increase till the economy will reach the next steady state. Once it reaches the next steady state, it will maintain a steady state of growth rate.

  1. The golden rule level of capital is denoted as k*. Now, we know that

c* = f(k*) – dk*, where c* is the golden rule level of consumption. Therefore, the golden rule level of consumption is dependent entirely on k*. Therefore, in order to maximize the individual consumption level, it is perfectly justified for the policymaker to choose the golden level of capital k*.

 

  1. There is a trade-off between current consumption and future consumption. If current consumption is reduced, saving is done in current period, which translates into investment, which increases capital stock and therefore future consumption. Therefore, when an economy starts above the golden rule level of capital, if it moves towards the golden rule level, addition to the capital stock falls that means current consumption increases. So a policymaker would always choose a higher than golden rule level of capital.

On the other hand, when a policymaker starts below the golden rule level of capital, in order to reach the golden rule level, current consumption has to be sacrificed. Therefore, whether or not the policymaker would choose a level below golden rule would depend entirely on his long-term goals.

 

  1. The impact of increase in population can be clearly shown using a diagram. In the diagram below, the initial population growth rate is n. Therefore, the steady state level of capital is k1. Now, the population growth rate increases to n’. It causes the steady state level of capital to fall, to k’. As steady state level of capital falls, the steady state level of income would also fall.

However, the steady state growth rate is given by (n+g) where n is population growth rate and g is the growth rate of efficiency per worker. So when n increases,  the steady state rate of growth also increases.

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Y = K.5L.5

 

  1. In order to examine the returns of scale, we replace K and L each by aK and aL respectively, where a is a constant.

 

Y1 = (aK).5(aL).5 or. Y1 = a K.5L.5                     or, Y1 = aY

Therefore, the production function exhibits constant returs to scale.

 

  1. y = Y/L = (K/L).5 = k.5     where k = K/L

 

  1. We know in steady state, sf(k) = dk

 

Also, from part b, f(k) = k.5     Therefore, s k.5 = dk or,  k = (s/d).5

Therefore, for country A, kA =(0.1/0.05)2 = 4

And for country B, kB =(0.2/0.05)2 = 16

 

Therefore, yA = 2 and yB = 4

 

Also, the consumption is

CA = (1 – sA)yA = 1.8

CB = (1 – sB)yB = 3.2

 

  1. If the countries start off with an initial capital stock per worker of 2, then for country A the capital per worker would be 1.414 and consumption would be 1.272. For country B y would be 1.414 and c would be 1.131.

Below, we provide the table for year-to-year change for both country A and B

 

COUNTRY A

YEAR k y c i dk ∆k
1 2 1.414214 1.272792 0.141421 0.1 0.041421
2 2.041421 1.428783 1.285905 0.142878 0.102071 0.040807
3 2.082229 1.442993 1.298694 0.144299 0.104111 0.040188
4 2.122416 1.456852 1.311166 0.145685 0.106121 0.039564
5 2.161981 1.470368 1.323331 0.147037 0.108099 0.038938
6 2.200919 1.483549 1.335194 0.148355 0.110046 0.038309

 

 

 

 

COUNTRY B

YEAR k y c i dk ∆k
1 2 1.414214 1.131371 0.282843 0.1 0.182843
2 2.182843 1.477445 1.181956 0.295489 0.109142 0.186347
3 2.36919 1.539217 1.231374 0.307843 0.118459 0.189384
4 2.558573 1.599554 1.279643 0.319911 0.127929 0.191982
5 2.750556 1.65848 1.326784 0.331696 0.137528 0.194168
6 2.944724 1.71602 1.372816 0.343204 0.147236 0.195968


As we can see from the table, after 5 years, consumption in country B would be greater than that of country A.

 

  1. When a part of the labor force is destroyed, total output will fall, as total output is a direct function of labor and capital Y = F(K, L). However, output per person would increase, as it is given by y = f(k) where k = K/L.
  2. As output per person increases, after the war, the economy starts at a point where the level of capital is greater than the steady state level. Therefore, current consumption increases and the economy slowly moves back to the steady state level, i.e. output per person falls. Therefore, the growth of output per person would be slower until the economy moves back to the steady state, after that, the growth rate would be equal to the steady state rate.

 

  1. Y = K.3L.7

 

  1. Per worker production function is Y/L =y = K.3L-.3 = (K/L).3

or, y = k.3

 

  1. Steady state capital per worker, output per worker, consumption per worker

We know that in the steady state,

∆k = sf(k) – δk

In steady state, ∆k = 0, so

sf(k) = δk

We have from a. f(k) = k.3

So, s k.3 = δk

or, k.7 = s/δ

 

Therefore, k* = (s/δ)1/.7 = (s/δ)1.428

This is the steady state level of capital per worker.

 

Therefore,  y* = (s/δ).3/.7 = (s/δ).428

This is the steady state level of output per worker.

 

c = y* – δk* = (s/δ).428 – δ(s/δ)1.428

This is the steady state level of consumption per worker.

 

  1. Given depreciation = 10%. Therefore, the table is reproduced below –
s k* y* c*
0 0 0 0
0.1 1 1 0.9
0.2 2.690734 1.345367 1.076294
0.3 4.800972 1.600324 1.120227
0.4 7.240052 1.810013 1.086008
0.5 9.957015 1.991403 0.995702
0.6 12.91814 2.153023 0.861209
0.7 16.09904 2.299863 0.689959
0.8 19.48106 2.435132 0.487026
0.9 23.04933 2.561037 0.256104
1 26.79168 2.679168 0

 

A savings rate of 1, i.e. 100% saving maximizes output per worker. However, that is practically impossible as it rules out any current consumption.

 

  1. MPK = dY/dK = 0.3L.7K.7

It can be written as 0.3K.3L.7/K = 0.3Y/K

Dividing numerator and denominator by L, we get, 0.3y/k

In the table we substitute the values and find MPK

 

s k* y* c* MPK
0 0 0 0  
0.1 1 1 0.9 0.3
0.2 2.690734 1.345367 1.076294 0.15
0.3 4.800972 1.600324 1.120227 0.1
0.4 7.240052 1.810013 1.086008 0.075
0.5 9.957015 1.991403 0.995702 0.06
0.6 12.91814 2.153023 0.861209 0.05
0.7 16.09904 2.299863 0.689959 0.042857
0.8 19.48106 2.435132 0.487026 0.0375
0.9 23.04933 2.561037 0.256104 0.033333
1 26.79168 2.679168 0 0.03

 

The table shows that marginal product of capital steady declines.

 

 

 

 

 

 

 

 

 

 

 

  1. If Canada experiences a fall in population growth rate, it would increase its steady state capital per worker (from k1 to k2) and hence output per worker.

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The growth rate of output is the sum of population growth rate and rate of technological progress. So as population growth rate falls, total output growth rate falls as well.

However, the growth rate of output per person does not depend on the population growth rate, but it depends on the growth of technological progress. So growth rate of output per person does not change.

 

 

 

CHAPTER 8

 

  1. In steady state level, the income per worker is determined by only the growth of technological progress.
  3. According to Mankiw, if the economy is operating with less capital than in the Golden Rule steady state, then MPK – d > n + g. And if the economy is operating with too much capital, then MPK –d < n+ g. So in order to know whether an economy is operating, we need to know the growth rate of output (n + g), which can be found from the real GDP growth rate and net marginal product of capital (MPK −d), which can be found from the capital stock, depreciation of capital and capital income.

 

 

 

  2. y = k.5

We know, with technological progress an population growth, the equation of change is

∆k = sf(k) – (δ + n + g)k

in steady state, ∆k = 0, so sf(k) = (δ + n + g)k

f(k) = k.5

So,

s k.5 = (δ + n + g)k

or, s = (δ + n + g) k.5

or, s = (δ + n + g) y

therefore,

y = s / (δ + n + g)  This is the steady state value of y                               (1)

  1. we have, Sd = .28 (developed country) SL = .1 (less-developed country)

nd = 0.01(developed country)       nL = 0.04  (less-developed country)

g = 0.02     ∂ = 0.04

Plugging the values in (1),

yd = 4

yL = 1

 

  1. The country’s government can take an active population control policy, like China, education people and reducing the birth rates. However, to most of the countries it would be too restrictive and intrusive. Therefore, another way would be to try and increase the rate of growth for technological progress by investing more in research and development.

 

 

  1. a. The rate of growth of total income: It is given by n + g, so efficiency of labor does not affect the rate of growth of total income. Therefore, it will not be affected by education.
  2. The level of income per worker: Except education, nothing is different between the countries. SO assume, the equilibrium level of income per worker in the less educated country is y1 = Y/E1L where E is the level of income and the equilibrium level of income per worker in the more educated country is y2 = Y/E2L. Now, if everything else is same, y1 = y2 = y*. Therefore, Y/L in the less educate country must be less than Y/L in the more educated country to offset the effect of E2 > E1.
    The level of income per worker will be more in the country with more educated labor force.
  3. The real rental price of capital. The real rental is determined by MPK, which is unaffected by the level of education according to the growth model. Therefore, it will not change between countries.
  4. The real wage. The real wage per unit of labor can be expressed as wE where w is the nominal wage and E is the level of education. So, the level of real wage will be more in the country with more educated labor force.

 

CHAPTER 10

 

  1. The fiscal policy has a multiplied effect on national income because there is an income consumption spiral. As a result of an expansionary fiscal policy, the national income increases in the first round. That, in turn, causes the consumption to increase. As consumption increases, expenditures increase even more and more income is generated. This spiral goes on. According to the Keynesian cross, the net effect of an expansionary fiscal policy is given by ∆G/(1 – MPC) where MPC is the marginal propensity to consume.

 

 

Ms
Ms’
r
  • The theory of liquidity preference assumes there is a fixed supply of real money balances which is an exogenous policy variable chosen by a central bank. The price level is also an exogenous variable. The demand for money supply is a downward sloping curve. This is given in the figure below.

 

 

 

 

 

 

 

 

 

 

As the money supply increases, the money supply line shifts to right. This causes the equilibrium market clearing rate of interest to fall.

 

  1. The IS curve is sloped downwards because it shows the inverse relationship between the rate of interest and investment. As interest rate falls, it is beneficial for investors to borrow more money. So level of investment also rise. The IS curve captures this inverse relationship.
  2. The LM curve is upward sloping because it shows the relationship between interest rate and income. A higher level of income leads to a higher interest rate. This is because as income rises, the demand for real money balances also rises. Therefore, to bring the money market back in equilibrium, the rate of interest must rise. The LM curve captures this positive relationship and therefore is upward sloped.

 

 

 

 

  1. An increase in government purchases.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

An increase in government purchases causes the planned expenditure function shift upward by the amount of increase in G. The resulting increase in income is much more, from Y1 to Y2, due to the multiplier effect.

 

  1. An increase in taxes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

An increase in tax would shift the expenditure line down, by the amount of the tax. The resultant fall in income (Y2-Y1) would be more than that, due to the multiplier effect.

 

 

  1. An equal increase in government purchases and taxes.

 

An increase in G causes Y to increase by ∆G/(1 – MPC) while an increase in taxes causes Y to fall by ∆T*MPC/(1 – MPC).

Therefore, the net effect is
∆G/(1 – MPC) – ∆T*MPC/(1 – MPC) = 1/(1 – MPC) * (∆G – ∆T*MPC)

As ∆G = ∆T, the net effect is

1/(1 – MPC) * (∆G – ∆G*MPC) = ∆G

Therefore Y would increase by the increase in G.

 

 

  1. a. In this case, for one dollar increase in G, consumption increases by (1 – t)MPC. Because, according to the problem, t is the marginal tax rate. Therefore, the effect on Y is less.
  2. We have seen that a government purchase causes Y to change by ∆G/(1 – MPC). In this case, intuitively, the multiplier would be ∆G/(1 – t)MPC.
  3. The per dollar tax would increase the slope of the IS curve.

 

 

 

 

 

 

 

 

 

  1. (M/P)d = Y − 100r (1)

M is 1,000 P is 2.

  1. Therefore, M/P = 500 = real money supply.
M/P

 

 

 

 

 

 

 

 

 

 

 

 

  1. Equilibrium interest rate can be solved from (M/P)d = Y − 100r à 500 = 1000 – 100r à r = 5
  2. M is now 1200 but P is 2. So, (M/P)d = 600. Plugging the value in (1), r = 4. i.e. the equilibrium interest rate falls.
  3. Plug r = 7 in (1)

(M/P)d = Y – 100*7

Y = 1000, P = 2

so, M = 600.

 

Therefore, money supply has to be reduced to 600.

 

 

 

 

 

 

 

 

 

 

CH 11.

Questions For Review

  1. The aggregate demand curve is negatively sloped because it reflects the negative relationship between the aggregate price level in the economy and national income. As the price level increases, given money supply doesn’t change, the income falls.

 

  1. When taxes are increases the income falls, by the tax rate multiplier. For one unit of tax increase , the national income falls by

∆T × [ – MPC/(1 – MPC)]

 

Where ∆T is the change in tax, MPC is marginal propensity to consume. The movement can be shown using a diagram. The tax increase would cause the IS curve to shift to the left. This would cause the rate of interest to fall and output to fall as well. As rate of interest falls, investment would rise. However the rise in investment would be offset by the fall in income, so consumption would fall.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. A decrease in money supply reduces real money balances therefore, the LM curve shifts leftwards, with no change in the IS curve. This causes the income to fall and the interest rate to rise. Consumption also falls as income falls. Investment falls too, because the interest rate rises.

 

 

 

 

 

Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Falling prices will increase income.

 

CASE 1: SHIFT IN IS :

As prices fall, real wealth increases, which increases demand and would shift the IS curve to the right, this causes the rate of interest to rise, investment to fall and income to rise.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASE 2: SHIFT IN LM:

As prices fall, real money balance increase, which would shift the LM curve to the right, this causes the rate of interest to fall, investment to rise and income to rise.

Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CH11.

Problems

 

  1. When the central bank increases money supply, LM curve shifts to the right, with no change in the IS curve. Interest rate falls, investment increases and income and consumption rise.

 

 

 

 

 

 

 

PLEASE TURN OVER

Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. The IS curve shifts to the right, interest increases, investment falls, output and consumption both rise.

 

r

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. If the givt increases taxes, the IS curve will shift to the right by the amount of the tax multiplier, interest would fall, investment would rise, income and consumption both would fall.

 

r
r1
r2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. If the govt increases government purchases and taxes by equal amounts, the net change in the IS curve would depend on the impact of the two policies.

The change in Y due to government purchases  = ∆G/(1 – MPC)

The change in Y due to taxes  = ∆T *MPC/(1 – MPC)

 

The net impact is ∆G /(1 – MPC) – ∆T *MPC/(1 – MPC)

Now, ∆G = ∆T by the question

 

so,the net impact is ∆G /(1 – MPC) – ∆G *MPC/(1 – MPC)

= ∆G [(1-MPC) / (1 – MPC)]

= ∆G

 

Therefore, it would shift the IS curve to the right by the amount of the change in govt purchases.

 

 

 

 

 

 

 

PLEASE TURN OVER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. C = 200 + 0.75(Y – T)

I = 200 – 25r

G = 100

T = 100

 

  1. IS equation: Y = C(Y – T) + I(r)+ G

 

Substituting the values and simplifying,

Y = 1700 – 100r.

 

THE GRAPH IS AT THE END OF PART C

 

 

  1. LM equation: (M/P) = Y – 100r, M = 1000

 

M/P =  1000/2 = 500

LM: 500 = Y – 100r.

or, Y = 500 + 100r

  1. In eqlm, IS = LM,

 

1700 – 100r = 500 + 100r

r = 6

 

When r =6, Y = 1100

 

 

r
6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. If  G increase from 100 to 150, IS: Y = 200 + 0.75(Y – 100) + 200 – 25r + 150, or, Y = 1900 – 100r

Therefore, is shifts to the right by (1900 – 100r) – (1700 – 100r) = 200

  1. If M becomes 1200, L eqn: 600 =  Y – 100r, or, Y = 600 + 100r

LM shifts to the right by (600 + 100r) – (500 + 100r) = 100

  1. If prices rise to 4, LM would be: 250 = Y – 100r or, Y = 250 + 100r

The new interest rate can be found from the IS and LM equation

1,700 – 100r = 250 + 100r, r = 7.25

Y = 975

  1. The AD curve shows the relationship between output and rice level.

We have, IS = Y = 1700 – 100r    or, Y – 1700 = 100r

LM = (M/P) = Y – 100r                or, (M/P) – Y = 100r

 

Therefore, 1700 – Y = Y – (M/P),                        M = 1000

 

Y = 850 + 500/P

 

 

When P = 5, Y = 950

When P = 10, Y = 900

When P = 50, Y = 860

 

 

AD
Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If (d) govt purchases increase, the AD curve would shift to the right.

 

Because, when G increases, the IS curve is Y = 1900 – 100r

LM: 100r = Y – (1,000/P).

 

Solving, Y = 950 + 500/P, so AD shifts to the right by 100.

 

 

If (e) money supply increases, the AD curve will also shift to the right.

 

 

 

  1. Increase in money supply:

 

In short run, the increase in money supply would shift the LM curve to the right. That would reduce the rate of interest, increase investment and increase the output beyond the potential GDP. Therefore, in long run price would increase, real balances would fall and the LM curve would shift to the left and it will come back to its original position.

 

Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase in govt purchase:

 

An increase in govt purchase in the short run would shift the IS curve to the right, which will increase the output beyond the potential output, but also increase the interest rate. In long run, the increased interest rate would crowd out the output and price will rise. This would shift the LM curve to the left. LM would shift to left till the initial output is reached. However, the prevailing interest rate in the economy would be higher.

 

 

 

 

 

 

PLEASE TURN OVER

 

Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase in taxes:

 

In short run, the IS curve will shift to left, causing the interest rate to drop and income to fall. As output falls below the potential level, the price would fall and the LM curve would shift to right, restoring the potential output in the long run but at a lower interest rate level.

 

 

Y

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. M/P = L(r, Y – T)

 

  1. No, the money demand function is independent of the government purchase, so it should not alter.
  2. Yes, as money demand is depends on the amount of tax (T), so when T increases, M/P increases and vice versa, leading to a rightward shift of the IS curve.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCOUNTING

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1) Eileen is a hard-working college sophomore. One Tuesday, she decides to work nonstop until she has answered 250 practice problems for her physics course. She starts work at 8:00 AM and uses a table to keep track of her progress throughout the day. She notices that as she gets tired, it takes her longer to solve each problem.

Time Total Problems Answered
8:00 AM 0
9:00 AM 100
10:00 AM 175
11:00 AM 225
Noon 250

Use the table to answer the following questions.

The marginal, or additional, gain from Eileen’s second hour of work, from 9:00 AM to 10:00 AM, is

[removed]

problems.

The marginal gain from Eileen’s fourth hour of work, from 11:00 AM to noon, is

[removed]

problems.

Later, the teaching assistant in Eileen’s physics course gives her some advice. “Based on past experience,” the teaching assistant says, “working on 87.5 problems raises a student’s exam score by about the same amount as reading the textbook for 1 hour.” For simplicity, assume students always cover the same number of pages during each hour they spend reading.

Given this information, in order to use her 4 hours of study time to get the best exam score possible, how many hours should she have spent working on problems, and how many should she have spent reading?

[removed]0 hours working on problems, 4 hours reading

[removed]1 hour working on problems, 3 hours reading

[removed]2 hours working on problems, 2 hours reading

[removed]4 hours working on problems, 0 hours reading

 

 

2) Juanita is deciding whether to buy a skirt that she wants, as well as where to buy it. Three stores carry the same skirt, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $102 for the skirt:

 

Store Travel Time Each Way Price of a Skirt
(Minutes) (Dollars per skirt)
Local Department Store 15 102
Across Town 30 85
Neighboring City 60 76

Juanita makes $42 an hour at work. She has to take time off work to purchase her skirt, so each hour away from work costs her $42 in lost income. Assume that returning to work takes Juanita the same amount of time as getting to a store and that it takes her 30 minutes to shop. As you answer the following questions, ignore the cost of gasoline and depreciation of her car when traveling.

Complete the following table by computing the opportunity cost of Juanita’s time and the total cost of shopping at each location.

Store Opportunity Cost of Time Price of a Skirt Total Cost
(Dollars) (Dollars per skirt) (Dollars)
Local Department Store [removed] 102 [removed]
Across Town [removed] 85 [removed]
Neighboring City [removed] 76 [removed]

Assume that Juanita takes opportunity costs and the price of the skirt into consideration when she shops. Juanita will minimize the cost of the skirt if she buys it from the   .

 

 

3) The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he receives in Social Security benefits is typically reduced.

The provision of Social Security gives people the incentive to save ________   while working. Moreover, the reduction in benefits associated with higher earnings gives people the incentive to __________   past age 65.

4) A 1996 bill reforming the federal government’s antipoverty programs limited many welfare recipients to only 2 years of benefits.

This change gives people the incentive to find a job ______   quickly than if welfare benefits lasted forever.

The loss of benefits after 2 years will result in the distribution of income becoming _______   equal. In addition, the economy will be __________   efficient because of the change in working incentives.

 

 

5) Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency.

Activity Equality Efficiency
Regulating cable TV prices [removed] [removed]
Providing some poor people with vouchers that can be used to buy food [removed] [removed]
Prohibiting smoking in public places [removed] [removed]
Breaking up Standard Oil (which once owned 90% of all oil refineries) into several smaller companies [removed] [removed]
Imposing higher personal income tax rates on people with higher incomes [removed] [removed]
Instituting laws against driving while intoxicated [removed] [removed]

6) Which of the following statements support the reality that your standard of living is different from that of your parents or grandparents when they were your age? Check all that apply.

[removed]Many families have at least two cars per household, whereas having a vehicle was a luxury in the early 20th century.

[removed]A cutting-edge television comes with HD, 3D, and SmartTV technology, while your grandparents likely enjoyed a black-and-white television in the early years.

[removed]In the United States, the average person’s life expectancy was roughly 78 years old in 2010, but only 70 years old in 1960.

True or False: Labor unions are the primary reason the standard of living in the United States has changed over time.

[removed]True

[removed]False

 

7) During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort; to make up the difference, the colonies decided to print more money. Printing money to cover expenditures is sometimes referred to as an inflation tax.

Who is being taxed when more money is printed?

[removed]Banks only

[removed]Families of soldiers in active duty

[removed]Anyone who is holding money

 

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You are an accounts payable manager at Tiptop Sellers, which is a medium size department store. The company is having liquidity issues and needs to free up cash for expansion projects. You have come across the Wall Street Journal article entitled, “Delaying Payments to Suppliers Helps Companies Unlock Cash”. The article gives you some ideas for increasing liquidity, but you need to do more industry analysis. To help you understand liquidity within the retail sector, your boss creates a dashboard visualization using financial data from largest the five retailers mentioned in the article. The data is sourced from the Reuters website which is publicly available. She asks you to interpret the data and answer the questions below.
Click here to view the data in Tableau, and here to view it in Power BI. (The Tableau and Power BI files contain the same data; you can use either to answer the questions in this assignment. Your instructor may specify which program they prefer you to use!)
How to Access Tableau: You can open the Tableau file in this problem statement with Tableau Desktop software. If you don’t have Tableau Desktop, you can download Tableau Reader, a free program that allows you to open Tableau visualizations. To get it, search for “Tableau Reader” in your internet browser, or click here.
How to Access Power BI: You can open the Power BI file in this problem statement with Power BI Desktop. If you don’t have it already, search for “Power BI download” in your internet browser, or click here for a free download.

1. Which company has the highest current ratio compared to the other companies?

Costco

Walmart

Walgreens

Amazon

2. Which company had a decrease in the acid test ratio from 2018 to 2019?

Walmart

Costco

Walgreens

Amazon

3. Which of the following statement is true?

Companies that had the largest sales revenue had the highest current ratio.

There is no relationship between the amount of sales revenue and the value of the current ratio.

Amazon has acceptable current ratio and acid test ratio values.

Companies that had the lowest sales revenue had the lowest acid test ratio.

4. What can be concluded from the dashboard?

Walmart’s Other Current Assets can be used to pay its immediate debts.

The retail sectors share a common quick ratio that can be used as an industry benchmark.

The value of Cash & Equivalents is directly correlated with the company’s total revenue.

Walmart’s creditors will have concern over Walmart’s ability to pay.

You are an accounts payable manager at Tiptop Sellers, which is a medium size department store. The company is having liquidity issues and needs to free up cash for expansion projects. You have come across the Wall Street Journal article entitled, “Delaying Payments to Suppliers Helps Companies Unlock Cash”. The article gives you some ideas for increasing liquidity, but you need to do more industry analysis. To help you understand liquidity within the retail sector, your boss creates a dashboard visualization using financial data from largest the five retailers mentioned in the article. The data is sourced from the Reuters website which is publicly available. She asks you to interpret the data and answer the questions below.
Click here to view the data in Tableau, and here to view it in Power BI. (The Tableau and Power BI files contain the same data; you can use either to answer the questions in this assignment. Your instructor may specify which program they prefer you to use!)
How to Access Tableau: You can open the Tableau file in this problem statement with Tableau Desktop software. If you don’t have Tableau Desktop, you can download Tableau Reader, a free program that allows you to open Tableau visualizations. To get it, search for “Tableau Reader” in your internet browser, or click here.
How to Access Power BI: You can open the Power BI file in this problem statement with Power BI Desktop. If you don’t have it already, search for “Power BI download” in your internet browser, or click here for a free download.

A. If the average quick ratio was calculated using the values from the dashboard, can it be used as a benchmark for TipTop Sellers? What should be considered when using the average quick ratio as a benchmark?

B. How would you assess the current ratio and the acid test ratio for these five companies? What strategies or tactics can retail companies use to increase their current ratio and acid test ratio?

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Newton Manufacturing acquired new machinery on January 1 at a cost of $90,000. It is estimated to have a useful life of 10 years and a salvage value of $30,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the original estimate of useful life had been too long and that the machinery would have to be retired after two more years (at the end of the eighth year of service). Under this revised, the depreciation expense for the seventh year of would be:

 

$11,250.

$27,000.

$18,000.

$12,000.

 

A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 4-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is

 

25%.

50%.

20%.

5%.

 

Tomko Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Tomko uses straight-line depreciation, annual depreciation will be

 

$2,036.

$2,050.

$3,050.

$1,880.

 

On October 1, 2013, Holt Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2013, balance sheet assuming that Holt Company uses the double-declining-balance method of depreciation?

 

$52,000

$60,000

$72,000

$76,000

 

Don’s Copy Shop bought equipment for $150,000 on January 1, 2012. Don estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2013, Don decides that the business will use the equipment for 5 years. What is the revised depreciation expense for 2013?

 

$20,000

$50,000

$37,500

$25,000

 

If sixty $1,000 convertible bonds with a carrying value of $69,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is

 

Bonds Payable60,000

Premium on Bonds Payable9,000

Common Stock69,000

 

Bonds Payable60,000

Premium on Bonds Payable9,000

Common Stock45,000

Paid-in Capital in Excess of Par24,000

 

Bonds Payable69,000

Discount on Bonds Payable9,000

Common Stock45,000

Paid-in Capital in Excess of Par15,000

 

 

Bonds Payable69,000

Common Stock69,000

 

 

Under IFRS, the proceeds from the issuance of convertible debt are reported as

 

both debt and equity.

debt only.

debt or equity depending on the circumstances.

equity only.

 

Each of the following is correct regarding bonds except they are

 

a form of interest-bearing notes payable.

attractive to many investors.

issued by corporations and governmental agencies.

sold in large denominations.

 

On October 1, Steve’s Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. The entry by Steve’s Carpet Service to record payment of the note and accrued interest on January 1 is

 

Notes Payable250,000

Interest Payable5,000

Cash255,000

 

Notes Payable255,000

Cash255,000

 

Notes Payable250,000

Interest Payable20,000

Cash270,000

 

Notes Payable250,000

Interest Expense5,000

Cash255,000

 

The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders’ equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What will be the effect on Greyson’s debt to total assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?

 

The debt to total asset ratio will increase from 40 before to 48 after the additional investment.

The debt to total asset ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale.

The additional stock issuance will have no effect on the debt to total asset ratio.

The debt to total asset ratio will decrease from 4/36 before to 4/44 after the additional stock sale.

 

The relationship of current assets to current liabilities is used in evaluating a company’s

 

operating cycle.

revenue-producing ability.

short-term debt paying ability.

long-range solvency

 

The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:

Premium on  Bonds PayableDiscount onBonds Payable

 

Deduct                                       Add

Add                                              Deduct

Add                                                Add

Deduct                                      Deduct

 

Jarrett Company issued 600 shares of no-par common stock for $8,800. Which of the following journal entries would be made if the stock has no stated value?

 

Cash 8,800

Common Stock600

Paid-in Capital in Excess of Par8,200

 

Common Stock8,800

Cash8,800

 

Cash 8,800

Common Stock600

Paid-in Capital in Excess of Stated Value8,200

 

Cash 8,800

Common Stock8,800

 

Crawl Inc., has 1,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2012, and December 31, 2013. The board of directors declared and paid a $2,000 dividend in 2012. In 2013, $12,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2013?

 

$8,000

$4,000

$3,000

$6,000

 

Bacon Corporation began business by issuing 150,000 shares of $5 par value common stock for $25 per share. During its first year, the corporation sustained a net loss of $25,000. The year-end balance sheet would show

 

Common stock of $750,000.

Total paid-in capital of $3,725,000.

Total paid-in capital of $775,000.

Common stock of $3,750,000.

 

A small stock dividend is defined as

 

between 50% and 100% of the corporation’s issued stock.

more than 30% of the corporation’s issued stock.

less than 30% but greater than 25% of the corporation’s issued stock.

less than 20–25% of the corporation’s issued stock

 

Rouse Corporation’s December 31, 2013 balance sheet showed the following:

8% preferred stock, $10 par value, cumulative, 20,000 shares authorized; 15,000 shares issued$150,000

Common stock, $10 par value, 2,000,000 shares authorized; 1,950,000 shares issued, 1,930,000 shares outstanding19,500,000

Paid-in capital in excess of par—preferred stock60,000

Paid-in capital in excess of par—common stock27,000,000

Retained earnings7,650,000

Treasury stock (20,000 shares)630,000

 

Rouse’s total stockholders’ equity was

 

$53,730,000.

$46,710,000.

$54,360,000.

$54,990,000

 

Information that is not generally reported for each class of stock on the balance sheet is

 

the par value.

shares authorized.

shares issued.

the market value.

 

The authorized stock of a corporation

 

must be recorded in a formal accounting entry.

is indicated in its by-laws.

only reflects the initial capital needs of the company.

is indicated in its charter.

 

A corporation purchases 30,000 shares of its own $30 par common stock for $45 per share, recording it at cost. What will be the effect on total stockholders’ equity?

 

Increase by $900,000

Decrease by $900,000

Decrease by $1,350,000

Increase by $1,350,000

 

Which of the following factors does not affect the initial market price of a stock?

 

the company’s anticipated future earnings

the expected dividend rate per share

the par value of the stock

the current state of the economy

 

A corporation is not committed to a legal obligation when it declares

 

a cash dividend.

either a cash dividend or a stock dividend.

a stock dividend.

None of the above

 

The effect of the declaration of a cash dividend by the board of directors is to

IncreaseDecrease

 

LiabilitiesAssets

Stockholders’ equityAssets

AssetsLiabilities

LiabilitiesStockholders’ equity

 

Corporations generally issue stock dividends in order to

 

increase the marketability of the stock.

exceed stockholders’ dividend expectations.

decrease the amount of capital in the corporation.

increase the market price per share.

 

Ralston Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Ralston issues 6,000 shares of common stock to pay its recent attorney’s bill of $25,000 for legal services on a land access dispute, which of the following would be the journal entry for Ralston to record?

 

Legal Expense25,000

Common Stock6,000

Paid-in Capital in Excess of Par – Preferred19,000

 

Legal Expense6,000

Common Stock6,000

 

Legal Expense25,000

Common Stock25,000

 

Legal Expense25,000

Common Stock6,000

Paid-in Capital in Excess of Stated

Value – Common19,000

Accounting

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1-    FIFO and LIFO inventory methods.

 

During June, the following changes in inventory item 27 took place:

 

June     1          Balance                        1,400 units @ $36

14        Purchased                       800 units @ $54

24        Purchased                       700 units @ $45

8          Sold                                400 units @ $75

10        Sold                             1,000 units @ $60

29        Sold                                500 units @ $66

 

Perpetual inventories are maintained.

 

Instructions

What is the cost of the ending inventory for item 27 under the following methods? (show calculations)

(a)   FIFO.

(b)  LIFO.

 

 

 

 

1-    Lower-of-cost-or-market.

Determine the proper unit inventory price in the following independent cases by applying the

lower of cost or market rule.

Circle your choice.

 

    1               2              3               4               5

$7.80      $10.50      $11.80      $6.00         $7.20

8.85        10.00         12.20        4.25           6.90

8.15        9.00           11.40        3.75           6.50

7.90        10.10         12.50        4.00           5.40

 

Cost

Net realizable value

Net realizable value less normal profit

Market replacement cost

 

 

 

 

 

2-    Lower-of-cost-or-market

The December 31, 2017 inventory of Gwynn Company consisted of four products, for which certain information is provided below.

 

 

Replacement       Estimated            Expected           Normal Profit

Product            Original Cost         Cost           Disposal Cost     Selling Price           on Sales

A                  $24.00                 $22.00            $6.50                   $40.00                    20%

B                  $42.00                 $40.00            $10.00                 $48.00                    25%

C                  $120.00               $115.00          $25.00                 $190.00                  30%

D                  $19.00                 $15.80            $4.00                   $26.00                    10%

 

Instructions

 

Using the lower-of-cost-or-market approach applied on an individual-item basis, compute the inventory valuation that should be reported for each product on December 31, 2017.

 

 

 

1-    Relative sales value method.

Doran Realty Company purchased a plot of ground for $1,900,000 and spent $4,100,000 in developing it for building lots. The lots were classified into Highland, Midland, and Lowland grades, to sell at $120,000, $90,000, and $60,000 each, respectively.

 

Instructions

Complete the table below to allocate the cost of the lots using a relative sales value method.

 

No. of              Selling             Total                % of                Apportioned cost

Grade    Lots              Price                Revenue          Total Sales       Total                Per Lot

Highland   20              $                      $                                              $                      $

Midland    40               $                                                                                              $

Lowland   100            $                      _______                                  _______          $

160                                   $_______                                $_______

 

 

2-    A major difference between GAAP and IFRS with respect to accounting for inventories pertains to:

 

a.     Guidelines on ownerships of goods.

b.     Costs to include in inventories.

c.     The use of LIFO cost flow assumption.

 

d.     The use of LCNRV.

 

 

1-    Calculate depreciation.

A machine which cost $500,000 is acquired on October 1, 2017. Its estimated salvage value is $40,000 and its expected life is eight years.

 

Instructions

(1)  Calculate depreciation expense for 2017 and 2018 by each of the following methods, showing the figures used.

(a)   Double-declining balance

(b)  Sum-of-the-years’-digits

(2)  At the end of 2018, which method results in the larger accumulated depreciation amount?

 

2-     Calculate depreciation.

 

A machine cost $900,000 on April 1, 2017. Its estimated salvage value is $90,000 and its expected life is eight years.

 

Instructions

(1)  calculate the depreciation expense (to the nearest dollar) by each of the following methods, showing the figures used.

(a)   Straight-line for 2017

(b)   Double-declining balance for 2018

(c)    sum-of-the-years’-digits for 2018

 

 

(2)  which method would result in the smallest income amount for 2018?

 

 

 

 

 

1-    The following costs are incurred during the research and development phases of a laser bone scanner

 

Laboratory research aimed at discovery of new knowledge                      $800,000

Search for application of new research findings                                          400,000

Salaries of research staff designing new laser bone scanner                    1,200,000

Material, labor and overhead costs of prototype laser scanner                   850,000

Costs of testing prototype and design modifications                                  450,000

Engineering costs incurred to advance the laser scanner to full                  700,000

Production stage (technological feasibility reached)

 

Identify which of these are development phase item and will be immediately expensed under GAAP and IFRS

 

GAAP                         IFRS

a.          $1,200,000                   $1,200,000

b.          $2,400,000                   $1,400,000

c.          $2,400,000                   $2,500,000

 

d.          $3,200,000                   $2,500,000

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1.  How are liabilities classified on the balance sheet?

 

paid and unpaid

current and long-term

definitely determinable and estimated

current and unfunded

 

2.  Definitely determinable liabilities are ________.

 

always current liabilities

obligations of an exact amount

obligations of an uncertain amount

always long-term liabilities

 

3.  Beau Brentley earned $60,000 from his job at Bridgestone Tires. He had 15% of his gross pay withheld for federal income taxes, 6.2% withheld for FICA Social Security taxes, and 1.45% withheld for Medicare taxes. What was Beau’s net pay?

 

$48,000

$46,410

$48,200

$60,000

 

4.  Brook’s Bike Company sold 80 mountain bikes during May. The company offered a one-year warranty. Future warranty expense was estimated to be $25 per bike. During May, the company spent $115 on parts and labor to repair three bikes that were under warranty. The warranty expense for May was ________.

 

$115

$2,115

$2,000

$345

 

5.  When companies borrow money for longer than one year, that obligation is called ________.

 

a long-term liability

equity financing

a current liability

an operating activity

 

6.  On January 1, 2011, Climax Corporation signed a $10,000,000, 6%, 10-year mortgage note to finance the construction of its new hotel in Cancun. The note will be repaid in 10 equal annual installments of $1,358,679. Over the 10-year period, as each installment payment is made, the portion of the payment that is used to reduce the principal will ________.

 

decrease

stay the same

increase

The answer cannot be determined from the information given.

 

7.  On January 1, 2011, Ajax Corporation signed a $1,000,000, 7%, 10-year mortgage note to buy a new warehouse. The note will be repaid in 10 equal annual installments of $142,378. The first payment was made on December 31, 2011. How much of the first mortgage payment will be used to reduce the principal?

 

$72,378

$132,412

$142,378

$0

 

8.  A bond is ________.

 

long-term debt until the year it matures

debt sold to investors

an agreement, which requires a company to repay principal plus interest

all of these

 

9.  When a bond sells at its face amount, the market rate of interest is ________.

 

irrelevant to investors

less than the bond’s stated rate of interest

greater than the bond’s stated rate of interest

equal to the bond’s stated rate of interest

 

10.  When a bond sells at less than its face amount, the market rate of interest is ________.

 

less than the bond’s stated rate of interest

equal to the bond’s stated rate of interest

greater than the bond’s stated rate of interest

irrelevant to investors

 

11.  When a bond sells for 102, the bond is selling at ________.

 

a premium

par

a discount

face value

 

12.  When a bond sells for 98, the bond is selling at ________.

 

face value

a discount

a premium

par

 

13.  On January 1, Wok ‘n’ Roll, Inc. issued $50,000 worth of 8%, 20-year bonds for $52,950. These bonds sold at ________.

 

face value

a premium

a discount

par

 

14.  On January 1, Bank, Rupp & Baroque, Inc. issued $50,000 worth of 10-year, 9% bonds for $48,890. These bonds sold at ________.

 

a discount

par

face value

a premium

 

15.  On January 1, Bank, Rupp & Baroque, Inc. issued $50,000 worth of 10-year, 9% bonds for $48,890. What is the amount of the first year’s interest payment?

 

$4,400.10

$1,100.00

$88.80

$4,500.00

 

16.  On November 1, 2011, The Mane Event, Inc. borrowed $40,000 from a local bank for 24 months at 11% annual interest. Both principal and interest are due when the note matures. Which statement below is TRUE?

 

The transaction represents a financing activity.

The note is a long-term liability on the balance sheet at Dec. 31, 2012.

The note is a current-term liability on the balance sheet at Dec. 31, 2011.

The transaction represents an investing activity.

 

17.  On January 1, 2011, Dew Drop Inn borrowed $80,000 at 8% interest. The loan will be repaid with equal annual installment payments of $8,900 made on the last day of each year, which is the company’s yearend. Notes payable at December 31, 2011 equals ________.

 

$80,000 on the balance sheet

$77,500 on the balance sheet

$80,000 on the income statement

 

18.  On October 31, 2011, Bondable, Inc. issued $20,000 of 10-year, 6% bonds at 100. The bonds pay interest annually on October 31. On its statement of cash flows for the year ended December 31, 2011, Bondable will show Cash paid for interest of ________.

 

$0

$(120) in the cash flows from operating activities section of the statement

$(200) in the cash flows from financing activities section of the statement

$(1,200) in the cash flows from operating activities section of the statement

 

19.  On November 30, 2011, Just in Thyme, Inc. issued $10,000 of 20-year, 9% bonds at 100. The bonds pay interest semiannually on May 31 and November 30. On its statement of cash flows for the year ended December 31, 2011, Just in Thyme will show Cash paid for interest of ________.

 

$(450) in the cash flows from operating activities section of the statement

$(900) in the cash flows from operating activities section of the statement

$0

$(75) in the cash flows from financing activities section of the statement

 

20.  If a company earns more with the money it borrows than it has to pay to borrow that money, it is called ________.

 

positive financial leverage

negative financial leverage

positive cost/benefit

negative cost/benefit

 

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P4-23 Funding your retirement You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period. 1.How large a fund will you need when you retire in 20 years to provide the 30-year, $20,000 retirement annuity? 2.How much will you need today as a single amount to provide the fund calculated in part a if you earn only 9% per year during the 20 years preceding retirement? 3.What effect would an increase in the rate you can earn both during and prior to retirement have on the values found in parts a and b? Explain. P4-32 Funding budget shortfalls As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the given year to balance your budget—that is, to make inflows equal outflows. You expect to be able to earn 8% on your investments during the next 5 years and wish to fund the budget shortfalls over the next 5 years with a single amount. End of year Budget shortfall 1 $ 5,000 2 4,000 3 6,000 4 10,000 5 3,000 1.How large must the single deposit today into an account paying 8% annual interest be to provide for full coverage of the anticipated budget shortfalls? 2.What effect would an increase in your earnings rate have on the amount calculated in part a? Explain. P4-46 Loan amortization schedule Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments. 1.Calculate the annual, end-of-year loan payment. 2.Prepare a loan amortization schedule showing the interest and principal breakdown of each of the three loan payments. 3.Explain why the interest portion of each payment declines with the passage of time. P4-48 Monthly loan payments ***** ***** is shopping for a used car. He has found one priced at $4,500. The dealer has told Tim that if he can come up with a down payment of $500, the dealer will finance the balance of the price at a 12% annual rate over 2 years (24 months). 1.Assuming that Tim accepts the dealer’s offer, what will his monthly (end-of-month) payment amount be? 2.Use a financial calculator or Equation 4.15a (found in footnote 9) to help you figure out what Tim’s monthly payment would be if the dealer were willing to finance the balance of the car price at a 9% annual rate. P6-3 Real and nominal rates interest Zane Perelli currently has $100 that he can spend today on polo shirts costing $25 each. Alternatively, he could invest the $100 in a risk-free U.S. Treasury security that is expected to earn a 9% nominal rate of interest. The consensus forecast of leading economists is a 5% rate of inflation over the coming year. 1.How many polo shirts can Zane purchase today? 2.How much money will Zane have at the end of 1 year if he forgoes purchasing the polo shirts today? 3.How much would you expect the polo shirts to cost at the end of 1 year in light of the expected inflation? 4.Use your findings in parts b and c to determine how many polo shirts (fractions are okay) Zane can purchase at the end of 1 year. In percentage terms, how many more or fewer polo shirts can Zane buy at the end of 1 year? 5.What is Zane’s real rate of return over the year? How is it related to the percentage change in Zane’s buying power found in part d? Explain. P6-11 Bond prices and yields Assume that the Financial Management Corporation’s $1,000-par-value bond had a 5.700% coupon, matured on May 15, 2017, had a current price quote of 97.708, and had a yield to maturity (YTM) of 6.034%. Given this information, answer the following questions. 1.What was the dollar price of the bond? 2.What is the bond’s current yield? 3.Is the bond selling at par, at a discount, or at a premium? Why? 4.Compare the bond’s current yield calculated in part b to its YTM and explain why they differ. P7.6 Common stock valuation—Zero growth Scotto Manufacturing is a mature firm in the machine tool component industry. The firm’s most recent common stock dividend was $2.40 per share. Because of its maturity as well as its stable sales and earnings, the firm’s management feels that dividends will remain at the current level for the foreseeable future. 1.If the required return is 12%, what will be the value of Scotto’s common stock? 2.If the firm’s risk as perceived by market participants suddenly increases, causing the required return to rise to 20%, what will be the common stock value? 3.Judging on the basis of your findings in parts a and b, what impact does risk have on value? Explain.

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1. The H&S Motor Company produces small motors at a production cost of $30 per unit. Defective motors can be reworked at a cost of $12 each. The company produces 100 motors per day and averages 80 percent good-quality motors. Based on past experience, 50% of the defective motors can be reworked prior to shipping to customers. A good motor can be sold for $100 while a defective motor can be scrapped and sold for $15. Income consists of both the revenue from the sold motors and the scrapped motors.

a) Using the number of good motors shipped as the measure of output and the cost of production as the input, what is the company’s productivity if no defective motors are reworked?

b) Suppose that the company now uses the total income as the output measure. What is the company’s productivity if no defective motors are reworked?

c) Now suppose the company reworks the defective motors that can be reworked. Using the number of good motors shipped as the measure of output and the cost of production as the input, what is the company’s productivity now?

2. (18 points)

A toy company buys large quantities of plastic pellets for use in the manufacture of its products. The production manager wants to develop a forecasting system for plastic pellet prices. The price per pound of plastic pellets has varied as shown:

Month Plastic Pellets Price/Pound Month Plastic Pellets Price/Pound
1 $0.39 9 $0.35
2 $0.41 10 $0.38
3 $0.45 11 $0.39
4 $0.44 12 $0.43
5 $0.40 13 $0.37
6 $0.41 14 $0.38
7 $0.38 15 $0.36
8 $0.36 16 $0.39

Provide your forecast for Month 17 using the moving average, weighted moving average, and exponential smoothing methods as follows:
a) For the moving average, use a 4-period moving average.
b) Use a three-period weighted moving average. Unfortunately, you spilled water on the sheet with the weights to be used for the weight moving average and this blurred the weight for the most recent period. However, you can tell that the weights for the second and third most recent months are 0.25 and 0.15 respectively.
c) For exponential smoothing, using an α = 0.3, and the forecast for Month 6 was $0.40.
d) Using the methods in a) through c), which method provides the better forecast for Month 17? Why? Your selection criteria must be based on the forecasts for Months 12 through 16 using one of the one of the numerical evaluation methods we have learned and used on homework assignments this term.

Provide your forecasts to three decimal places ($0.xxx).

3. (20 points)

Barney’s Boston Bagel ‘n Bun Bakery is looking into a new type of bag tie that will better seal, and more importantly, better reseal the company’s bagels after they have been taken home. The process that it is using at this time without the new bag tie is referred to as Current and will use the old bag tie. According to a competitive analysis of Barney’s bagels compared to those of the competition, the new bag ties would dramatically increase the shelf life of the bagels. Barney currently sells all the bagels the company can make, 5,000 bags of bagels a week. The new tie would cost $0.02 more than the old one, but the longer shelf life would create incremental value to the customer

a) In addition to the cost of the new ties, assume that the new tie would require a machine that would add $200 per week to the company’s fixed costs. How much more should Barney’s charge per bag in order to make the same profit as it made using the Current process?

b) Instead of the modification in a), Barney’s is considering adding a faster machine along with a second baker. For this modification, a new tie costing $0.03 more than the old bag tie is required. In addition to the additional cost of this new tie, this would add $1,500 per week to the company’s fixed costs but would triple the company’s output. How much should the company add to the price of a bag of bagels if it wants to increase profit by at least $3,000 per week compared to the Current operation.

c) Barney has decided to add $0.40 for the price of a bag and wants to make $3,000 per week compared to the Current operation. He will be adding the faster machine, the new tie and the second baker explained in b) above. How many bags of bagels will he need to produce to make $3,000 per week compared to the Current operation using the old bag time?

4. (18 points)

a) Operations management concepts can be applied to both manufacturing and service operations. It can often be more challenging to apply them in a service operation. Briefly describe at least two of the challenges that a service operation presents for the application of operations management concepts that are not found in a manufacturing operations. Briefly describe a way to address one of the challenges that you have identified.

b) Six Sigma and TQM approach quality from different perspectives. For a customer service operation, explain how each of these two approaches could be used to address the complaints that are being received from the customers about the poor customer service.

5. (22 points)

A company is going to introduce a new cell phone. ABC Cell Services is going to sell the phones and has established specification limits of 5.0 ounces and 5.5 ounces for the weight of the phone. The company currently has determined that its phones currently weigh 5.2 ounces.

a) If the company wants to have a Cpk of 2.0 or greater (equivalent to a six sigma process), what is the maximum value of the standard deviation (σ) so that the Cpk of the process indicates that the company can provide the six sigma process (process capability = 2.0)?

b) Suppose that the company is operating at a standard deviation (σ) of 0.025. What is the range on the mean of the process to maintain a Cpk of 2.0 or greater?

c) Suppose that the company can maintain an average weight of 5.2 ounces and a standard deviation (σ) of 0.05 ounces. The company does not believe it can improve on these values. The company wants to see if ABC would be willing to adjust its spec limits rather them keep them at 5.0 and 5.5 if necessary to meet the minimum Cpk of 2.0. What should the company tell ABC that it would need to adjust the spec limits to in order to ensure a Cpk of 2.0 or greater?

6. (18 points)

Joe Builder has located a piece of property that he plans to buy and build on and then sell to a third party. The land is currently zoned for four homes per acre, however Joe is planning to request that it be rezoned. What Joe builds depends on the approval of the rezoning request and your analysis of his situation. With his input and your help, the decision process has been reduced to the following costs, alternatives and probabilities:

Cost of land: $2 million
Probability of rezoning: 0.60
If the land is rezoned, there will be additional costs for new roads, lighting, etc. of $1 million. This will be referred to as property improvements.

If the land is rezoned, Joe must decide whether to build a shopping center or 1,500 apartments. In either case, Joe is planning to sell the property after he has built either the shopping center or apartments. He is certain that he can sell the property, although there are probabilities associated with who would be the buyer. If a shopping center is built, it can be sold to either an insurance company for a profit of $5 million before the cost of the land and the property improvements or to a large department store chain for a profit of $4 million before the cost of the land and property improvements are considered. The probability of selling it to the department store chain is 70 percent so that the probability of selling it to the insurance company is 30 percent. If, instead of the shopping center, he decides to build the 1,500 apartments, the probabilities on the profits for selling them are as follows:

40 percent chance he can get a profit of $2,000 for each apartment before the cost of the land and property improvements are considered, or
60 percent chance he can get a profit of $3,000 for each apartment before the cost of the land and property improvements are considered.

If the land is not rezoned, Joe will comply with the existing zoning restrictions and simply build 600 homes on which he expects to make a profit of $4,000 on each one before the cost of the land is considered.

Using the decision tree and expected value approach, determine the best solution for Joe and his expected net profit. In providing your answer include your decision tree.

7. (14 points)

The Security National Bank is considering two locations for a new branch. The two choices are a major mall and a strip mall. The site selection team is evaluating two sites, and they have scored the critical success factors for each as shown below. The weights reflect the same relative importance as we have used in class. They want to use these ratings to compare the locations.

Critical Success Factor Factor Weight Major Mall Site Strip Mall Site
Relocation cost 0.30 $190,000 $240,000
Customer service 0.40 2.5 3.0
Service quality 0.10 1.8 2.4
Security and safety 0.10 2.4 1.8
Market share 0.10 1.8 2.1

The non-economic scores are on a 0 to 3.0 basis with 3.0 being best and it is possible to achieve the 3.0 score.

a) Using the factor scoring (rating) method as we learned in class, which site should Security National Bank use based on the above information?

b) Suppose the 3.0 value for the Customer Service for the Strip Mall Site is questionable. At what Customer Service score would the bank change its decision from what it found in a)?

8. (20 points)

The registrar at State University believes that decreases in the number of freshman applications that have been experienced are directly and linearly related to tuition increases. They have collected the following enrollment and tuition data for the past ten years:

Year 1 2 3 4 5 6 7 8 9 10
Freshman Applications 6010 5560 6100 5330 4980 5870 5120 4750 4615 4100
Annual Tuition ($) 3600 3600 4000 4400 4500 5700 6000 6000 7500 8000

Your work must reflect the correct independent and dependent variables based on the problem statements. This is part of the solution that is required.

a) Evaluate the registrar’s belief that there is a direct relationship between the number of freshman applications as the tuition increases. What is this regression relationship and how strong is this relationship?

b) What is the expected number of applications if tuition increases to $10,000 per year?

c) Looking at the annual tuition for the past ten years, the Levy family believes that there is only a relationship between time (expressed as the Year) and the tuition. They want to plan on the total tuition for a four year college degree for their son who will be applying and if accepted enrolling beginning in year 12. What should they budget for the tuition by year for each of the four years? How strong is the relationship you are using?

9. (20 points)

ABC Insurance Company tracks absenteeism by weekly random samples. Based on historical experience and data, the company expects about 250 employs to be absent from its workforce of 5,000 on the average.

For a variety of financial reasons, the company has eliminated its flex time option for its employees. It has tracked absences over the past fifteen days. The size of each sample is 450. The numbers of absences per sample for the last 15 days are as follows:

Day Number Absent Day Number Absent Day Number Absent
1 5 6 5 11 9
2 10 7 8 12 8
3 6 8 6 13 7
4 7 9 10 14 8
5 7 10 10 15 9

Assume that these 15 days are sufficient to perform this analysis.

a) Construct a 2σ control chart for the proportion absent and plot the sample data
points. Base the center line and control limits using the historical absentee rate prior to the elimination of the flex time.

b) Has there been a change in the absenteeism rate? Explain why or why not and base it on the control chart results.

c) Suppose the insurance industry’s standard for absenteeism is 4% (lower limit) to 8% (upper limit). What would you conclude about ABC’s performance compared to the industry standard? Explain your reason and base it on the control chart results.

10. (28 points)

The Judy Gray Income Tax Service is analyzing its customer service operations during the month prior to the April filing deadline. On the basis of past data, it has been estimated that customers arrive according to a Poisson process with an average arrival rate of one every 12 minutes. The time to complete a return for a customer is exponentially distributed with a mean of 10 minutes. Assume that the customer has all of the information needed for Judy to complete the tax return at this one visit. When the person is being helped, she meets with Judy in her office. If the individual is waiting for help, she will be in the waiting area. Based on this information, answer the following questions.

Do not round your results to integer numbers.

a) If you went to Judy, how much time should you allow for getting your return done? Measure this time from when you first arrive at her office.

b) On the average, how many customers should the waiting area be designed to hold?

c) What is the probability that an arriving customer would find at least three people in the waiting area waiting for help?

d) At this time, Judy is not going to add another person to help complete the tax returns. If the arrival rate remains unchanged but the average time in the system must be 40 minutes or less, what would need to be changed and what would the value of the change need to be?

e) Judy is now considering adding a person to help her process the tax returns. This person will help Judy by checking the paper work for the customers but does not work directly with any customer. Judy believes that this will allow her (Judy) to complete the returns in six minutes 40 seconds on average. Judy would need to pay this person $50 per hour. Judy believes that she has to reduce her cost of the service by $15 per hour for every hour a customer is in her office either waiting for help or being helped. Should she add this person or continue working by herself? Base your analysis on the economics of the two options.