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Questions and Answers of Accounting

Lilly Painting Company is considering whether to purchase a new spray paint machine that costs $4,000. The machine is expected to save labor, increasing net income by $600 per year. The effective
Computing the payback period and unadjusted rate of return for the same investment opportunity Foy Rentals can purchase a van that costs $60,000; it has an expected useful life of three years and no
Using present value techniques to evaluate alternative investment opportunities Fast Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of
Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities Louis Gallo owns a small retail ice cream parlor. He is considering expanding the business and
Using net present value and internal rate of return to evaluate investment opportunities Veronica Tanner, the president of Tanner Enterprises, is considering two investment opportunities. Because
Using net present value and payback period to evaluate investment opportunities Bruce Graham saved $250,000 during the 25 years that he worked for a major corporation. Now he has retired at the age
Effects of straight-line versus accelerated depreciation on an investment decision Zito Electronics is considering investing in manufacturing equipment expected to cost $184,000. The equipment has an
Applying the net present value approach with and without tax considerations Paxton Kingsley, the chief executive officer of Kingsley Corporation, has assembled his top advisers to evaluate an
Comparing internal rate of return with unadjusted rate of return Walker Auto Repair, Inc., is evaluating a project to purchase equipment that will not only expand the company’s capacity but also
Ernest Jones is reviewing his company's investment in a cement plant. The company paid $15,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it.
Identifying cash inflows and outflowsRequiredBarry Nance is considering whether to invest in a dump truck. Mr. Nance would hire a driver and use the truck to haul trash for customers. He wants to use
Determining the present value of a lump-sum future cash receipt One year from today Bernice Smyth is scheduled to receive a $60,000 payment from a trust fund her father established. She wants to buy
Determining the present value of a lump-sum future cash receipt Cornelius Toran has a terminal illness. His doctors have estimated his remaining life expectancy as three years. Cornelius has a
Determining the present value of an annuity Julia Rainy is considering whether to install a drink machine at the gas station she owns. Julia is convinced that providing a drink machine at the station
Rafael Ortega, manager of the Pena Music Hall, is considering the opportunity to expand the company’s concession revenues. Specifically, she is considering whether to install a popcorn machine.
Determining the net present value Howard Parmer has decided to start a small delivery business to help support himself while attending school. Mr. Parmer expects demand for delivery services to grow
Two alternative investment opportunities are available to Claude Reyna, president of Reyna Enterprises. For the first alternative, the present value of cash inflows is $133,000, and the present value
Sam Eatmon, CFO of Chaiston Enterprises, is evaluating an opportunity to invest in additional manufacturing equipment that will enable the company to increase its net cash inflows by $150,000 per
Using the internal rate of return to compare investment opportunities Yvonne Tower has two alternative investment opportunities to evaluate. The first opportunity would cost $149,512.23 and
Determining a cash flow annuity with income tax considerations Jay Welch is considering whether to invest in a computer game machine that he would place in a hotel his brother owns. The machine would
Four years ago Jeanne Nolen decided to invest in a project. At that time she had projected annual net cash inflows would be $54,000. Over its expected four-year useful life, the project had produced
The management team at Rawden Manufacturing Company has decided to modernize the manufacturing facility. The company can replace an existing, outdated machine with one of two technologically advanced
Determining the payback period with uneven cash flows Cascade Snowmobile Company is considering whether to invest in a particular new snowmobile model. The model is top-of-the-line equipment for
Determining the unadjusted rate of return Intercity Shuttle Service, Inc., is considering whether to purchase an additional shuttle van. The van would cost $36,000 and have a zero salvage value. It
Computing the payback period and unadjusted rate of return for the same investment opportunity Gunter Marina (Guntersville) rents pontoon boats to customers. It has the opportunity to purchase an
Using present value techniques to evaluate alternative investment opportunities Porter Automobile Repair, Inc., currently has three repair shops in Boston. Vincent Porter, the president and chief
Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities Jessica and Victor Services is planning a new business venture. With $100,000 of available
Using net present value and internal rate of return to evaluate investment opportunities Kerry Wood’s rich uncle gave him $60,000 cash as a gift for his 40th birthday. Unlike his spoiled cousins
Using net present value and payback period to evaluate investment opportunities Margaret Hubbard just won a lottery and received a cash award of $800,000 net of tax. She is 61 years old and would
Effects of straight-line versus accelerated depreciation on an investment decision Pacific Steel Company decided to spend $160,000 to purchase new state-of-the-art equipment for its manufacturing
Applying the net present value approach with and without tax considerations Luther Currie, the president of Luther's Moving Services, Inc., is planning to spend $625,000 for new trucks. He expects
Comparing internal rate of return with unadjusted rate of return Ledlow Corporation faces stiff market competition. Top management is considering the replacement of its current production
Max Baldwin is wondering whether he made the right decision four years ago. As the president of Baldwin Health Care Services, he acquired a hospital specializing in elder care with an initial cash
Karen and Steve Catrow want to replace the windows in the older house they purchased recently. The company they have talked to about doing the work claims that new windows will reduce the couple’s
Espada Real Estate Investment Company (EREIC) purchases new apartment complexes, establishes a stable group of residents, and then sells the complexes to apartment management companies. The average
Capital Expenditures at the Archer Daniels Midland Company Obtain Archer Daniels Midland Company’s (ADM) Form 10-Ks for the fiscal year ending on June 30, 2006 and 2009. To obtain the Form 10-Ks
Limitations of capital investment techniques Webb Publishing Company is evaluating two investment opportunities. One is to purchase an Internet company with the capacity to open new marketing
Gaines Company recently initiated a postaudit program. To motivate employees to take the program seriously, Gaines established a bonus program. Managers receive a bonus equal to 10 percent of the
Kilby Company is considering the purchase of new automated manufacturing equipment that would cost $150,000. The equipment would save $42,500 in labor costs per year over its six-year life. At the
ASAP Delivery is a small company that transports business packages between San Francisco and Los Angeles. It operates a fleet of small vans that moves packages to and from a central depot within each
Magnificent Modems, Inc. (MMI), has several capital investment opportunities. The term, expected annual cash inflows, and the cost of each opportunity are outlined in the following table. MMI has
A firm that makes expenditures to self-construct a building treats the expenditures as an asset. When that same firm makes research and development expenditures to create a new patented technology,
A pharmaceutical firm that makes expenditures to research new drugs must treat the expenditures as an expense. If that same pharmaceutical firm acquires a patent for a new drug from its creator, it
a. What is the effect of capitalizing interest on reported net income summed over all the periods of the life of a gin self-constructed asset, from building through use until eventual retirement?
Contrast the terms finite life, infinite life, and indefinite life as they apply to depreciation of tangible long-lived assets and amortization of intangible assets.
When PepsiCo (see Exhibit 9.2) acquires another firm, it allocates a portion of the purchase price to brand names, some of which it amortizes and some of which it does not amortize. How does PepsiCo
An airline has depreciated its new aircraft in the past over 25 years. New fuel usage and safety standards indicate that a shorter useful life is now appropriate for all of its existing aircraft.
A firm expects to use a delivery truck for five years. At the end of three years, the transmission wears out and requires replacement at a cost of $4,000. The firm argues that it should capitalize
Relate the concept of return of capital to the criterion under U.S. GAAP for deciding whether an impairment loss on long-lived assets other than nonamortized intangibles has occurred.
Why does the cash recoverability criterion apply to impairment losses on amortized intangibles but not on nonamortized intangibles under U.S. GAAF?
The text states, “The use of undiscounted, instead of discounted, cash flows [for identifying asset impairment losses on depreciable and amortizable long-lived assets under U.S. GAAP] seems
Competition among acquiring firms to make a corporate acquisition may result in the successful firm paying more than the fair value of another firm. The acquiring firm will allocate the excess
Calculating acquisition costs of long-lived assets. Outback Steakhouse opened a new restaurant on the site of an existing building. It paid the owner $260,000 for the land and building, of which it
Classifying expenditure as assets or expense. For each of the following expenditures or acquisitions, indicate the type of account debited. Classify the account as (1) Asset other than product cost,
Cost of self-constructed assets. Assume that Bolton Company purchased a plot of the land for $90,000 as a factory site. A small office building sits on the plot, conservatively appraised at $20,000.
Cost of self-developed product. Duck Vehicle Manufacturing Company incurs various costs in developing a new, amphibious vehicle for use in provision tours on land and water. Indicate the accounting
Calculating interest capitalized during construction. Bulls Eye Stores constructed new stores during the current year. The average balance in the Construction-in-Process account excluding the current
Amount of interest capitalized during construction. Nexor, a steel manufacturer, self-constructs a new manufacturing facility in Vermont. At the start of 2008, the Construction-in-Process account had
Calculations for various depredation methods. Alcoa acquires a machine for $88,800. It expects the machine to last six years and to operate for 30,000 hours during that time. Estimated salvage value
Calculations for various depredation methods. On January 1, 2008, Luck Delivery Company acquired a new truck for $30,000. It estimated the truck to have a useful life of five years and no salvage
Change in depreciable life and salvage va1ue. Thompson Financial acquired a computer on January 1, 2006, for $10,000,000. The computer had an estimated useful life of six years and $1,000,000
Journal entries for revising estimate of life. Give the journal entries for the following selected transactions of Florida Manufacturing Corporation. The company uses the straight-line method of
Distinguishing repairs Versus betterments. Disney World experienced damage from a tornado at Space Mountain, one of its most popular attractions. It paid $30,200 to replace steel reinforcements to
Computing the amount of an impairment loss on tangible long-lived assets. Wildwood Properties owns an apartment building that has a carrying value of $15,000,000 on January 1, 2008. The highway
Computing the amount of impairment loss. Tillis Corporation acquired the assets of Kieran Corporation (Kieran) on January 1, 2006, for $2,400,000. On this date the fair values of the assets of Kieran
Computing the gain or loss on sale of equipment. Fedup Express acquired a delivery truck on January 1, 2004, for $48,000. It estimated that the truck would have a six-year useful life and $6,000
Working backward to derive proceeds from disposition of plant assets. The balance sheets of Wilcox Corporation at the beginning and end of the year contained the following data:During the year,
Journal entries to correct accounting errors. Give correcting entries for the following situations. In each case, the firm uses the straight-line method of depreciation and closes its books annually
Recording transactions involving tangible and intangible assets. Present journal entries for each of the following transactions of Moon Macro systems:(a) Acquired computers costing $400,000 and
Effect on net income of changes in estimates for depreciable assets. American Airlines has $3 billion of assets, including airplanes costing $2.5 billion with net carrying value of $1.6 billion. It
Recognizing and measuring impairment losses. Give the journal entry to recognize an impairment loss. if appropriate, in each of the following cases under U.S. GAAR If a loss does not qualify as an
Expensing versus capitalizing research and development costs. Pfizer, a pharmaceutical company, plans to spend $90 million on research and development (R&D) at the beginning of each of the neat
Interpreting disclosures regarding long-lived assets. Exhibit 9.6 presents a partial balance sheet for General Mills Inc., a consumer foods processing company, for its fiscal years ending May 28,
Interpreting disclosures regarding long-lived assets. Exhibit 9.7 presents a partial balance sheet for Amgen Inc., a creator and manufacturer of biotechnology pharmaceutical products, for December
Interpreting disclosures regarding long-lived assets Exhibit 9.8 presents a partial balance sheet for Hewlett-Packard Company (HP). a creator and manufacturer of computer hardware and software and
Valuation of brand name. When an acquiring firm purchases another firm with established brand names, it will likely allocate a portion of the purchase price to the brand names. Measuring the fair
Using amortized cost based on the historical market interest rate to account for bonds in periods subsequent to their initial issuance provides a carrying value for bonds that is consistent with
Applying the effective interest method using the historical market interest rate gives a constant amount of interest expense on bonds each period.” Do you agree? If not, how would you change the
A firm issues two bonds with identical issue prices, market-required yields, and final maturity dates. One bond is a semiannual coupon bond, and the other bond is a serial bond. Will the total
Firm A issues $1,000,000 face value. 9% semiannual coupon bonds at a price to yield 8% compounded semiannually. Firm B issues $1,000,000 face value, 7% semiannual coupon bonds at a price to yield 8%
The total effect on income before income taxes over the life of a bond that a firm repays at maturity will be the same whether the firm accounts for the bond using amortized cost measurement based on
Refer to question 6. Would your answer differ if the firm repaid the bond prior to maturity?
Why is the identification of the entity in a lease transaction that enjoys the benefits and incurs the risk of the leased asset important in accounting for the lease?
A retailer leases space in a shopping center on a ten-year lease. The lessee pays a small fixed amount per month plus 10% of sales for the previous month. The retailer will likely treat this lease as
A trucking company leases a hauling rig from the manufacturer for a three-year period. The trucking company pays a monthly rental and guarantees a certain minimum resale value of the rig at the end
In what ways is the economic substance of a lessee’s capital lease similar to, and different from, that of purchasing the equipment using the proceeds of a loan repayable in installments?
The lessor recognizes the same amount of income (revenue minus expenses) over the term of a lease as the lessee recognizes as expenses. Do you agree or disagree? Explain.
If permitted, a lessee generally prefers to account for leases using the operating leases method for financial reporting and the capital lease method for tax reporting. Explain.
If permitted, a lessor generally prefers to account for leases using the capital lease method for financial reporting and the operating lease method for tax reporting. Explain.
Amortization schedule for note where stated interest rate differs from historical market rate of interest. Hager Company acquires a computer from Volusia Computer Company. The cash price (fair value)
Computing the issue price of bonds. Compute the issue price of each of the following bonds.a. $10,000,000 face value, zero coupon bonds due in 20 years, priced on the market to yield 8% compounded
Computing the issue price of bonds. Compute the issue price of each of the following bonds.a. $1,000,000 face value, zero coupon bonds due in 20 years, priced on the market to yield 10% compounded
Amortization schedule for bands. On January 1 of the current year, Womack Company issues 10% semiannual coupon bonds maturing five years from the date of issue. The firm issues the bonds to yield 8%
Amortization schedule for bonds. On January 1, 2008, Seward Corporation issues $100,000 face value, 8% semiannual coupon bonds maturing three years from the date of issue. The coupons, dated for
Accounting for bonds using amortized cost measurement based on the historical market interest rate. O’Brien Corporation issues $8,000,000 face value, 8% semiannual coupon bonds maturing in 20
Accounting for bonds using amortized cost measurement based on the historical market interest rate. Robinson Company issues $5,000,000 face value, 8% semiannual coupon bonds maturing in 10 years. The
Accounting for bonds using amortized cost measurement based on the historical market interest rate. Several years ago, Huergo Dooley Corporation (HDC) issued $2,000,000 face value, 8% semiannual
According for bonds using the fair a1ue option based on the current market interest rate. Stroud Corporation issues $10,000,000 face value, 10-year, 6% semiannual coupon bonds on January 1, 2008. The
Accounting for bonds using the fair value option basedd on the current market interest rate. Restin Corporation issues $20,000,000 face value, 10 year, 8% semiannual coupon bonds on January 1, 2008.
Applying the capital lease criteria. Boeing manufactures a jet aircraft at a cost of $50 million. The usual selling price for this aircraft is $60 million, and its typical useful life is 25 years.

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