Problem 14-52 Economic Value Added (LO 14-4)

Biddle Company uses EVA to evaluate the performance of division managers. For the Wallace Division, after-tax divisional income was $600,000 in year 3.

The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-tax divisional income. Second, the company managers believe that advertising has a three-year positive effect on the sale of the companys products, so it amortizes advertising over three years. Advertising expenses in year 1 will be expensed 50 percent, 40 percent in year 2, and 10 percent in year 3. Advertising expenses in year 2 will be expensed 50 percent, 40 percent in year 3, and 10 percent in year 4. Advertising expenses in year 3 will be amortized 50 percent, 40 percent in year 4, and 10 percent in year 5. Third, unamortized advertising expenses become part of the divisional investment in the EVA calculations. Wallace Division incurred advertising expenses of $150,000 in year 1 and $300,000 in year 2. It incurred $360,000 of advertising in year 3.

Before considering the unamortized advertising, the Wallace Division had total assets of $6,300,000 and current liabilities of $900,000 at the beginning of year 3. Biddle Company calculates EVA using the divisional investment at the beginning of the year. The company uses a 10 percent cost of capital to compute EVA.

Required:

Compute the EVA for the Wallace Division for year 3.

Adjusted divisional income	$645,000
Cost of adjusted divisional investment
Economic Value Added (EVA)

Exercise 15-26 International Transfer Prices: Ethical Issues (LO 15-4) Trans Atlantic Metals has two operating divisions. Its forging operation in Finland forges raw metal, cuts it, and then ships it to the United States where the companys Gear Division uses the metal to produce finished gears. Operating expenses amount to $20 million in Finland and $60 million in the United States exclusive of the costs of any goods transferred from Finland. Revenues in the United States are $150 million.

If the metal were purchased from one of the companys U.S. forging divisions, the costs would be $30 million. However, if it had been purchased from an independent Finnish supplier, the cost would be $40 million. The marginal income tax rate is 60 percent in Finland and 40 percent in the United States.

Required:

What is the companys total tax liability to both jurisdictions for each of the two alternative transfer pricing scenarios ($30 million and $40 million)? (Enter your answers in dollars and not in millions of dollars.)

		Transfer Price
		30 Million	$ 40 Million
Total Tax Liability		$30,000,000