1. When the prevailing interest rate in the market is 8% and the stated interest rate in the bonds is 5%, investors would normally purchase the bonds at:
Investors would normally purchase the bonds at a discount because the stated interest rate in the bonds is lower than the prevailing interest rate in the market. The discount would be calculated as the difference between the present value of the future cash flows (interest payments and principal repayment) discounted at the prevailing interest rate, and the face value of the bond.
2. What is the asset turnover ratio of Company A7?
The asset turnover ratio is calculated by dividing the net sales or revenue by the average total assets. To calculate the average total assets, add the beginning and ending total assets and divide by 2.
Average total assets = (Beginning total assets + Ending total assets) / 2
= ($5,000,000 + ($5,000,000 + $500,000 - $2,000,000)) / 2
= $4,250,000
Asset turnover ratio = Revenues / Average total assets
= $8,500,000 / $4,250,000
= 2
Therefore, the asset turnover ratio of Company A7 is 2.
3. What would be the net operating income of Company IR?
The net operating income of Company IR can be calculated using the contribution margin approach, which deducts the variable costs from the sales revenue to determine the contribution margin. The contribution margin is then used to cover the fixed costs, and any remaining amount is the net operating income.
Sales revenue = 45,000 units x $100 = $4,500,000
Variable costs = (Direct materials + Direct labor + Variable manufacturing overhead) x Number of units produced
= ($30 + $20 + $20(1-30%)) x 50,000 = $2,300,000
Contribution margin = Sales revenue - Variable costs
= $4,500,000 - $2,300,000
= $2,200,000
Fixed costs = Total period cost x (Fixed cost as a percentage of total cost)
= $20,000 x 30% = $6,000
Net operating income = Contribution margin - Fixed costs
= $2,200,000 - $6,000
= $2,194,000
Therefore, the net operating income of Company IR is $2,194,000.
4. How much is the total production cost in January?
The total production cost is the sum of direct materials, direct labor, and manufacturing overhead.
Direct materials cost = $20 per unit x 200,000 units = $4,000,000
Direct labor cost = $20 per unit x 0.5 hr per unit x 200,000 units = $2,000,000
Manufacturing overhead = $10 per unit x 200,000 units = $2,000,000
Manufacturing overhead as a percentage of direct labor rate per unit = 80%
Direct labor rate per unit = $20 per unit
Manufacturing overhead = 80% x $20 per unit x 200,000 units = $3,200,000
Total production cost = Direct materials + Direct labor + Manufacturing overhead
= $4,000,000 + $2,000,000 + $3,200,000
= $9,200,000
Therefore, the total production cost in January is $9,200,000.
5. Compute the net present value if the company will replace the old machinery.
The net present value can be calculated by subtracting the initial investment cost from the present value of the cash inflows over the useful life of the new machinery. The present value of the cash inflows can be calculated using the formula:
PV = FV / (1 + r)^n
Where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.
Initial investment cost = Cost of new machinery - Proceeds from sale of old machinery + Accumulated depreciation of old machinery
= $1,200,000 - $500,000 + $500,000
= $1,200,000
Cash inflows = Annual cash savings from operations + Resale value of new machinery
= $200,000 x 5 + 10% x $1,200,000
= $1,100,000
Present value of cash inflows = $1,100,000 / (1 + 0.10)^5
= $593,848.18
Net present value = Present value of cash inflows - Initial investment cost
= $593,848.18 - $1,200,000
= -$606,151.82
Therefore, the net present value is -$606,151.82, which indicates that the company should not replace the old machinery.
6. Adjusting entries are mandatorily reversed in what accounting period?
Adjusting entries are usually made at the end of the accounting period to record transactions or events that have occurred but have not yet been recorded. They are made to ensure that the financial statements accurately reflect the company's financial position and performance. Adjusting entries are not reversed in the same accounting period, but may be reversed in the next accounting period if necessary. However, some adjusting entries are not reversed, such as those made to record depreciation expense or to adjust the allowance for bad debts.
7. Compute the degree of financial leverage.
The degree of financial leverage measures the sensitivity of earnings before interest and taxes (EBIT) to changes in earnings before interest and taxes. It is calculated by dividing the percentage change in EBIT by the percentage change in net income.
Degree of financial leverage = (Percentage change in EBIT / EBIT) / (Percentage change in net income / net income)
To calculate the percentage change in EBIT, use the formula:
Percentage change in EBIT = (EBIT - EBIT at break-even point) / EBIT at break-even point
EBIT at break-even point can be calculated using the formula:
EBIT at break-even point = Total fixed costs / (1 - (Total variable costs / Sales))
Total fixed costs = Total variable costs + Total fixed costs / Degree of operating leverage
= $350,000 + $250,000 / 1.25
= $600,000
EBIT at break-even point = $600,000 / (1 - ($350,000 / $1,000,000))
= $1,071,429
Percentage change in EBIT = ($250,000 - $1,071,429) / $1,071,429
= -76.70%
To calculate the percentage change in net income, use the formula:
Percentage change in net income = (Net income - Net income at break-even point) / Net income at break-even point
Net income at break-even point can be calculated using the formula:
Net income at break-even point = Sales - Total variable costs - Total fixed costs
Net income at break-even point = $1,000,000 - $350,000 - $600,000
= $50,000
Percentage change in net income = ($100,000 - $50,000) / $50,000
= 100%
Degree of financial leverage = (-76.70% / $250,000) / (100% / $100,000)
= -3.08
Therefore, the degree of financial leverage is -3.08.
8. Using the high-low method, how much is the fixed cost per month?
The high-low method is used to separate semi-variable costs into their fixed and variable components. To do this, the highest and lowest levels of activity (units produced or hours worked) and their corresponding costs are used to calculate the variable cost per unit and the fixed cost.
Assuming that the costs given are for the first, second, and third months, respectively, we can determine the highest and lowest levels of activity:
Highest level of activity = 125,000 units
Total cost at highest level of activity = $3,000,000
Lowest level of activity = 90,000 units
Total cost at lowest level of activity = $2,000,000
The total variable cost can be calculated as follows:
Variable cost per unit = Change in total cost / Change in activity
= ($3,000,000 - $2,000,000) / (125,000 - 90,000)
= $20 per unit
Using the high level of activity, we can determine the total variable cost:
Total variable cost = Variable cost per unit x Highest level of activity
= $20 per unit x 125,000 units
= $2,500,000
The fixed cost can be calculated as follows:
Fixed cost = Total cost - Total variable cost
= $3,000,000 - $2,500,000
= $500,000
Therefore, the fixed cost per month is $500,000.
9. Using net present value as the basis, which project should the company pursue?
The net present value (NPV) is the difference between the present value of the cash inflows and the present value of the cash outflows. A positive NPV indicates that the project is expected to generate more cash inflows than outflows and is therefore profitable. The project with the higher NPV should be pursued.
Project A-1 has an NPV of $150,000 and Project A-2 has an NPV of $10,000. Therefore, the company should pursue Project A-1 since it has a higher NPV and is more profitable.
10. How much should be the amount of adjustment?
The amount of adjustment is the difference between the required ending balance of the allowance for bad debts and the existing balance of the allowance for bad debts before adjustment.
Required ending balance of the allowance for bad debts = Accounts receivables balance x Allowance for bad debts percentage
= $1,650,000 x 3%
= $49,500
Existing balance of the allowance for bad debts before adjustment = $1,500 debit balance
Amount of adjustment = Required ending balance - Existing balance before adjustment
= $49,500 - (-$1,500)
= $51,000
Therefore, the amount of adjustment is $51,000. The allowance for bad debts should be credited for $51,000 to increase the balance to the required ending balance of $49,500.