Solutions to Accounting and Finance Problems

Accounting and Finance

Determine the costs that should be capitalized in the machinery account

Capitalization is the act of recognizing costs that provide a future economic benefit by setting up an asset account (Power Point). The costs that should be capitalized include:

Cost of raw materials used during trial runs of machinery $1,000

Additional materials, lumber, steel, and other supplies needed in installation $35,400

Wages paid to company employees to help unload and install the machinery during regular working hours $10,500

Trucking expenses related to the rigging company, which disassembled the machinery in Kentucky and transported it to Pawtucket $104,783

Legal bill related to writing the contract for the equipment $3,000

For any cost that was not capitalized, explain your reasoning

Cost to repair damage from machinery dropped from truck during unloading -- This cost is not included because it is self-inflicting by the company, or rather internally generated cost

ii. Cost of advertising the company's new manufacturing capability in national trade magazines. This cost will only be of benefit for a designated period and not for the economic life of the machinery iii. Casualty insurance policy on new machinery. This cost will only be of benefit for that period and not for the economic life of the machinery

iv. Interest paid on note to bank used to finance the purchase of machinery. This cost will only be of benefit for that period and not for the economic life of the machinery

c. Determine the depreciable cost of the machinery

The depreciable cost of the machinery includes the cost of purchase and also set up and expenses linked to the machinery

200,000 + 3,000 + 104,783 + 10,500 + 6,000 + 35,400 + 5,540 + 3,000 + 1,000 + 30,000 = $399,223

d. Compute the depreciation expense for 2001 and 2002 using straight-line depreciation

Depreciation = Depreciable Cost / Number of Useful asset years

= (399,223 -- 30,000) / 20 years

i. Annual expense for 2001 is $18,461.15 x 3/12 = $4,615.29

ii. Annual expense for 2002 is $18,461.15

e. Compute the depreciation expense for 2001 and 2002 using double-declining balance depreciation

The depreciation under double declining method is calculated as:

Depreciable Cost / Asset's useful life in years x 2

Depreciable Cost = (original cost - accumulated depreciation)

i. Depreciation expense for 2001

Accumulated depreciation for 2001 = 0

= ((399,223 -0) / 20) x 2

= $39,922.3

ii. Depreciation expense for 2002

((399,223 -39,922.3) / 20) x 2

= $35,930.07

f. Assume that, during 2004, a large oven used to dry decorated prices needed a major repair costing $20,000. Should the cost of the repair be capitalized? Why or why not?

The cost of the large oven repair should be capitalized. This is because the repair can be classified to be an extraordinary repair, which implies that it is nonrecurring. Therefore, the cost should be added to the cost of the machine because the benefit that will arise will be more than just that particular period or year.

Chapter 13

Problem 13-5

a. What was the average issue price of the preferred stock as of December 31, 2004?

4,000 + 480 = 4,480

4,480,000 / 40,000 = $112

b. How many shares of common stock are outstanding?

Outstanding common shares = 1,000,000 (authorized) -- 600,000 (issued) -- 50, 000 (held at treasury)

= 350,000 shares of common stock

c. What journal entry was made when the common stock was issued?

Dr: Cash 600,000

Cr: Common Stock 600,000

d. If all of the treasury stock was reissued for $400,000, what journal entry would the company make?

Dr: Cash 400,000

Cr: Common Stock 50,000

Cr: Additional Paid in Capital 350,000

e. What is the amount of the total dividend requirement on preferred stock annually?

Total dividend required = 7%

= 7 / 100 x 40,000

= 280,000

f. Assuming that there are no dividends in arrears, if the company declared a total cash dividend of $580,000, what would be the dividend per share for the preferred and common stock?

i. Preferred Stock

280,000 / 40,000

= $7 per share

ii. Common Stock

580,000 -- 280,000 = 300,000

300,000 / 600,000

= $0.5 per share

g. Assume the company's common stock is selling for $80 per share. What journal entry would be made if the company issues a 10% common stock dividend?

600,000 x 80 = 48,000,000

10% of 48,000,000 = 4,800,000

Dr: Cash 48,000,000

Cr: Common Stock 600,000

Cr: Dividend 4,800,000

Cr: Additional Paid In Capital 42,600,000

h. Compute basic earnings per share if the company's net income was $1,560,000 during 2004. Assume no new shares were issued during the year

Earnings per share = (Net Income -- Preferred Dividends) / Weighted Average Common Shares Outstanding

= (1,560,000 -- 280,000) / 650,000

= 1,280,000 / 350,000

= $3.68 per share

i. Refer to the original data. Assume the company declares a 3-for-2 stock split. How many shares of common stock would be outstanding after the split?

3/2 x 1,000,000 = 1,500,000

3/2 x 600,000 = 900,000

3/2 x 50,000 = 75,000

Shares outstanding would be 1,500,000 -- 900,000 -- 75,000

= 525,000 shares outstanding

j. Refer to the previous requirement. What effect would the stock split have on the company's income statement, balance sheet, and statement of cash flows?

The stock split would have an effect on the income statement because the earning per share of the shares decreases in figures but not in value. This is because of the increase in the number of shares outstanding. On the other hand, the balance sheet is affected simply because after the stock split the market capitalization of the company changes as well and this has to reflect on the balance sheet. Lastly, the statement of cash flows is affected by the stock split because the company has to show the flow of money in the investment aspect of the company and it has to reflect in the financial statatements.

k. If the stock market reacts rationally to the stock split, what would you expect the stock to be selling for after the split? Assume the stock was selling for $80 per share before the split