1 All the following are true about an installment note for a borrower except?

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1

All the following are true about an installment note for a borrower except

Installment notes are a series of payments to a lender

Installment notes are recorded by including a credit to cash

Installment notes are recorded by including a credit to notes payable

Installment notes are recorded by including a debit to cash

2

Accounts payable are

Amounts owed to suppliers for products and/or services purchased on credit

Paid within 30 days

Estimated liabilities

Long-term liabilities

4

The face amount of a promissory note is called the:

time of the note

discount of the note

principal of the note

interest rate of the note

6

The entry to accrue interest at year-end on a note payable would be

debit Interest Expense, credit Cash

debit Interest Expense, credit Notes Payable

debit Interest Expense, credit Interest Payable

8

On June 20, 2013, ABC Services received $2,400 in advance from a customer for one month’s service. The journal entry to record the receipt of cash would be which of the following?

Debit Cash $2,400 and credit Service revenue $2,400

Debit Cash $2,400 and credit Unearned service revenue $2,400

Debit Unearned service revenue $2,400 and credit Cash $2,400

Debit Unearned service revenue $2,400 and credit Service revenue $2,400

Lenient Auto signed a $45,000 8% 30-year installment note on November 1, 2013. The note requires semiannual payments of $750 plus interest on May 1 and November 1 of each year. How will Lenient Auto classify this loan on its December 31, 2013 Balance Sheet?

Current Portion of Long-term debt, $0; Long-term debt, $45,000

Current Portion of Long-term debt, $45,000; Long-term debt, $0

Current Portion of Long-term debt, $750; Long-term debt, $44,250

Current Portion of Long-term debt, $1,500; Long-term debt, $43,500

4

Bingo Corp signed a promissory note of $1,000 for one of its vendors in exchange for supplies. $100 cash payment is due upon signing the note and the term is that the balance and interest are due in 90 days at 12% (assume 360 days and that interest payable has been recorded). Bingo will record the transaction at the end of the term as

Debit Accounts Receivable $900; Credit Cash $900

Debit Notes Payable $900, Debit Interest payable $27; Credit Cash $927

Debit Accounts Payable $900, Debit Interest expense $27; Credit Cash $927

None of the above

5

The cost of borrowing money or the return on lending money is called

Notes payable

Interest

Liabilities

None of the above

A short-term note payable

Is a contingent liability

Is an estimated liability

Is a written promise to pay a specified amount on a definite future date within one year or the company’s operating cycle, whichever is longer

Is not a liability until the due date

8

Archie’s had sales of $6,758. The state sales tax rate is 7%. All sales are cash. What amount will be debited to Cash?

$7,231.06

$866.06

$473.06

$6,758.00

When a company issues a promissory note, the entry will include a credit to Note Payable for the

face value of the note

face value of the note minus interest to pay

face value of the note plus interest to pay

maturity value of the note

We R Kids purchased playground equipment for 12,000 on credit and issued a 120-day note bearing interest at 9 percent a year as evidence of the debt. To record this transaction, the accountant would

Debit equipment for $12,000, debit Interest Expense for $360, and credit Notes Payable for $12,360

Debit equipment for $12,360, credit Interest Expense for $360, and credit Notes Payable for $12,000

Debit equipment for $12,000 and credit Notes Payable for $12,000

Debit equipment for $12,000 and credit Accounts Payable for $12,000

Vacation benefits are an example of:

accounts to be created

estimated liabilities, contingent liabilities

a pension plan

a reconciliation of petty cash

2

The matching principle requires businesses to record Warranty Expense: (choose 2)

incurred when the company makes a sale

with its accounts payable

in the same period the company records revenue related to said warranty

with a check number

P

3

Warranty obligations are estimated based on: (choose 2)

historical experience of anticipated product defects

the customer’s age and gender

material and labors estimates for repair

the suppliers

4

Contingent liabilities are: (choose 2)

set values used for the matching principle

potential liabilities that may not actually occur in the future

accrued when they are likely to occur & can be reasonably estimated

the same thing as estimated liabilities

5

Two examples of an “estimated liability” are: (choose 2)

Supplier information

Employee benefits

Income taxes

Account to be debited

5

The obligation a company has to the purchaser of its product or service is: (choose 2)

to keep records of competing products or services

an estimate of obligation

its names of suppliers

a warranty liability

7

Accounting for liabilities is important for a company to remain in compliance with: (choose 2)

GAAP

IRR

JIT

IFRS

8

An estimated liability is:

accrued overtime

a known obligation of uncertain amount that can be estimated, an obligation with no set value that will be determined in the future

the same as a payroll

the estimation of a business’ liability

7

A co-signed ‘note Payable’ is an example of a (an):

account to be credited

form of financial statement

assets

estimated current liability

8

Two types of classification of “Contingent Liability” are: (choose 2)

“Unreasonable”

“Unlikely”

“Probably”

“Remote”

Hatmaker Company signs a note payable for $3,500 at 9% for 45 days. How much interest (to the nearest cent) will the company owe using a 360-day year?

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Hatmaker Company signs a note payable for $3,500 at 9% for 45 days. How much interest (to the nearest cent) will the company owe using a 360-day year?

$ 38.84

$354.38

$ 39.38

$315.00

3

Bingo Corp signed a promissory note of $1,000 for one of its vendors in exchange for supplies. $100 cash payment is due upon signing the note and the term is that the balance and interest are due in 90 days at 12% (assume 360 days). Bingo will record the note in the book at the inception of the term as

Debit Accounts Receivable $1, 000; Credit Cash $100 and credit Notes Receivable $900

Debit Accounts Payable $1, 000; Credit Cash $100 and credit Notes Payable $900

Debit Supplies $1, 000; Credit Cash $100 and credit Notes Payable $900

None of the above

4

Archie’s had sales of $6,758. The state sales tax rate is 7%. All sales are cash. What amount will be credited to Sales revenue?

$7,231.06

$6,758.00

$473.06

$458.00

5

A major difference between accounts payable and notes payable is that

Accounts payable are classified as current assets but notes payable are not

Notes payable are more formal than accounts payable

Notes payable are long-term assets but accounts payable are current assets

Notes payable charge interest but accounts payable do not

6

On June 20, 2013, ABC Services received $2,400 in advance from a customer for one month’s service. The journal entry to record the receipt of cash would be which of the following?

Debit Cash $2,400 and credit Service revenue $2,400

Debit Unearned service revenue $2,400 and credit Service revenue $2,400

Debit Cash $2,400 and credit Unearned service revenue $2,400

Debit Unearned service revenue $2,400 and credit Cash $2,400

7

Carter Company records sales on account of $950,500. The company operates in a state that imposes a 5% sales tax. Which of the following would be the amount of the Sales tax payable to the state?

$45,000

$50,500

$47,525

$55,000

8

Accounts payable is a(n)

Contingent liability

Estimated liability

Accrued liability

Known liability

Checklist: Evaluate the business change process by researching and addressing the following:

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Checklist: Evaluate the business change process by researching and addressing the following:

Provide an overall assessment of the existing program and what needs to be changed to be viable.
Analyze the likely reasons that the application processing time for microfinancing is taking 4-6 months.
Identify the stakeholders who should be involved in this change management process and explain BOH’s responsibility towards these stakeholders. HINT: A stakeholder is any person, group, or organization that has a positive or negative impact on the work or anyone who might be affected by the outcome.
Explain how you will evaluate success once your proposed plan is in place.
Access instructions concerning how to add audio to PowerPoint presentations and adding notes to a presentation. The professional presentation should include a cover slide, abstract slide, body of the presentation addressing the checklist items, with APA citations and references (i.e., separate references slide).

Background: Mohammed Yunus is the founder of the concept of microfinancing. His initial impetus to provide financing to individual small family owned businesses in India and elsewhere inspired a movement that has spread across the world with some controversy as to the real benefits of such financing. See the founder’s website for some background on microfinancing.

In addition, you practiced with some of Geert Hofstede’s cultural dimensions in the Learning Activity that you will now use to address any cultural considerations in your evaluation of the business process described.
Scenario: You were recently hired by a nonprofit organization that is headquartered in Montreal, Canada. This organization, Beacon of Hope (BOH), had a mission of providing financing to businesses who wished to start a business in third world countries. Two years ago, they changed their mission to providing microfinancing to individuals in third world countries who want to start up a small business in their own country. The first two countries they focused on were Angola and Ghana. After two years in operation, it has become apparent that a change is necessary. Choose either Angola or Ghana to evaluate the organization’s current process addressing the following concerns:

Here are some of the reported problems:

-Only 225 applications were received from prospects concerning each of the two countries. At the 2-year mark, the expectation was 1200 applications for each.

-The application processing time is taking 4–6 months. The original goal was 2 months.

-Only 100 applications have been approved for each country, and the average loan is $10,000.

-The most recent report shows that only 15% of the businesses funded are still in operation.

-Accessing the microfinancing funds has proven problematic using in-country banks.

-Accounting for the expenditure of funds by BOH has been difficult to track.

-Loan delinquency is a major concern due to business failure.

What are H. B. Fuller’s moral obligations in this case? What ideals, effects, and consequences are at stake? Have any moral rights been violated? What would a utilitarian recommend? A Kantian?

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What are H. B. Fuller’s moral obligations in this case? What ideals, effects, and consequences are at stake? Have any moral rights been violated? What would a utilitarian recommend? A Kantian?

Case Study 3

Sniffing Glue Could Snuff Profits

HARVEY BENJAMIN FULLER FOUNDED THE H. B. Fuller Company in 1887. Originally a one-man wallpaper-paste shop, H. B. Fuller is now a leading manufacturer of industrial glues, coatings, and paints, with operations worldwide. The company’s 10,000 varieties of glue hold together everything from cars to cigarettes to disposable diapers. However, some of its customers don’t use Fuller’s glues in the way they are intended to be used.

That’s particularly the case in Central America, where Fuller derives 27 percent of its profits and where tens of thousands of homeless children sniff some sort of glue. Addicted to glue’s intoxicating but dangerous fumes, these unfortunate children are called resistoleros after Fuller’s Resistol brand. Child-welfare advocates have urged the company to add a noxious oil to its glue to discourage abusers, but the company has resisted, either because it might reduce the glue’s effectiveness or because it will irritate legitimate users.111

Either way, the issue is irritating H. B. Fuller, which has been recognized by various awards, honors, and socially conscious mutual funds as a company with a conscience. Fuller’s mission statement says that it “will conduct business legally and ethically, support the activities of its employees in their communities and be a responsible corporate citizen.” The St. Paul-based company gives 5 percent of its profits to charity; it has committed itself to safe environmental practices worldwide (practices that are “often more stringent than local government standards,” the company says); and it has even endowed a chair in business ethics at the University of Minnesota. Now Fuller must contend with dissident stockholders inside, and demonstrators outside, its annual meetings.

The glue-sniffing issue is not a new one. In 1969, the Testor Corporation added a noxious ingredient to its hobby glue to discourage abuse, and in 1994 Henkel, a German chemical company that competes with Fuller, stopped making certain toxic glues in Central America. However, Fuller seems to have been singled out for criticism not only because its brand dominates Central America but also because—in the eyes of its critics, anyway—the company has not lived up to its own good-citizen image. Timothy Smith, executive director of the Interfaith Center for Corporate Responsibility, believes that companies with a reputation as good corporate citizens are more vulnerable to attack. “But as I see it,” he says, “the hazard is not in acting in a socially responsible way. The hazard is in over-marketing yourself as a saint.”

Saintly or not, the company has made matters worse for itself by its handling of the issue. H. B. Fuller’s board of directors acknowledged that “illegal distribution was continuing” and that “a suitable replacement product would not be available in the near future.” Accordingly, it voted to stop selling Resistol adhesives in Central America. “We simply don’t believe it is the right decision to keep our solvent product on the market,” a company spokesman said.

The Coalition on Resistoleros and other corporate gadflies were ecstatic, but their jubilation turned to anger when they learned a few months later that Fuller had not in fact stopped selling Resistol in Central America and did not intend to. True, Fuller no longer sold glue to retailers and small-scale users in Honduras and Guatemala, but it continued to sell large tubs and barrels of it to industrial customers in those countries and to a broader list of commercial and industrial users in neighboring countries.

The company says that it has not only restricted distribution but also taken other steps to stop the abuse of its product. It has altered Resistol’s formula, replacing the sweet-smelling but highly toxic solvent toluene with the slightly less toxic chemical cyclohexane. In addition, the company has tried—without success, it says—to develop a nonintoxicating water-based glue, and it contributes to community programs for homeless children in Central America. But the company’s critics disparage these actions as mere image polishing. Bruce Harris, director of Latin American programs for Covenant House, a nonprofit child-welfare advocate, asserts that Resistol is still readily available to children in Nicaragua and El Salvador and, to a lesser extent, in Costa Rica. “If they are genuinely concerned about the children,” he asks, “why haven’t they pulled out of all the countries—as their board mandated?”

Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The discount rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

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Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The discount rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

Q14) On January 1, 2009, your brother’s business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2009?

Q15)The Ramirez Company’s last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 13%. What is the best estimate of the current stock price?

Q16) ABC Inc.’s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $35 semi-annual coupon and have a 15-year maturity, but they can be called in 10 years at $1,100. What is their yield to call (YTC)?

Q18) ABC Inc.’s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm’s expected rate of return?

ABC Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company’s stock?

Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market’s required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund’s assets are as follows:

Stock Investment Beta Weight
A $200,000 1.5 0.100 0.15
B $300,000 -0.5 0.150 -0.075
C $500,000 1.25 0.250 0.3125
D $1,000,000 1.75 0.500 0.875

Q22) ABC Trucking’s balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share; stockholders’ required return, rs, is 14.00%; and the firm’s tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?

Barry Company is considering a project that has the following cash flow and WACC data. What is the project’s NPV? What is IRR? What is MIRR? Should this project be accepted? Why?
WACC: 13.00%
Year 0 1 2 3 4 5
Cash flows -$1,100 $400 $390 $380 $370 $360

Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?
Depreciation
Year Rate
1 0.20
2 0.32
3 0.19
4 0.12
5 0.11
6 0.06

Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project’s life. Revenues and other operating costs are expected to be constant over the project’s 3-year life. What is the project’s NPV?

Q26) Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $18,500 the first year, $21,000 the second year, $25,000 the third year, -$10,000 the fourth year, $31,000 the fifth year, $37,000 the sixth year, $39,000 the seventh and eighth year, and -$9,000 the ninth year. The project would cost the firm $145,000. If the firm’s cost of capital is 11%, find NPV, IRR and MIRR for the project. Do you accept this project? Why?

Q27) XYZ Corporation is considering an expansion project. To date they have spent $65,000 investigating the viability of the project and have decided to proceed. The CEO of XYZ spent $20,000 last year on his business trip to New York where he discussed about the proposed new project with the board members. The company spent $50,000 on a marketing study before its current analysis regarding whether to accept or reject the project. The proposed project will cost $550,000. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33% 45%, 15% and 7%.
If the project is undertaken the company will need to increase its inventories by $45,000, and its accounts payable will rise by $10,000. The company will realize an additional $750,000 in sales over each of the next four years. The company’s operating costs (not including depreciation) will increase by $540,000 a year. Both sales and the operating cost are expected to grow 4.5% annually during the life of the project. The company’s tax rate is 35%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $55,000 after three years. The project’s WACC is 10.5%. What is the project’s net present value (NPV)? What is the IRR? Should the project be accepted? Why or why not?

Using the following information, find the Expected Return, Variance, and Standard Deviation for the returns on Stock 1 and Stock 2. Also, find the Covariance and Correlation Coefficient between the returns on Stocks 1 and 2. If you invest $10,000 in stock X and $25,000 in stock Y, what would be the expected return and risk on your portfolio?

Q29) An investment pays $2,500 per year for the first 6 years, $3,000 per year for the next 8 years, and $5,000 per year the following 10 years (all payments are at the end of each year). If the discount rate is 7% compounding quarterly, what is the fair price of this investment?

Q30) The required return on ABC Corporation’s stock is 10.4%, beta is 1.7, and a risk-free asset is 5%. What would be the required rate of return on the stock if the stock’s beta increased to 2.15 while the risk-free rate and market return remained unchanged?

Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm’s optimal capital structure and what is the weighted average cost of capital at the optimal structure?

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Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm’s optimal capital structure and what is the weighted average cost of capital at the optimal structure?

Exercise 20-6
Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue’s 30-year life. Schumann’s investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today’s market. Neither they nor Schumann’s management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates will increase.

A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Schumann’s marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period.

a. Perform a complete bond refunding analysis. What is the bond refunding’s NPV?
b. At what interest rate on the new debt is the NPV of the refunding no longer positive?

Exercise 18-6
As part of its overall plant modernization and cost reduction program, Western Fabrics’ management has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be 20% versus the project’s required return of 12%.

The loom has an invoice price of $250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at the end of each year. In the event that the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $20,000 per year paid at the end of each year. The loom falls in the MACRS 5-year class, and Western’s marginal federal-plus-state tax rate is 40%.
Aubey Automation Inc., maker of the loom, has offered to lease the loom to Westen for $70,000 upon delivery and installation (at t=0) plus 4 additional annual lease payments of $70,000 to be made at the ends of Years 1 through 4. (Note that there are 5 lease payments in total.) The lease agreement includes maintenance and servicing. Actually, the loom has an expected life of eight years, at which time its expected salvage value is zero; however, after 4 years, its market value is expected to equal its book value of $42,500. Tanner-Woods plans to build and entirely new plant in 4 years, so it has no interest in either leasing or owning the proposed loom for more than that period.

a. Should the loom be leased or purchased?
b. The salvage value is clearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pre-tax discount rate is 15 percent. What would be the effect of a salvage value risk adjustment on the decision?
c. Assuming that the after-tax cost of debt should be used to discount all anticipated cash flows, at what lease payment would the firm be indifferent to either leasing or buying?