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1.       High Hopes Incorporated, a new start-up company, has just hired you as their new business consultant. High Hopes’ management is faced with making some quick decisions as to which accounting methods they should use. They have provided you with the following projected financial information for 2015:

On 1/1/15
    

Acquire equipment for $40,000 cash. The equipment has a 5-year life and a $5,000 salvage value.

During 2015
    

Purchase inventory:
    

 

 
    

Date
    

Number of Units
    

Unit Price

 
    

1/1
    

100
    

$115

 
    

7/1
    

150
    

$110

 
    

11/1
    

110
    

$100

 
    

Total
    

360
    

 

 
    

Sell 200 units of inventory at $400 each.

 
    

Other expenses for the year, excluding depreciation, total $10,000.

 

They are considering two alternatives for these items:

1. Double-declining balance depreciation and the FIFO periodic inventory method, OR

 2. Straight-line depreciation and the LIFO periodic inventory method.

It’s your first day on the job. They have asked you to indicate the impact of these alternative accounting method choices on their income statement. Quickly, you dash back to your office and compute the income statement for the first year of operation under each alternative.

In your haste, you spill coffee on all of your work papers and you can read only the following:

 
    

Alternative

 
    

1
    

2

Sales
    

$ 80,000
    

$ 80,000

Cost of goods sold
 

 Gross margin
  
Depreciation expense

Other operating expenses
    

 10,000
    

 10,000

 Net income  Recalculate the missing information on the alternative income statements and enter the information in the table above. Enter digits only( no commas or $)

QUESTION 2

1.      During your presentation to High Hopes’ management, you are asked if these alternative accounting methods have any impact on the balance sheet – if so, what accounts will be affected? What is your response
 

QUESTION 3

1.      High Hopes’ management is concerned that the use of an accelerated method of depreciation will make their equipment less valuable (if they should decide to sell it). What is your response

QUESTION 4

1.       Finally, High Hopes’ management is also concerned about choosing the proper accounting methods for tax purposes. Do they need to use the same depreciation method for tax and book purposes?

        

yes

        

no

2 points   

QUESTION 5

1.       Do they need to use the same inventory method for tax and book purposes

        

yes

        

no

2 points   

QUESTION 6

1.       The fiscal 2006 Toys ‘R’ Us annual report contains the following footnote:

Merchandise Inventories

Merchandise inventories for the U.S.A. toy store operations, which represent over 60% of total inventories, are stated at the lower of LIFO (last-in, first-out) cost or market . . . If inventories had been valued at the lower of FIFO (first-in, first-out) cost or market, inventories would show no change at January 31, 2006 or February 1, 2005. (emphasis added)

How is it possible to have LIFO and FIFO inventory valuation the same?

 

4 points   

 

QUESTION 7

1.      On January 1, 2010, Mason Enterprises Corporation issues $150,000,000 par value, 10% semiannual coupon bonds due in 10 years. The market-required interest rate on the date of issue was 12% (i.e., bonds were priced to yield 12%).

 What was the issue price of the bonds on January 1, 2010?

 

10 points   

QUESTION 8

1.        Did they sell at a discount or premium?

2 points   

QUESTION 9

1.        What amount would be recorded for interest expense on July 1, 2010?

4 points   

QUESTION 10

1.        What would be the book value of the bonds payable on July 1, 2010?

4 points   

QUESTION 11

1.       The following information is required for this and all remaining questions. Click on the following link Kraft Foods to access the Form 10-K annual report of Kraft Foods Group Inc. The following additional information is available.

1. Money amounts are reported in millions of dollars.

2. You will need to use the following pages in the annual report to answer all the exam questions in this section: pages 34 to 38 - Financial statements and pages 39 to 70 - Notes to financial statements.

 

Question 3a:

What is dollar amount of common stock repurchased by Kraft Foods in 2014?


QUESTION 12

1.       What inventory costing method is being used by Kraft? Based on our class discussions, what is the assumption about the order of inventory purchases under that method? Why has Kraft not reported any LIFO Reserve?

 

6 points   

QUESTION 13

1.                   Calculate ROE for 2014. Show that the ROE value is the same using the disaggregated components - profit margin, asset turnover and financial leverage. Also, calculate adjusted ROA.

ROE
    

ROA
    

Profit Margin
    

Asset Turnover
    

Financial Leverage
    

Adjusted ROA


    

10 points   

QUESTION 14

1.       What are the "Asset impairment and exit costs" on the company's Income Statement? Based on our discussions in class, what should we look out for when a company accounts for such type of expenses?

 

4 points   

QUESTION 15

1.       What is the total outstanding long term debt amount for Kraft Foods in the year 2014? Does the long term debt carry variable or fixed rate of interest? Calculate the two solvency ratios for Kraft for the year 2014.

 

 

 

8 points   

QUESTION 16

1.       Calculate the accounts receivable turnover and average collection period for the year 2014. (Hint: use gross accounts receivables for your calculations, not net!)

 

4 points   

QUESTION 17

1.       What was the effective tax rate for Kraft Foods in 2014? Has the company managed its tax rate better in 2014 compared to previous years? What is the dollar amount of deferred tax assets and deferred tax liabilities in 2014?

 

6 points   

QUESTION 18

1.                    How does Kraft account for its R&D costs?

 

2 points   

QUESTION 19

1.       What is the reason for the change in goodwill from 2013 to 2014

QUESTION 20

1.       Calculate Kraft Foods' current and quick ratios for the year 2014. What do these ratios tell you about the company's liquidity position in the year 2014.

5 points   

QUESTION 21

1.       Bonus question: What is the estimated useful life of Kraft’s property, plant and equipment as of the end of 2014?

 



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