ACT 325 Portfolio Project Description
Problem 1
Santana Rey created Business Solutions on October 1, 2011. Company has been successful and Santana plans to expand her business. She believes that an extra $86,000 is required and is investigating these funding sources.
a. Santana's sister Cicely is willing to invest $86,000 in business as a common shareholder. As Santana presently had about $129,000 invested in business, Cicely's investment would mean that Santana would maintain about 60% ownership and Cicely would have 40% ownership of Business Solutions.
b. Santana's Uncle Marcello is willing to invest $86,000 in business as preferred stockholder. Marcello would purchase 860 shares of $100 par value, 7% preferred stock.
c. Santana's banker is willing to lend her $86,000 on a 7%, 10-years not payable. She would make monthly payments of $1,000 per month for 10 years.
Questions:
1. Create journal entry to reflect initial $86,000 investment under each of the options (a), (b), and (c).
2. Evaluate three proposals for expansion, providing the pros and cons of each option.
3. Which option did you recommend Santana adopt? Describe.
Problem 2
While reviewing March 31, 2012, balance sheet of Business Solutions, Santana Rey notes that business has built a large cash balance of $68,057. Its most recent bank money market statement shows that the funds are earning an annualized return of 0.75%, so Rey decided to make several investments with the wish to earn a higher return on the idle cash balance. Accordingly, in April, 2012, Business Solutions makes the following investments in trading solutions:
April 16 - Purchase 400 shares of Johnson & Johnson at $50 per share plus $300 commission.
April 30 - Purchase 200 shares of Starbucks Corporation at $22 per share plus $250 commission.
Questions:
1. Create journal entries to record April purchases of trading securities by Business Solutions.
2. On June 30, 2012, per share market price (fair value) of the Johnson & Johnson shares is $55 and the Starbucks shares is $19. Create adjusting entry to record any essential fair value adjustment to its portfolio of trading securities.
Problem 3
Use following selected data from Business Solutions' income statement for the three months ended March 31, 2012, and from its March 31, 2012, balance sheet to complete the requirements before computer services revenue, $25,307; net sales (of goods), $18,693; total sales and revenue, $44,000; cost of goods sold, $14,052; net income, $18,833; quick assets, $90,924; current assets, $95,568; total assets, $120,268; current liabilities, $875; total liabilities, $875, and total equity, $119,393.
Questions:
1. Calculate the gross margin ratio (both with and without services revenues) and net profit margin ratio.
2. Compare the current ratio and acid-test ratio.
3. Calculate the debt ratio and equity ratio.
4. What percent of its assets are current? What percent is long term?
Problem 4
The computer workstation furniture manufacturing that Santana Rey started January is progressing well. As of the end of June, Business Solutions' job cost sheets show following total costs accumulated on three furniture jobs.
Job 6.02 Job 6.03 Job 6.04
Direct materials $1500 $3300 $2700
Direct labor 800 1420 2100
Overhead 400 710 1050
Job 6.02 was started in production in May, and these costs were assigned to it in May: direct materials, $600; direct labor, $180; and overhead, $90. Job 6.03 and 6.04 were started in June. Overhead costs is applied with a predetermined rate based on direct labor costs. Jobs 6.02 and 6.03 are finished in June, and Job 6.04 is expected to be finished in July. No raw materials are used indirectly in June. (Suppose this company's predetermined overhead rate didn’t change over three months).
Questions:
1. Determine the cost of the raw materials used in June for each of the three jobs and in total?
2. How much total direct labor cost is incurred in June?
3. What predetermined overhead rate is used in June?
4. How much cost is transferred to finished goods inventory in June?
Problem 5
After reading the article about activity-based costing in the trade journal for furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In recent month, Rey found that setup costs, inspection costs, and utility costs made up most of its overhead. Extra information about overhead follows:
Activity Cost Driver
Setting up machines $20,000 25 batches
Inspecting components $7,500 5,000 parts
Providing utilities $10,000 5,000 machine hours
Overhead has been applied to output at a rate of 50% if direct labor costs. The following data pertain to Job 6.15.
Direct materials $2500 Number of Parts 400 parts
Direct labor $3500 Machine Hours 600 machine hours
Batches 2 batches
Questions:
1. Determine the total cost of Job 6.15 if Business Solutions applies overhead at 50% of direct labor cost?
2. Find the total cost of job 6.15 is Business Solutions uses activity based costing?
3. Which approach to assigning overhead gives a better representation of the costs incurred to produce Job 6.15? Describe.
Problem 6
Santana Rey expects second quarter 2012 sales of her new line of computer furniture to be the same as first quarter sales (reported below) without any changes in strategy. Monthly sales averaged 40 desk units (sales price of $1,250) and 20 chairs (sales price of $500).
Business Solutions Segment Income Statement* For Quarter Ended March 31, 2012
Sales † $180,000
Cost of goods sold‡ 115,000
Gross Profit 65,000
Expenses
Sales commissions (10%) 18,000
Advertising expenses 9,000
Other fixed expenses 18,000
Total expenses 45,000
Net income $20,000
*Reflect revenue and expense activity only related to the computer furniture segment.
†Revenue: (120 desks X $1,250)+ (60 chairs X $500) = $150,000+$30,00 + $180,000
‡ Cost of goods sold: (120 chairs C $750) + (60 chairs X $250) + $10,000 = $115,000
Santana Rey believes that sales would increase each month for next three months (April - 48 desks, 32 chairs: May - 52 desks, 35 chairs: June - 56 desks, 38 chairs) if selling prices are reduced to $1,150 for desks and $450 for chairs, and advertising expenses are increased by 10% and remain at that level for all three months. The products' variable cost will remain at $750 for desks and $250 for chairs. The sales staff would continue to earn a 10% commission, the fixed manufacturing costs per month would remain at $10,000 and other fixed expenses would remain at $6,000 per month.
Questions:
1. Create budgeted income statements for each of the months of April, May, and June which show the expected results from implementing the proposed changes. Use three-column format, with one column for each month.
2. Use budgeted income statements from part 1 to recommend whether Santana Rey must implement the proposed changes. Describe.
Problem 7
Santana Rey is considering the purchase of equipment for Business Solutions which will allow the company to add the new product to its computer furniture line. The equipment is expected to cost $300,000 and to have the six-year life and no salvage value. It would be depreciated on the straight line basis. Business Solutions expects to sell 100 units of the equipment's products each year. The expected annual income related to this equipment follows.
Sales $375,000 Costs Materials, labor, and overhead (except for depreciation) 200,000 Depreciation of new equipment 50,000 Selling and administrative expenses 37,500 Total costs and expenses 287,500 Pretax income 87,500 Income taxes (30%) 26,250 Net income $61,250
Question:
1. Calculate the (1) payback period and (2) accounting rate of return for this equipment. (Record answers as percents, rounded to one decimal.)