Question & Answer

What is the price elasticity of demand at the point (a) where the demand curve crosses the vertical axis; (b) where it crosses the horizontal axis?

Indicate where the following items would be shown on a balance sheet. (a) A lien that was attached to the land when purchased. (b) Landscaping costs. (c) Attorney’s fees and recording fees related to purchasing land. (d) Variable overhead related to construction of machinery. (e) A parking lot servicing employees in the building. (f) Cost of temporary building for workers during construction of building. (g) Interest expense on bonds payable incurred during construction of a building. (h) Assessments for sidewalks that are maintained by the city. (i) The cost of demolishing an old building that was on the land when purchased.

1.              : What are Krista Russell’s options for responding to Tate’s decision? What should she do now? Why?

Solve Problem 20.26 except that the height = 60 mm

Value-added and non-value-added activities Some activities add value to an organisation, while others do not.   Required Determine whether each of the following activities is likely to be value-added or non-value-added and explain your choice. (a)          Inspection activities (b)          Moving materials to work stations (c)           Manufacturing extra inventory to keep employees busy (d)          Packing to fill a customer order (e)           Product design initiatives

Explain how the credit crisis in the 2008–2009 period affected some savings institutions. Compare the causes of the credit crisis to the causes of the SI crisis in the late 1980s. (LO6)

Cleveland Company has a stock portfolio valued at $4,000 (available-for-sale). Its cost was $3,300. If the Fair Value Adjustment account has a debit balance of $200, prepare the journal entry at year-end.

The terms ‘doves’ and ‘hawks’ are frequently used to describe central banks. How do these terms relate to the Taylor rule?

Using the availability heuristic, explain hindsight bias.

How would the principle of weighing up marginal costs and benefits apply to a worker deciding how much overtime to work in a given week?

What is the difference between a future taxable amount and a future deductible amount? When is it appropriate to record a valuation account for a deferred tax asset?

Fontenot Corporation sold some machinery to its majority owner Gray (an individual who owns 60 percent of Fontenot). Fontenot purchased the machinery for $100,000 and has claimed a total of $40,000 of depreciation expense deductions against the property. Gray will provide Fontenot with $10,000 of cash today and a $100,000 note that will pay Fontenot $50,000 one year from now and $50,000 two years from now.  a. What gain or loss does Fontenot realize on the sale? b. What are the amount and character of the gain or loss that Fontenot must recognize in the year of sale (if any) and each of the two subsequent years? (Hint: Use the Internal Revenue Code and start with §453; please give appropriate citations.)

On January 1, 2014, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting January 1, 2014. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke’s incremental borrowing rate is 10%, and the Lessor’s implicit rate is unknown. Instructions (a) What type of lease is this? Explain. (b) Compute the present value of the minimum lease payments. (c) Prepare all necessary journal entries for Burke for this lease through January 1, 2015.

Explain the differences between financial and non-financial performance measures and give two examples of each.             (LO1)

At the end of 2014, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. Given the nature of Sawyer’s production process, the equipment is for special use. (No secondhand market values are available.) The equipment will be obsolete in 2 years, and Sawyer’s accountants have developed the following cash flow information for the equipment. 7 9 Net Cash Flow Probability Year Estimate Assessment 2015 $6,000 40% 9,000 60% 2016 $ (500) 20% 2,000 60% 4,000 20% Scrap value 2016 $ 500 50% 900 50% Instructions Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2014. Use a 6% discount rate. Assume all cash flows occur at the end of the year.

Incentives and risk management Part B Once the Western Australian operation has settled and sales are going well, Bernard considers further expansion opportunities. Given the mature life cycle status of the brewery industry, declining consumption, strong competition from leading producers and competition from substitute products, Bernard wants to expand his business in other value-adding ways. He calls on his management team for ideas. One potential idea worth pursuing comes from Damien Poulsen, a long-term employee.   Damien Poulsen has been Bernard’s one and only production manager in charge of Mountain Mist’s spring water. Bernard has great respect for Damien’s work ethic and long-standing commitment to Mountain Mist. Damien is also a qualified microbiologist and employs a team of experts to extract and process the Mountain Mist spring water for the brewing department. A large portion of the Spring Water department’s (SWD) activities relates to the quality control (QC) function for Mountain Mist Brewery. Their main requirement is to ensure the spring water continually meets Mountain Mist’s strict specifications. The mix of sulphates, calcium, phosphorous and magnesium must be correct as excessive amounts of any ingredient can result in poor tasting ales. It can also lead to residue forming on the ale containers.   As the spring water from Mountain Mist’s Macedon Ranges spring provides beautifully tasting spring water (free of excessive mineral content) and more than enough spring water for the beer manufacture, Damien Poulsen suggested to Bernard that they expand production into bottled water sales. He points out that spring water is the fastest growing beverage type in Australia and Mountain Mist would be foolish not to take advantage of the opportunity to participate in this market. Australians spent more than $500 million on bottled water last year, a 1.6 per cent increase on the previous year. The current key competitors in the bottled water market include Coca-Cola Amatil Limited (42.0 per cent), P&N Beverages Australia Pty Ltd (22.0 per cent) and others (36.0 per cent). These key competitors own prominent brands including Mount Franklin, Peats Ridge and Cool Ridge. Damien suggest to Bernard that a niche marketing opportunity exists and that they should compete with the higher-priced sparkling and still water brands, which include European imports such as San Pellegrino and Perrier.   Damien is also aware of exploiting the growing market sensitivities towards increased water consumption. For instance, climate change has increased demand for bottled water (because of the extended hot summers). However, the demand remains high throughout the cooler seasons of the year for other sports and health-related reasons. The factors that significantly contribute to increasing demand for bottled water include general health awareness and greater knowledge of the benefits of adequate water consumption, concerns about the microbiological condition and taste of tap water in some regions, and that fact that many consumers are beginning to acknowledge bottled water as a healthy alternative to high-sugar soft drinks.   In Damien’s proposal, he outlines the cost structure required for the bottled spring water proposal. He builds his figures from the 2009 industry data. He bases his figures on the average retail price for 1-litre of bottled water ($2.53). Damien outlines the purchases that are most significant to this industry. They include containers, labels and other packaging materials. He explains how the costs for water extraction, such as pumping equipment, have been included in the depreciation cost (but mentions that these costs are currently paid for in full by the brewery). Water costs are relatively minor. That is, they pay the Macedon Ranges Shire Council fees for ground water extraction; however, the fees are insignificant.   In the proposal, Damien also mentions that he could draw on existing labour for the production processes, but will need a small number of additional staff to handle the clerical, sales and marketing functions. The total labour costs are equivalent to 14.7 per cent of revenue. In this machine-intensive industry, approximately 53 per cent of total labour is required for managerial, clerical, sales, marketing and other functions. The remaining 47 per cent of total labour is involved in the bottled water production. Damien includes asset acquisitions and associated depreciation costs in his proposal. To begin, he includes full depreciation costs on existing equipment required for the filtration, UV sterilisation and zonation processes that remove undesirable compounds and organic elements from the spring water. Damien also includes the purchase of new assets such as computers and automated bottle production lines in his depreciation costs. In addition, he includes the purchase and depreciation on two trucks required to transport the bottled water to distributors from the Mountain Mist source. In Damien’s list of acquisitions required, he makes mention of new legislative requirements associated with environmental emissions. With this impending legislation, Damien allocates funds to the newly implemented carbon pollution reduction scheme (CPRS) that will measure, monitor and report on the Mountain Mist carbon emissions. To meet the legislative requirements, Damien needs to allocate a percentage of staff resources (15 per cent of one full-time employee’s wages) and equipment to correctly measure their carbon emissions. He notes that this additional cost will be incurred regardless of the decision to invest in the bottled spring water project.   Damien also includes accounting, auditing, repair, maintenance, market research and advertising as components of ‘other’ costs. Marketing is a significant cost to the bottled water industry given the need to differentiate a largely homogeneous product. He explains that, in Europe, for water to be designated ‘natural’ it must be bottled at the spring. This could be an important marketing feature for Mountain Mist bottled spring water, even though Australia does not have such a labelling requirement. He mentions how competitor water that has been transported in holding tanks to bottlers can risk contamination. As such, water that is not bottled on site may require chlorination which in turn affects the taste. Mountain Mist water, as it is bottled onsite, can truly offer the ‘natural’ European equivalent marketing feature. Damien explains how they would pitch this style of marketing in the up-market hospitality channel representing pubs, restaurants, cafes, cinemas and arenas. They will also focus on marketing to supermarkets and convenience stores as sales through these major outlets comprise 67 per cent of total bottled water sales, but, in this setting, they will not compete on price. He points out that while price is important (that is, they will compete with house brands and generics), the image, particularly from the large brands, remains the most important factor in establishing market share. The niche market could bear additional costs for perceived additional quality and image created by the brewery arm.   The main thrust of Damien’s argument is for Mountain Mist to exploit its economies of scope by expanding its beverage offerings. He explains that while materials and packaging are the main cost pressures, he hopes to achieve up to 60 per cent gross profit margin on the Mountain Mist private-label bottle water sales. He argues that he can reduce many of the costs. For example, input costs will be reduced as Mountain Mist has the spring water onsite. Rent is not applicable as Mountain Mist owns the Macedon Ranges facilities. In addition, wages, much of the depreciation and other costs can be allocated to the brewing division as it is currently paying for them anyway.   As Bernard evaluates Damien’s $30 million bottled water proposal, he also considers the key success factors in the bottled water manufacturing industry. ·           Control of distribution arrangements — arrangement of distribution ensures timely delivery, low costs and maximised product reach. ·           Economies of scope — economies of scope refers to the efficiencies in distribution, marketing and administration when a firm produces a wide range of beverage brands. ·           Having a good reputation — first movers have an advantage in this industry in that they can establish strong reputations, which new competitors need to spend heavily on marketing to match. ·           Market research and understanding — market research into consumer profiles, attitudes and preferences are important for informing both brand promotion and bottle and label design. ·           Marketing of differentiated products — product innovation and differentiation (including packaging) contributes significantly to selling the industry’s products. ·           Economies of scale — scale economies are very important to a low value product since high volumes must be produced and sold to achieve reasonable profits. ·           Establishment of brand names — strong brand names contribute to the appeal of bottled water as an accessory, as well as building a product’s reputation of quality. This allows bottlers to both win market share within particular consumer segments, and to charge premium prices. ·           Attractive product presentation — the design of the bottle is of importance in winning market share and justifying higher pricing in this competitive industry. ·           Effective product promotion — use of in-store merchandising can have a strong influence on consumer choice.   This all sounds quite interesting to Bernard, but he does wonder at the affect of the carbon pollution reduction scheme and the more recent negative publicity bottled water is receiving. This negative publicity surrounds the view that bottled water is not environmentally friendly as it produces significant greenhouse gas emissions and plastic bottles commonly end up in landfill.   Bernard wonders at the viability of Damien’s $30 million proposal.   Required (a)          Advise Bernard on the types of strategic risks you might associate with Mountain Mist. In your discussion, include the risks associated with the expansion of Mountain Mist’s brewing to Western Australia and into the spring water market. You may also wish to discuss the beverage industry in general. (b)          What do you consider the level of risk exposure for Mountain Mist? Justify using the risk profile discussion in this chapter. (c)           What suggestions do you have for Bernard to overcome these risks? (LO2, 3, 4 and 6)

Johnson & Johnson, the world’s leading and most diversified health-care corporation, serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular health-care market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2011 annual report is shown in the notes to the financial statements below.     Instructions (a) What was the cost of buildings and building equipment at the end of 2011? (b) Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment? (c) What was the actual interest expense paid by the company in 2011? (d) What is Johnson & Johnson’s free cash flow? From the information provided, comment on Johnson & Johnson’s financial flexibility.

What are some of the techniques of disclosure for the balance sheet?

Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain.

Sustainability disclosures; management accounting tools Search the newspapers/web to find examples of Australian companies disclosing their sustainability practices using management accounting information or tools such as the balanced scorecard. Provide a report on your findings.             (LO 1 and 4)

Cost function using regression; other potential cost drivers The new cost analyst in your accounting department just received a computer-generated report that contains the results of a simple regression analysis. The analyst was estimating the costs of the marketing department using units sold as the cost driver. Summary results of the report are shown below.   Required (a)          Write an equation for the cost function based on the regression analysis. (b)          What does the adjusted R-square tell you? (c)           What other cost drivers could potentially explain marketing costs? Explain.

Assume Rafael can earn an 8 percent after-tax rate of return. Would he prefer $1,000 today or $1,500 in five years?

Use the information in BE7-9 for Wood. Assume that the receivables are sold with recourse. Prepare the journal entry for Wood to record the sale, assuming that the recourse liability has a fair value of $7,500.

What is the purpose of a fair value hedge?

] Lindley has become very frustrated in researching a tax issue using keyword searches.  What suggestions can you give her?