Answer:
Characteristics Steam Chlorine Iodophor QUATS* AAS**
Gram-positive bacteria Best Good Good Good Good
Gram-negative bacteria Best Good Good Poor Fair
Spores Good Good Poor Fair Fair
Yeasts and molds Best Good Good Fair Poor
Bacteriophage Best Good Fair Poor Poor
Optimum pH N/A 4-5 3 10 2-2.5
Penetration Poor Good Poor Good Excellent
Corrosive No Yes Slight No Slight
Irritation N/A Yes No No Yes
Hard water affects No No Slight Yes/No Slight
Shelf-life N/A Short Long Long Long
Organic matter affects No Yes Slight Low Slight
Stable in 140°F H2O N/A No No Yes Yes
Leaves residue No No Yes Yes Yes
Flavor/odor No Yes Yes No No
Ease of use Poor Excellent Excellent Foam Foam
Use with detergent No No/yes Yes No/yes No
Maximum use by FDA/USDA None 200 ppm*** 25 ppm**** 200 ppm***** 200-400 ppm
Cost High Low Moderate Moderate Moderate
Where to use Equipment Equipment, floors, walls Rubber, plastic crates Aluminum, walls, floors Stainless steel, CIP
Henry Ford famously mass-produced cars at the beginning of the twentieth century, starting Ford Motor Company. He made millions because mass production made cars cheap to make, and he passed some of the savings to the consumer in the form of a low price. Cars became a common sight in the United States thereafter. Keeping total revenue and its relationship with price in mind, do you expect the demand for cars to be elastic or inelastic given the story of Henry Ford?
Answer:
Elastic
Explanation:
Elasticity of demand measures the responsiveness of quantity demanded to changes in price of a good
Elasticity of demand = percentage change in quantity demanded / percentage change in price
demand is elastic if a small change in price leads to a greater change in quantity demanded
Because there are a lot of cars available, if the price of cars are increased, consumers can easily shift to the consumption of cheaper cars
Demand is inelastic if a small change in price leads to little or no change in quantity demanded
The comparative statements of Cullumber Company are presented here.
CULLUMBER COMPANY
Income Statements
For the Years Ended December 31
2017 2016
Net sales $1,899,240 $1,759,200
Cost of goods sold 1,067,240 1,014,700
Gross profit 832,000 744,500
Selling and administrative expenses 508,700 487,700
Income from operations 323,300 256,800
Other expenses and losses
Interest expense 23,200 21,200
Income before income taxes 300,100 235,600
Income tax expense 93,200 74,200
Net income $ 206,900 $ 161,400
CULLUMBER COMPANY
Balance Sheets
December 31
Assets 2017 2016
Current assets
Cash $ 60,100 $ 64,200
Debt investments (short-term) 74,000 50,000
Accounts receivable 126,500 111,500
Inventory 127,200 116,700
Total current assets 387,800 342,400
Plant assets (net) 663,000 534,300
Total assets $1,050,800 $876,700
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 168,700 $154,100
Income taxes payable 44,700 43,200
Total current liabilities 213,400 197,300
Bonds payable 234,000 214,000
Total liabilities 447,400 411,300
Stockholders’ equity
Common stock ($5 par) 290,000 300,000
Retained earnings 313,400 165,400
Total stockholders’ equity 603,400 465,400
Total liabilities and stockholders’ equity $1,050,800 $876,700
All sales were on account. Net cash provided by operating activities for 2017 was $246,000. Capital expenditures were $135,000, and cash dividends were $58,900.
Compute the following ratios for 2017. (Round all answers to 2 decimal places, e.g. 1.83 or 1.83%.)
(a) Earnings per share $
(b) Return on common stockholders’ equity
%
(c) Return on assets
%
(d) Current ratio
(e) Accounts receivable turnover
times
(f) Average collection period
days
(g) Inventory turnover
times
(h) Days in inventory
days
(i) Times interest earned
times
(j) Asset turnover
times
(k) Debt to assets ratio
%
(l) Free cash flow $
Answer:
Cullumber Company
(a) Earnings per share = Net Income / No. of outstanding common shares
= $ 206,900/58,000
$ 3.57
(b) Return on common stockholders’ equity = Net Income/Equity
= $ 206,900/603,400 * 100
= 34.29%
(c) Return on assets = Net Income/Assets * 100
= $206,900/$1,050,800 * 100
= 19.69%
(d) Current ratio = Current Assets/ Current Liabilities
= $387,800/213,400
= 1.82
(e) Accounts receivable turnover = Sales /Average Receivable
= $1,899,240/119,000
= 15.96 times
Average receivable = (126,500 + 111,500)/2 = 119,000
(f) Average collection period = Average Receivable/Sales * 365
= 119,000/1,899,240 * 365
= 22,87 days
(g) Inventory turnover = cost of goods sold/average inventory
= 1,067,240/121,950
= 8.75 times
Average Inventory = )127,200 + 116,700 )/2 = 121,950
(h) Days in inventory = 365/8.75
41.71 days
(i) Times interest earned = EBIT/Interest Expense
= $323,300/23,200
= 13.94 times
(j) Asset turnover = Sales/Average Assets
= 1.97 times
(k) Debt to assets ratio = Total Liabilities/Total Assets
= $447,400/$1,050,800 * 100
= 42.58%
(l) Free cash flow
= Operating Cash Minus CAPEX
= $246,000 - $135,000 = $111,000
= $111,000
Explanation:
a) Data:
CULLUMBER COMPANY
Income Statements
For the Years Ended December 31
2017 2016
Net sales $1,899,240 $1,759,200
Cost of goods sold 1,067,240 1,014,700
Gross profit 832,000 744,500
Selling and administrative expenses 508,700 487,700
Income from operations 323,300 256,800
Other expenses and losses
Interest expense 23,200 21,200
Income before income taxes 300,100 235,600
Income tax expense 93,200 74,200
Net income $ 206,900 $ 161,400
CULLUMBER COMPANY
Balance Sheets
December 31
Assets 2017 2016
Current assets
Cash $ 60,100 $ 64,200
Debt investments (short-term) 74,000 50,000
Accounts receivable 126,500 111,500
Inventory 127,200 116,700
Total current assets 387,800 342,400
Plant assets (net) 663,000 534,300
Total assets $1,050,800 $876,700
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 168,700 $154,100
Income taxes payable 44,700 43,200
Total current liabilities 213,400 197,300
Bonds payable 234,000 214,000
Total liabilities 447,400 411,300
Stockholders’ equity
Common stock ($5 par) 290,000 300,000
Retained earnings 313,400 165,400
Total stockholders’ equity 603,400 465,400
Total liabilities and
stockholders’ equity $1,050,800 $876,700
Others:
All sales were on account. Net cash provided by operating activities for 2017 was $246,000. Capital expenditures were $135,000, and cash dividends were $58,900
b) Explanation:
Asset Turnover = Sales/Average Assets
= $1,899,240/$963,750
= 1.97 times
Average assets = ($1,050,800 + $876,700 )/2 = $963,750
Debit to asset ratio = Total Liabilities/Total Assets
= $447,400/$1,050,800 * 100
= 42,58%
Free Cash Flow = Operating Cash Minus CAPEX
= $246,000 - $135,000 = $111,000
The Polaris Company uses a job-order costing system. The following transactions occurred in October:
a. Raw materials purchased on account, $210,000.
b. Raw materials used in production, $191,000 ($152,800 direct materials and $38,200 indirect materials).
c. Accrued direct labor cost of $49,000 and indirect labor cost of $21,000.
d. Depreciation recorded on factory equipment, $104,000.
e. Other manufacturing overhead costs accrued during October, $129,000.
f. The company applies manufacturing overhead cost to production using a predetermined rate of $7 per machine-hour. A total of 76,100 machine-hours were used in October.
g. Jobs costing $513,000 according to their job cost sheets were completed during October and transferred to Finished Goods.
h. Jobs that had cost $450,000 to complete according to their job cost sheets were shipped to customers during the month. These jobs were sold on account at 32% above cost.
Required:
a. Prepare journal entries to record the transactions given above.
b. Prepare T-accounts for Manufacturing Overhead and Work in Process.
Answer:
Journal entries are given below
Explanation:
We should always record the assets and expenses on the debit side of the account and liabilities and capital on the credit side of the account.
a. Raw materials purchased
Account DEBIT CREDIT
Raw material 210,000
Payables 210,000
b. Raw materials used in production
Account DEBIT CREDIT
Work in process inventory 152,800
Manufacturing Overhead 38,200
Raw material 191,000
c. Accrued direct labor cost
Account DEBIT CREDIT
Work in process 49,000
Manufacturing Overhead 21,000
Wages payable 70,000
d. Depreciation recorded on factory equipment
Account DEBIT CREDIT
Depreciation 104,000
Accumulated depreciation 104,000
e. Other manufacturing overhead
Account DEBIT CREDIT
Manufacturing Overhead 129,000
Account payable 129,000
f. The company applies manufacturing overhead cost to production
Account DEBIT CREDIT
Work in process inventory 532,700
(76,100 x $7)
Manufacturing Overhead 532.700
g. Job cost sheets were completed
Account DEBIT CREDIT
Finished goods inventory 513,000
Work in process inventory 513,00
h. Job cost sheets were shipped to customers
Account DEBIT CREDIT
Cost of goods sold 450,000
Finished goods inventory 450,000
Tiger Furnishings produces two models of cabinets for home theater components, the Basic and the Dominator. Data on operations and costs for March follow:
Basic Dominator Total
Units produced 950 500 1,450
Machine-hours 3,200 2,400 5,600
Direct labor-hours 2,700 1,100 3,800
Direct materials costs $9,600 $3,900 $13,500
Direct labor costs 63,700 37,700 101,400
Manufacturing overhead
costs 130,340
Total costs $245,240
Required:
Compute the predetermined overhead rate assuming that Tiger Furnishings uses direct labor-hours to allocate overhead costs.
Answer:
Tiger Furnishings
The predetermined overhead rate
= $34.30 per direct labor hour
Explanation:
a) Data and Calculations:
Basic Dominator Total
Units produced 950 500 1,450
Machine-hours 3,200 2,400 5,600
Direct labor-hours 2,700 1,100 3,800
Direct materials costs $9,600 $3,900 $13,500
Direct labor costs 63,700 37,700 101,400
Manufacturing overhead costs 130,340
Total costs $245,240
b) Computation of the Predetermined overhead rate
= Total manufacturing overhead costs divided by total direct labor hours
= $130,340/3,800
= $34.30 per direct labor hour
If the owner contributes 9200 and the owner withdraws 44500, how much is net income
Presented below is income statement information of the Schefter Corporation for the year ended December 31, 2021.
Sales revenue $504,000
Salaries expense 80,300
Interest revenue 6,600
Advertising expense 11,250
Gain on sale of investments 8,900
Cost of goods sold 277,200
Insurance expense 13,850
Interest expense 3,800
Income tax expense 39,500
Depreciation expense 23,000
Required:
1. Prepare the necessary closing entries at December 31, 2013.
2. Record the closure of revenue accounts.
3. Record the closure of expense accounts.
4. Record the transfer of the net profit.
Answer:
Explanation:
Please see attached sheet
Prepare an adjusted trial balance (LO3-3, 3-4) [The following information applies to the questions displayed below.] The December 31, 2021, unadjusted trial balance for Demon Deacons Corporation is presented below. Accounts Debit Credit Cash $ 10,000 Accounts Receivable 15,000 Prepaid Rent 7,200 Supplies 4,000 Deferred Revenue $ 3,000 Common Stock 11,000 Retained Earnings 6,000 Service Revenue 51,200 Salaries Expense 35,000 $ 71,200 $ 71,200 At year-end, the following additional information is available:______. 1. The balance of Prepaid Rent, $7,200, represents payment on October 31, 2021, for rent from November 1, 2021, to April 30, 2022. 2. The balance of Deferred Revenue, $3,000, represents payment in advance from a customer. By the end of the year, $750 of the services have been provided. 3. An additional $700 in salaries is owed to employees at the end of the year but will not be paid until January 4, 2022. 4. The balance of Supplies, $4,000, represents the amount of office supplies on hand at the beginning of the year of $1,700 plus an additional $2,300 purchased throughout 2021. By the end of 2021, only $800 of supplies remains
Answer:
1. December 31
Dr Rent expense 2,400
Cr Prepaid rent $2,400
2. Dr Deferred revenue $750
Service revenue $750
3. December 31
Dr Salaries expense $700
Cr Salaries payable $700
4. December 31
Dr Supplies expense $3,200
Cr Supplies $3,200
Explanation:
Preparation of Journal entries
1. Since Rent expense for 6 months is the
amount of $7,200 this means that the Rent expense for 2 months which is November and December will be calculated as 7,200 x 2/6
= $2,400 and recorded as :
December 31
Dr Rent expense 2,400
Cr Prepaid rent $2,400
( To record rent expense)
2. Based on the information given we were told that by year end the amount of $750 of the services have been provided which means that the Journal entry will be.
December 31
Dr Deferred revenue $750
Service revenue $750
( To record service revenue)
3. Based on the information given we were told that the an additional amount of $700 in salaries is owed to employees but will not be paid until January 4 which means that the Journal entry will be :
December 31
Dr Salaries expense $700
Cr Salaries payable $700
( To record salaries expense)
4. Since Supplies expense which is calculated as Beginning supplies 1,700+ Supplies purchases 2,300- Ending supplies 800 will gives us $3,200 the Journal entry for supplies will be recorded as :
December 31
Dr Supplies expense $3,200
Cr Supplies $3,200
( 1,700+2,300-800)
( To record supplies expense)
Acklin Company has two products: A and B. Annual production and sales are 600 units of Product A and 900 units of Product B.The company has traditionally used direct labor-hours as the basis for applying all manufacturing overhead to products.Product A requires 0.5 direct labor hours per unit and Product B requires 0.3 direct labor hours per unit.The total estimated overhead cost for the next period is $63,322.The company is now considering switching to an activity-based costing system. The new activity-based costing system would have three overhead activity cost pools- Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows:Estimated Overhead Expected Activity (Allocation Base)Activity Pool Cost Product A Product B TotalActivity 1 $18,900 700 200 900Activity 2 15,631 1,000 100 1,100General factory 28,791 300 270 570Total $63,322 (Note: The General Factory activity pool's costs are allocated on the basis of direct labor hours.)1. The overhead cost per unit of Product A under the traditional costing system is closest to:A) $10.50B) $55.55C) $25.26D) $7.112. The overhead cost per unit of Product A under the activity-based costing system is closest to:A) $25.26B) $73.44C) $42.21D) $55.55
Answer:
1. B $55.55
2.
Explanation:
1. The overhead cost per unit of product A under the traditional costing system
Overhead cost per unit = Estimated manufacturing overhead / Direct labor hours
= $63,332 / (570 × 0.5)
= $55.55 per unit
2. Activity rate
At the beginning of the month, the Painting Department of Skye Manufacturing had 20,000 units in inventory, 70% complete as to materials, and 20% complete as to conversion. The cost of the beginning inventory, $28,650, consisted of $22,400 of material costs and $6,250 of conversion costs. During the month the department started 115,000 units and transferred 120,000 units to the next manufacturing department. Costs added in the current month consisted of $229,600 of materials costs and $540,500 of conversion costs. At the end of the month, the department had 15,000 units in inventory, 40% complete as to materials and 10% complete as to conversion. If Skye Manufacturing uses the weighted average method of process costing, compute the costs per equivalent unit of materials and conversion respectively for the Painting Department.
a. $2.00;$4.50
b. $1.82;$4.45
c. $2.05;$4.60
d. $2.05;$4.45
e. $2.25; $4.65
Answer:
a. $2.00; $4.50
Explanation:
Equivalent unit of material = 120,000 units + (15,000 units*40%)
Equivalent unit of material = 120,000 units + 6,000 units
Equivalent unit of material = 126,000 units
Cost per equivalent unit of material = ($22,400 + $229,600) / 126,000 unit
Cost per equivalent unit of material = $252,000 / 126,000 unit
Cost per equivalent unit of material = $2 per unit
Equivalent unit of conversion cost = 120,000 units + (15,000*10%)
Equivalent unit of conversion cost = 120,000 units + 1,500 units
Equivalent unit of conversion cost = 121,500 units
Cost per equivalent unit of conversion = ($6,250 + $540,500) / 121,500 units
Cost per equivalent unit of conversion = $546,750 / 121,500 units
Cost per equivalent unit of conversion = 4.50 per unit.
Nix’It Company’s ledger on July 31, its fiscal year-end, includes the following selected accounts that have normal balances (Nix’It uses the perpetual inventory system). Merchandise inventory $ 44,800 Sales returns and allowances $ 5,100 Retained earnings 129,300 Cost of goods sold 109,200 Dividends 7,000 Depreciation expense 11,700 Sales 161,600 Salaries expense 39,500 Sales discounts 4,300 Miscellaneous expenses 5,000 A physical count of its July 31 year-end inventory discloses that the cost of the merchandise inventory still available is $42,950.Prepare journal entries to close the balances in temporary revenue and expense accounts. Remember to consider the entry for shrinkage.
Answer and Explanation:
The Journal entries are shown below:-
1. Sales Dr, $161,600
To Income summary $161,600
(Being To close a temporary account with credit balances is recorded)
2. Income summary Dr, $176,650
To Sales discount $4,300
To Sales return and allowance $5,100
To Cost of good sold $111,050
To Depreciation expenses $11,700
To Salaries expenses $39,500
To Miscellaneous expenses $5,000
(Being to close a temporary account with a debit balance is recorded)
Working note:-
shrinkage based on physical count = $44,800 - $42,950
= $1,850
Cost of good sold = $109,200 + $1,850
= $111,050
how are you doing today??
Answer:
Good. Thanks for asking how about you?
Explanation:
The prepaid insurance account had a balance of $3,000 at the beginning of the year. The account was debited for $32,500 for premiums on policies purchased during the year, ending on March 31.Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment:
a. The amount of unexpired insurance applicable to future periods is $4,800
b. The amount of insurance expired during the year is $30,700. Refer to the Chart of Accounts for exact wording of account titles.
Answer:
A. Date Account Title Debit Credit
Insurance expense $30,700
($3000+$32500-$4800)
Prepaid insurance $30,700
B. Date Account Title Debit Credit
Insurance expense $30,700
Prepaid insurance $30,700
Assume you are given a minimization linear program that has an optimal solution. The problem is then modified by changing a greater-than-or-equal-to constraint in the problem to a less-than-or-equal-to constraint. Is it possible that the modified problem is infeasible? Answer yes or no and justify. a. Yes, it is possible that the modified problem is infeasible. Modifying one constraint as described could cause the regions to produce alternate optimal solutions. b. Yes, it is possible that the modified problem is infeasible. Modifying one constraint as described could cause the regions to no longer overlap. c. No, it is not possible that the modified problem is infeasible. Modifying one constraint as described will result in an unbounded solution. d. No, it is not possible that the modified problem is infeasible. Modifying one constraint as described has no effect on the feasible region of the other constraints. e. No, it is not possible that the modified problem is infeasible. Modifying one constraint as described will result in alternate optimal solutions.
Answer:
a. Yes, it is possible that the modified problem is infeasible. Modifying one constraint as described could cause the regions to produce alternate optimal solutions.
Explanation:
Mostert Music Company had the following transactions in March:
a. Sold music lessons to customers for $14,000; received $8,400 in cash and the rest on account.
b. Paid $680 in wages for the month.
c. Received a $325 bill for utilities that will be paid in April.
d. Received $3,200 from customers as deposits on music lessons to be given in April.
Based on the information above, prepare a cash basis and an accrual basis income statement.
Answer:
1. Cash income is $10,920
2. Net income is $12,995
Explanation:
1. Cash basis income statement
A cash basis income statement refers to an income statement that records revenue for which cash has been received and expenses for which cash has been paid for in a particular period. Therefore, cash basis income statement is not compliant with the generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).
The cash basis income statement for Mostert Music Company for March can therefore be prepared as follows:
Mostert Music Company
Income Statement (Cash Basis)
For the month ended March
Particulars $
Cash Revenue:
Cash received for music lesson sold 8,400
Deposit received from customers 3,200
Total Cash revenue 11,600
Cash Expenses:
Wages paid (680)
Cash income 10,920
2. Accrual basis income statement
An accrual basis income statement records revenues when they are earned and expenses when they incurred no matter when cash is received or paid. Therefore, an accrual basis income statement is compliant with GAAP or IFRS.
The accrual basis income statement for Mostert Music Company for March can therefore be prepared as follows:
Mostert Music Company
Income Statement (Accrual Basis)
For the month ended March
Particulars $
Revenue:
Total sales to customers 14,000
Expenses:
Wages (680)
Utilities bill (325)
Net income 12,995
You are a newly hired operations manager for Hospital XYZ. You are required to:
Review the current hiring practices for nurses working in the emergency room department. Investigate recent patient complaints concerning bad bedside manner from nurses in labor and delivery.
Review financial requests for Environmental Services to purchase new buffers to wax floors.
Review Information Technology’s concerns regarding a possible information breach. Review request for implementation of new software in the radiology department.
Determine your approach to these tasks. How would you determine how to prioritize your tasks? Who are the stakeholders in each of these scenarios? Is there a need for project management? If so why?
Answer:
Follows are the solution to this question:
Explanation:
follows are the tasks, which is not in the priority order and at hand at Hospital XYZ:
HR domain: share the latest recruitment procedures throughout the emergency department of public health.
Operations: nurse staffing methods for function or treatment.
Funding: Review financial requests for both the purchase of new protections on wax surfaces by protection from the environment.
IT: IT reviews complaints regarding a possible breach of information.
IT: Study application in the physician's office for the implementation of new technology.
If valuing such activities, it should remember, that this patient (client) becomes impacted mainly. The clinicians or staff involved in Tasks 1 & 2, because Task 2, the very first priority must be considered, and also some standards must be developed, by each nurse, with remote care issues.
Information from its daily client is provided to control the staff, and a specific training program is intended for both the newly employed and negative feedback staff.
Respondents-Patients, Professions
Task 1, which directly affects the daily quality of service in a hospital, should be the secondary priority, with such a smaller shortage of hospitals due to customer dissatisfaction.
Members – Patients, medical personnel, permanent employees, doctors.
Task 4 When information violation is alleged, the third priority should to the loss of important patient data to certain other entities that may use for financial gains.
Participants – IT department, patients.
Task 3 will help its hospital cleaner if funds are required to purchase new buffers. Especially in comparison with all the above 3 tasks, it was taken as the fourth priority.
It was important, and that does not affect mostly the client nor would it impact the level of service as large as the three tasks above.
Advisor position-representatives of finance, environment protection, clean folk (sweepers). advisor position
Task 5 Its latest radiology software review application is now to be approved as the last. It indicates why old software is already in place since it is a new program. Consequently, nothing's ever going to stoop or the task in other projects is no slowdowns. It can be achieved as the last goal.
Investors involved-officials of the IT agency, diagnostic agents.
The process improvement throughout the solution of the problems in the hospitals by providing them the necessary importance to identify the priorities of different tasks.
Carmen and Marc form Apple Corporation. Carmen transfers land that is Sec. 1231 property, with an adjusted basis of $18,000 and an FMV of $20,000 in exchange for onehalf of the Apple Corporation stock. Marc transfers equipment that originally costs $28,000 on which he has taken $5,000 in depreciation deductions. The equipment has an FMV of $25,000 and he receives onehalf of the stock and a $5,000 shortterm note. The transaction meets the requirements of Sec. 351. Which statement below is correct?
a. Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes $5,000 as ordinary income.
b. Carmen recognizes no gain and Marc recognizes $2,000 as ordinary income.
c. There is no recognized gain or loss.
d. Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes a $5,000 Sec. 1231 gain.
Answer:
A. Carmen recognizes a $2,000 Sec. 1231 gain and Marc recognizes $5,000 as ordinary income.
Explanation:
Carmen transferred land (Sec. 1231 property) that has adjusted basis $18,000 with a FMV of $20,000. This means there is a gain to be recognized on the transfer of $2,000.
In case of Marc, there is no gain or loss on the transfer of equipment. However, the value of $5,000 short term note received will be recognized as ordinary income.
A. Keeping in view the above provided information, this statement is correct.
B. The transfer does result in a gain for Carmen, therefore, this statement is incorrect.
C. As there is gain for one individual and odinary income to be recoginzed for the other, therefore, this statement is also incorrect.
D. Marc has not transferred property Sec. 1231 instead the transfer was of machinery. Hence, this statement is also incorrect.
Ryan Hope, controller of Hope Inc., provides you with the following information concerning Hope during 2017. (Hope Inc. began operations on January 1, 2017.)
1. Issued 1,000 shares of common stock at $95 per share.
2. Paid $2,600 for each of 12 months to rent office and warehouse space for 2017. The rent was paid on the last day of each month.
3. Made total sales for services of $190,000: $65,000 for cash and $125,000 on account.
4. Purchased land for $32,000.
5. Borrowed $75,000 on December 31. The note payable matures in two years.
6. Salaries and wages totaling $80,000 were paid during the year.
7. Miscellaneous expenses totaling $40,000 were paid during the year.
8. $56,000 was received from customers as payment on account.
9. Declared and paid a dividend of $26,000.
Required:
a. Prepare journal entries for these transactions.
b. Establish T-accounts for each account, and post the journal entries to these T-accounts.
c. Prepare an income statement for 2017.
Answer:
a)
1. Issued 1,000 shares of common stock at $95 per share.
Dr Cash 95,000
Cr Common stock 95,000
2. Paid $2,600 for each of 12 months to rent office and warehouse space for 2017. The rent was paid on the last day of each month.
Dr Rent expense 31,200
Cr Cash 31,200
3. Made total sales for services of $190,000: $65,000 for cash and $125,000 on account.
Dr Cash 65,000
Dr Accounts receivable 125,000
Cr Service revenue 190,000
4. Purchased land for $32,000.
Dr Land 32,000
Cr Cash 32,000
5. Borrowed $75,000 on December 31. The note payable matures in two years.
Dr Cash 75,000
Cr Notes payable 75,000
6. Salaries and wages totaling $80,000 were paid during the year.
Dr Wages expense 80,000
Cr Cash 80,000
7. Miscellaneous expenses totaling $40,000 were paid during the year.
Dr Miscellaneous expense 40,000
Cr Cash 40,000
8. $56,000 was received from customers as payment on account.
Dr Cash 56,000
Cr Accounts receivable 56,000
9. Declared and paid a dividend of $26,000.
Dr Dividends 26,000
Cr Cash 26,000
b)
Cash
debit credit
95,000
31,200
65,000
32,000
75,000
80,000
40,000
56,000
26,000
81,800
Common stock
debit credit
95,000
Rent expense
debit credit
31,200
31,200
Accounts receivable
debit credit
125,000
56,000
69,000
Service revenue
debit credit
190,000
190,000
Land
debit credit
32,000
Notes payable
debit credit
75,000
Wages expense
debit credit
80,000
80,000
Miscellaneous expense
debit credit
40,000
40,000
Dividends
debit credit
26,000
26,000
Retained earnings
debit credit
38,800
26,000
12,800
closing entries
Dr Service revenue 190,000
Cr Income summary 190,000
Dr Income summary 151,200
Cr Rent expense 31,200
Cr Wages expense 80,000
Cr Miscellaneous expense 40,000
Dr Income summary 38,800
Cr Retained earnings 38,800
Dr Retained earnings 26,000
Cr Dividends 26,000
c. Hope, inc.
Income Statement
For the year ended December 31, 2017
Revenues $190,000
Operating expenses:
Rent expense $31,200Wages expense $80,000Miscellaneous expense $40,000 ($151,200)Net income $38,800
Pettit Ice Cream Company produces various ice cream products for which demand is highly seasonal. The company sells more ice cream in warmer months and less in colder ones. Last year, the high point in production activity occurred in August when Pettit produced 50,000 gallons of ice cream at a total cost of $82,000. The low point in production activity occurred in February when the company produced 20,000 gallons of ice cream at a total cost of $46,000.
Required:
a. Use the high-low method to estimate the amount of fixed cost per month incurred by Pettit Ice Cream Company
b. Determine the total estimated monthly cost when 40,000 gallons of ice cream are produced.
c. What factors could cause the estimate determined in Requirement b to be inaccurate?
d. Explain how regression analysis could be used to improve accuracy. Your explanation should in- clude a discussion of the R2 statistic as well as the potential impact of multiple regression analysis.
Answer:
a) Fixed costs = $22,000
b) $70,000
c) The high low cost method is generally inaccurate because it only considers the extremes, the highest and lowest costs and activity levels. Generally costs are not linear, but they might follow a certain tendency. The advantages of the high low cost method is that it is fairly accurate when costs are stable, plus it is much simpler to calculate.
d) Assuming that costs follow a certain tendency, regression analysis is much more exact since it analyses the relationship between different data and different variables. When you analyze only 2 variables, a linear regression analysis will serve you. but if you need to analyse more than two variables, then you must use a multiple regression analysis.
The R² statistic basically measures how one variable's variance is affected by other variables. E.g. if R² is 0.75, then 75% of the variance of A will be explained by the variance of B.
Explanation:
variable cost using high low cost method = (highest activity cost - lowest activity cost) / (highest activity level - lowest activity level) = ($82,000 - $46,000) / (50,000 - 20,000) = $36,000 / 30,000 gallons of ice cream = $1.20 per gallon of ice cream
fixed costs = $82,000 - (50,000 x $1.20) = $22,000
40,000 gallons
$22,000 + (40,000 x $1.20) = $70,000
how regression analysis improves accuracy of high low cost method
Rhianna makes edgy women's custom t-shirts. Rhianna started her business this year, and she uses a normal costing system.The company has two direct cost pools, materials and labor, and one indirect cost pool, overhead. Overhead is charged to jobs on the basis of direct labor cost. The following information is available for the most recent year: Budgeted direct labor costs $ Budgeted overhead costs $ Costs of material actually used $ Actual direct labor costs $ Actual overhead costs $ Rhianna had two jobs in process on December 31 of this year Jobs 75 and 76. There is no finished goods inventory because jobs are sent to customers as soon as they are completed. Direct costs associated with each job are below:________. Job 75 Job 76 Direct materials $ $ Direct labor $ $ Based on this data, the predetermined overhead rate is $ of manufacturing overhead for each dollar of direct labor costs. Required: Round your answer to the nearest dollar. Do not include %, $, etc.in your response. Using this overhead allocation rate and the data above, calculate:______ 1. The total manufacturing cost for Job 75. _____2. The total manufacturing cost for Job 76. ______
Find full question attached
Answer and Explanation:
1. Total manufacturing cost for job 75 and job 76= manufacturing cost for job 75 + manufacturing cost for job 76( being work in progress at end of the year)
= $(35725+49656)
=$85381
2. There is no cost of goods sold since there was no finished products and therefore no sales
Suppose that France and Sweden both produce jeans and olives. France’s opportunity cost of producing a crate of olives is 4 pairs of jeans, while Sweden’s opportunity cost of producing a crate of olives is 10 pairs of jeans. By comparing the opportunity cost of producing olives in the two countries, you can tell that has a comparative advantage in the production of olives, and has a comparative advantage in the production of jeans. Suppose that France and Sweden consider trading olives and jeans with each other. France can gain from specialization and trade as long as it receives more than of jeans for each crate of olives it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than of olives for each pair of jeans it exports to France. Based on your answers to the previous question, which of the following terms of trade (that is, price of olives in terms of jeans) would allow both Sweden and France to gain from trade? a. 1 pair of jeans per crate of olives b. 2 pairs of jeans per crate of olives c. 16 pairs of jeans per crate of olives d. 7 pairs of jeans per crate of olives
Answer:
France - Comparative Advantage in Olives, Sweden - Comparative Advantage in Jeans. France gains in trade by > 4 jeans/ olive, Sweden gains in trade by > 1/10 olive/jeans. d) 7 pair jeans per crate olives.
Explanation:
France opportunity cost of producing a crate of olives is 4 pairs of jeans, while Sweden’s opportunity cost of producing a crate of olives is 10 pairs of jeans.
As France opportunity cost of olive (in terms of jeans' pair sacrifised) is lesser than Sweden, it has comparative advantage in olives. Similarly, Sweden opportunity cost of jeans (in terms of olives sacrifised) is lesser ie 1/10, than France opportunity cost ie 1/4. So, Sweden has opportunity cost in Jeans.
France can gain in trade if it gets more than 4 pair jeans per olive crate. Sweden can gain in trade if it gets more than 1/10 olive crate per jeans pair.
'7 pairs of jeans per crate of olives' satisfies gainful trade conditions for both France & Sweden as : 7 (ie > 4) Jeans per olive, 1/7 (ie > 1/10) olive per jeans.
Hyatt's management program lasts about how long? O A. Two to three months B. Six to eighteen months C. Two to four years D. Five to seven years
Answer:
B “six to eighteen months“
Explanation:
i googled
Maury and Bev have saved all their lives and they have been able to pay off their mortgage on their home. Bev is getting elderly and frail and Maury needs to put her into a nursing home where they can give her round-the-clock care. Maury intends to finance this arrangement by getting a loan where the lender makes payments to the homeowner each month, based on accumulated equity. What type of loan does Maury want to get?
Answer:
A reverse mortgage
Explanation:
A reverse mortgage is a loan type available to senior citizens above the age of 62. This loan type allows the elderly to convert part of their home equity into cash without selling the house. Once a bank value home, it offers the loan against the home value. The loan amount is dispersed as a lump sum or fixed monthly payments. The elderly do not have to pay back the loan. The bank recover its money upon death or relocation.
Maury should get a reverse mortgage loan. He won't have to repay the loan but will be getting monthly payments to support Bev's care.
Bill and Bob are both 25 years old today. Each wants to begin saving for his retirement. Both plan on contributing a fixed amount each year into brokerage accounts that have annual returns of 12 percent. Both plan on retiring at age 65, 40 years from today, and both want to have $3 million saved by age 65. The only difference is that Bill wants to begin saving today, whereas Bob wants to begin saving one year from today. In other words, Bill plans to make 41 total contributions (t = 1, 2,.. 40).
How much more than Bill will Bob need to save each year in order to accumulate the same amount as Bill does by age 65?
Please find attached full question
Answer and Explanation:
Answer and explanation attached
Suppose that this year's money supply is $400 billion, nominal GDP is $12 trillion, and real GDP is $4 trillion.
The price level is______ , and the velocity of money is______ .
Suppose that velocity is constant and the economy's output of goods and services rises by 3 percent each year. Use this information to answer the questions that follow.
If the Fed keeps the money supply constant, the price level will_______ , and nominal GDP will_______ .
True
False
If the Fed wants to keep the price level stable instead, it should_________ keep the money supply_______ unchanged next year. True False If the Fed wants an inflation rate of 11 percent instead, it should the money supply by % . (Hint: The quantity equation can be rewritten as the following percentage change formula:
Answer:
1. Price Level
= Nominal GDP/Real GDP
= 12 trillion/4 trillion
= $3
b. Velocity
= Price level * Real GDP/ Money supply
= 3 * 4/0.4
= 30
2. If the Fed keeps the money supply constant, the price level will Decrease , and nominal GDP will Remain the same .
The economy rose however money supply was kept constant. This means that prices could not rise and so had to decrease to cater for the increase in output. With lower prices but higher output, the Nominal GDP remained the same.
3. If the Fed wants to keep the price level stable instead, it should keep the money supply unchanged next year. TRUE
4. If the Fed wants an inflation rate of 11 percent instead, it should Increase the money supply by 14%.
(Percentage Change in Money supply) + (Percentage Change in V) = (Percentage Change in Price) + (Percentage Change in GDP).)
V is constant so is 0.
(Percentage Change in M) = (Percentage Change in P) + (Percentage Change in Y).)
= 11% + 3%
= 14%
The price level and velocity are $3 and 30 respectively, if money supply is constant price decreases, if price level is stable the money supply remain unchanged. The money supply rate is 14%
What is GDP?GDP stands for gross domestic product, it is the total value (in monetary terms) of all finished goods and services produced by a country within a specific time period, usually a year.
Given:
Money Supply=$400 billion,
Nominal GDP = $12 trillion
Real GDP = $4 trillion
1.a. Price Level
= Nominal GDP/Real GDP
= 12 trillion/4 trillion
= $3
1.b. Velocity of money supply
= Price level x Real GDP/ Money supply
= 3 x 4/0.4
= 30
The price level is $3, and the velocity of money is 30.
2. On keeping the money supply constant by the Fed, the price level will Decrease, and nominal GDP will remain the same.
3. In order to keep the price level stable instead, the Fed should keep the money supply unchanged next year. TRUE
4. If the Fed wants an inflation rate of 11% instead, it should increase the money supply by 14%.
%ΔM+%ΔV=%ΔP+%ΔY
or
(Percentage Change in Money supply) + (Percentage Change in V) = (Percentage Change in Price) + (Percentage Change in GDP).
V is constant, so is 0.
(Percentage Change in M) = (Percentage Change in P) + (Percentage Change in Y).
= 11% + 3%
= 14%
Therefore, it can be said the above calculation aptly describes the statements.
Learn more about GDP here:
https://brainly.com/question/4131508
Which is a kind of federal payroll tax?
The two main federal payroll taxes levied on wages are known as Federal Insurance Contributions Act (FICA) taxes. Employees and employers both pay FICA taxes: employees usually have them withheld from their paychecks, while employers pay them in addition to any other taxes they owe.
Answer:
Medicare Tax
Explanation:
just answered question
Denzel Brooks opened a Web consulting business called Venture Consultants and completed the following transactions in March.
March 1 Brooks invested $175,000 cash along with $27,000 in office equipment in the company in exchange for common stock.
2 The company prepaid $9,000 cash for six months' rent for an office. Hint: Debit Prepaid Rent for $9,000.
3 The company made credit purchases of office equipment for $5,100 and office supplies for $1,700. Payment is due within 10 days.
6 The company completed services for a client and immediately received $4,000 cash.
9 The company completed a $10,400 project for a client, who must pay within 30 days.
12 The company paid $6,800 cash to settle the account payable created on March 3.
19 The company paid $7,800 cash for the premium on a 12-month insurance policy. Hint: Debit Prepaid Insurance for $7,800.
22 The company received $3,500 cash as partial payment for the work completed on March 9.
25 The company completed work for another client for $4,980 on credit.
29 The company paid a $6,400 cash dividend.
30 The company purchased $1,000 of additional office supplies on credit.
31 The company paid $900 cash for this month's utility bill.
Required:
1. Prepare general journal entries to record these transactions using the following titles: Cash; Accounts Receivable; Office Supplies; Prepaid Insurance; Prepaid Rent; Office Services Revenue; and Utilities Expense.
2. Prepare a trial balance as of the end of March.
Answer:
Venture Consultants
General Journal
March 1
Cash $175,000 (debit)
Office equipment $27,000 (debit)
Common Stock $202,000 (credit)
March 2
Prepaid Rent $9,000 (debit)
Cash $9,000 (credit)
March 3
Office equipment $5,100 (debit)
Office supplies $1,700 (debit)
Accounts Payable $6,800 (credit)
March 6
Cash $4,000 (debit)
Service Revenue $4,000 (credit)
March 9
Accounts Receivable $10,400 (credit)
Service Revenue $10,400 (credit)
March 12
Accounts Payable $6,800 (debit)
Cash $6,800 (credit)
March 19
Prepaid Insurance $7,800 (debit)
Cash $7,800 (credit)
March 22
Cash $3,500 (debit)
Accounts Receivable $3,500 (credit)
March 25
Accounts Receivable $4,980 (debit)
Service Revenue $4,980 (credit)
March 29
Dividends $6,400 (debit)
Cash $6,400 (credit)
March 30
Office supplies $1,000 (credit)
Accounts Payable $1,000 (credit)
March 31
Utilities $900 (debit)
Cash $900 (credit)
Venture Consultants
Trial balance as March 31.
Debit Credit
Cash $151,600
Office equipment $31,100
Common Stock $202,000
Prepaid Rent $9,000
Office supplies $2,700
Accounts Payable $1,000
Service Revenue $19,380
Accounts Receivable $11,880
Prepaid Insurance $7,800
Dividends $6,400
Utilities $900
Total $222,380 $222,380
Explanation:
Determine Account Balances at the end of the month as follows :
Cash : $175,000 - $9,000 + $4,000 - $6,800 - $7,800 + $3,500 - $6,400 - $900 = $151,600
Office equipment : $27,000 + $5,100 = $31,100
Common Stock : $202,000
Prepaid Rent: $9,000
Office supplies : $1,700 + $1,000 = $2,700
Accounts Payable : $6,800 - $6,800 + $1,000 = $1,000
Service Revenue : $4,000 + $10,400 + $4,980 = $19,380
Accounts Receivable: $10,400 - $3,500 + $4,980 = $11,880
Prepaid Insurance: $7,800
Dividends: $6,400
Utilities: $900
A professor decides to run an experiment to measure the effect of time pressure on final exam scores. He gives each of the 400 students in her course the same final exam, but some students have 90 minutes to complete the exam, while others have 120 minutes. Each student is randomly assigned one of the examination times, based on the flip of a coin. Let Y; denote the number of points scored on the exam by the ith student (0
(a) Explain what the term ui represents. Why will different students have different values of ui?
(b) Explain why E(ui|X;) = 0 for this regression model.
(c) Are the other assumptions among SLR.1-SLR.4 satisfied? Explain why.
(d) The estimated model is Y; = 49+0.24X;.
i. Based on the estimated model, predict the average score of students given 90 minutes. Repeat for 120 minutes and 150 minutes.
ii. Compute the average predicted gain in score for a student who is given an additional 10 minutes on the exam.
Answer:
Kindly check explanation
Explanation:
The regression model :
Y; = Bo + BiX; + ui
ui in the regression model represents other underlying factors aside the model variables which may affect the final exam score of student. These factor will almost likely vary from student to student and may include factors such as ; rate of assimilation, natural brilliance, psychological factors and so on.
E(ui|X) = 0 ; because ui and Xi are independent.
The estimated model is Y; = 49+0.24X;.
i. Based on the estimated model, predict the average score of students given 90 minutes.
X = 90 minutes
Y; = 49+0.24(90)
Y = 70.6
Repeat for 120 minutes and 150 minutes.
X = 120 minutes
Y; = 49+0.24(120)
Y = 77.8
X = 150 minutes
Y; = 49+0.24(150)
Y = 85
ii. Compute the average predicted gain in score for a student who is given an additional 10 minutes on the exam.
Gain in score for student Given additional 10 minutes :
Gain in score for X = 10
0.24X
= 0.24(10)
= 2.4
Branson paid $566,700 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2017. On that date, the subsidiary had a book value of $411,000 (common stock of $200,000 and retained earnings of $211,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $136,000 fair value. Any remaining excess fair value was considered goodwill. In negotiating the acquisition price, Branson also promised to pay Wolfpack’s former owners an additional $59,000 if Wolfpack’s income exceeded $130,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability-adjusted present value of this contingent consideration at $51,800. On December 31, 2017, based on Wolfpack’s earnings to date, Branson increased the value of the contingency to $59,200.
During the subsequent two years, Wolfpack reported the following amounts for income and dividends:
Net Income Dividends Declared
2017 $78,000 $15,000
2018 88,000 25,000
In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $74,000 performance fee to Wolfpack’s previous owners.
Prepare each of the following:
a. Branson’s entry to record the acquisition of the shares of its Wolfpack subsidiary.
b. Branson’s entries at the end of 2017 and 2018 to adjust its contingent performance obligation for changes in fair value and the December 31, 2018, payment.
c. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the equity method.
d. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the initial value method.
Answer:
a.
Dr Investment in Wolfpack, Inc. 618,500
Cr Contingent performance obligation 51,800
Cr Cash 566,700
b.
12/31/17
Dr Loss from increase in contingent performance obligation 7,400
Cr Contingent performance obligation 7,400
12/31/17
Dr Loss from increase in contingent performance obligation 200
Cr Contingent performance obligation 200
12/31/18
Dr Contingent performance obligation 59,000
Cr Cash 59,000
c.
Equity Method
Dr Common stock- Wolfpack 200,000
Dr Retained earnings-Wolfpack 274,000
Cr Investment in Wolfpack 474,000
Dr Royalty agreements 122,400
Dr Goodwill 71,500
Cr Investment in Wolfpack 193,900
Dr Equity earnings of Wolfpack 74,400
Cr Investment in Wolfpack 74,400
Dr Investment in Wolfpack 25,000
Cr Dividends paid 25,000
Dr Amortization expense 13,600
Cr Royalty agreements 13,600
d.
Initial Value Method
Dr Investment in Wolfpack 59,400
Cr Retained earnings-Branson 59,400
Dr Common stock- Wolfpack 200,000
Dr Retained earnings-Wolfpack 284,000
Cr Investment in Wolfpack 484,000
Dr Royalty agreements 122,400
Dr Goodwill 71,500
Cr Investment in Wolfpack 193,900
Dr Dividend income 25,000
Cr Dividends paid 25,000
Dr Amortization expense 13,600
Cr Royalty agreements 13,600
Explanation:
a. Preparation of the Journal entry to record the acquisition of the shares of its Wolfpack subsidiary
Dr Investment in Wolfpack, Inc. 618,500
Cr Contingent performance obligation 51,800
Cr Cash 566,700
(566,700+51,800)
b. Preparation of the Journal entries at the end of 2017 and 2018 and the December 31, 2018, payment.
12/31/17
Dr Loss from increase in contingent performance obligation 7,400
(59,200 - 51,800)
Cr Contingent performance obligation 7,400
12/31/17
Dr Loss from increase in contingent performance obligation 200
(59,000 - 59,200)
Cr Contingent performance obligation 200
12/31/18
Dr Contingent performance obligation 59,000
Cr Cash 59,000
c. Preparation of consolidation worksheet journal entries as of December 31, 2018
Equity Method
Dr Common stock- Wolfpack 200,000
Dr Retained earnings-Wolfpack 274,000
(211,000+ (78,000 - 15,000)
Cr Investment in Wolfpack 474,000 (274,000+200,000)
Dr Royalty agreements 122,400
(136,000 - 13,600)
(136,000/10 years=13,600)
Dr Goodwill 71,500
( 618,500- 411,000 - 136,000)
Cr Investment in Wolfpack 193,900
(122,400+71,500)
Dr Equity earnings of Wolfpack 74,400
(88,000 - 13,600)
Cr Investment in Wolfpack 74,400
Dr Investment in Wolfpack 25,000
Cr Dividends paid 25,000
Dr Amortization expense 13,600
(136,000/10 years)
Cr Royalty agreements 13,600
d. Preparation of consolidation worksheet journal entries as of December 31, 2018,
Initial Value Method
Dr Investment in Wolfpack 59,400
(88,000-15,000-13,600)
Cr Retained earnings-Branson 59,400
Dr Common stock- Wolfpack 200,000
Dr Retained earnings-Wolfpack 284,000
(211,000+ (88,000 - 15,000)
Cr Investment in Wolfpack 484,000
(284,000+200,000)
Dr Royalty agreements 122,400
(136,000 - 13,600)
Dr Goodwill 71,500
( 618,500 - 411,000 - 136,000)
Cr Investment in Wolfpack 193,900
Dr Dividend income 25,000
Cr Dividends paid 25,000
Dr Amortization expense 13,600
Cr Royalty agreements 13,600
On March 31, 2021, Chow Brothers, Inc., bought 8% of KT Manufacturing’s capital stock for $51.5 million. KT’s net income for the year ended December 31, 2021, was $80.5 million. The fair value of the shares held by Chow was $36.0 million at December 31, 2021. KT did not declare or pay a dividend during 2021.
Required:
a. Prepare all appropriate journal entries related to the investment during 2021.
b. Assume that Chow sold the stock on January 20, 2022, for $30.5 million. Prepare the journal entries to record the sale.
Answer and Explanation:
a. The Journal entries are shown below:-
Investment - Capital stock Dr, $51.5 million
To Cash $51.5 million
(Being investment is recorded)
Unrealized holding gain or loss Dr, $15.5 million ($51.5 - $36.0)
To Fair value adjustment $15.5 million
(Being fair value adjustment is recorded)
b. Unrealized holding gain or loss Dr, $5.5 million ($51.5 - $30.5 - $15.5)
To Fair value adjustment $5.5 million
(Being fair value adjustment before sale is recorded)
Cash Dr, $30.5 million
Unrealized holding gain or loss Dr, $21 million
To Investment - Capital stock $51.5 million
(Being sale of investment is recorded)
A customer, age 45, invests $100,000 in a variable annuity contract. It imposes an 8% charge if the contract is surrendered within the 1st 8 years; and a 4% charge if the contract is surrendered in years 9 and 10. Thereafter, there is no surrender charge. The contract has a Guaranteed Minimum Income Benefit (GMIB) that promises to annuitize the account at a value of $180,000 starting at age 60. After holding the contract for 5 years, the separate account has a net asset value of $120,000. The insurance company makes an offer to the client to buy back the contract at $121,000 with no surrender charges imposed. Assuming that the client's investment objectives have not changed, the best advice to the client is to:_______.
Answer:
the client should wait 10 more years until the contract is worth $180,000 since he will earn a slightly higher interest rate
Explanation:
we must determine the effective interest earned by the client if he accepts the company's proposal:
future value = present value x (1 + r)ⁿ
121,000 = 100,000 x (1 + r)⁵
(1 + r)⁵ = 121,000 / 100,000 = 1.21
⁵√(1 + r)⁵ = ⁵√1.21
1 + r = 1.0389
r = 0.0389 = 3.89%
if the client waits 10 more years until he is able to annuitize the account, he should earn:
180,000 = 100,000 x (1 + r)¹⁵
(1 + r)¹⁵ = 180,000 / 100,000 = 1.80
¹⁵√(1 + r)¹⁵ = ¹⁵√1.80
1 + r = 1.03996
r = 0.03996 = 4%