1) Balance sheet and income statement data indicate the following: Bonds payable
ID: 2496830 • Letter: 1
Question
1) Balance sheet and income statement data indicate the following:
Bonds payable, 10% (issued 1988 due 2012)
$1,000,000
Preferred 5% stock, $100 par (no change during year)
300,000
Common stock, $50 par (no change during year)
2,000,000
Income before income tax for year
350,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Based on the data presented above, what is the number of times bond interest charges were earned?
a.
3.7
b.
4.4
c.
4.5
d.
3.5
2) Kim Corporation has two major divisions: Northern Products and Southern Products. It provides the following information for the year 2014
Northern Products Division
Southern Products Division
Sales revenue
$140,000
$1,040,000
Operating income
$46,400
$220,000
Average total assets
$300,000
$5,540,000
Target rate of return
14.0%
14.0%
Calculate the residual income for the Northern division.
A) $5,500
B) $4,400
C) $2,500
D) $1,800
3) New York Inc. Inc. has a division that manufactures a component that sells for $150 and has a variable cost of $45. Another division of the company wants to purchase the component. Fixed cost per unit of component is $25. What is the minimum transfer price? Assume the division is operating at capacity?
A) $150
B) $45
C) $55
D) $140
4) New York Inc. Inc. has a division that manufactures a component that sells for $150 and has a variable cost of $45. Another division of the company wants to purchase the component. Fixed cost per unit of component is $25. What is the maximum transfer price if the division is operating below its capacity?
A) $70
B) $170
C) $150
D) $30
Bonds payable, 10% (issued 1988 due 2012)
$1,000,000
Preferred 5% stock, $100 par (no change during year)
300,000
Common stock, $50 par (no change during year)
2,000,000
Income before income tax for year
350,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Explanation / Answer
Solution1) Number of times bond interest is earned = Income before tax + Interest expense/ interest expense
=350,000 + 10,000/10,000 = 3.6.
3) When the division is working at full capacity, the minimum transfer price is equal to the variable cost + lost contribution margin. $45+$105 =$150
4) When the division is working at below capacity, there would not be a loss of contribution margin. The maximum transfer price is market price $150.
2) B) Kim Corporation
Average total assets = $300,000
Target rate of return = 14% = 0.14*300,000 = $42,000
Residual income = Operating income –equity charge
Equity charge = Capital *Cost of equity = $42,000
Thus residual income= $46,400 - $42,000 = $4,400
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