BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales contracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs: (1) sales commissions of 10% of selling price when the company collects from the customer, and (2) shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same.
a. Prepare comparative (side-by-side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives:
(1) Revenue is recognized at the time of shipment.
(2) Revenue is recognized at the time of collection.
(3) Revenue is recognized at the time of production.
Note: Net income for each of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively.
b. The method where revenue is recognized at time of collection, known as the installment method, is acceptable for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes?
c. Comment on the usefulness of the installment method for a credit analyst in using both the balance sheet and income statement.
A revenue recognition for comparative balance sheets are examined.
Recognition of Benefit plans: HP financial statement disclosures in the 10K
Please review the attached questions and 10k. I need simple, two line explanations for each.
1. HP provides disclosures related to its pension plans in Note 15 (pp. 129-135). Please answer the following questions based on your reading of this footnote. With respect to only the US Defined Benefit plans and only in 2004, please answer the following questions:
a. By what dollar amount did these plans affect profit?
b. Briefly explain how a company can report net pension income (vs. pension expense) at the same time it is realizing a negative return on pension investments.
c. Provide computations to yield (approximately) the $266 million in interest cost that HP reports as a component of pension expense for its US Defined Benefit plans in 2004.
d. HP has reduced its discount rate in each of the past 2 years. Briefly explain the general effect (no dollar amounts) that this rate reduction has on its balance sheet and income statement:
1. balance sheet
2. income statement
e. What amount of cash benefits did HP pay to its retirees for its US Defined Benefit plans in 2004?
f. What amount of cash contribution did HP make to its US Defined Benefit plans in 2004?
g. Is the HP US Defined Benefit plan over-funded or under-funded and by what amount?