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Estimating the appropriate bid price

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Guthrie Enterprises needs someone to supply it with 230,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It will cost you $1,000,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. Your fixed production costs will be $410,000 per year, and your variable production costs should be $8.50 per carton. You also need an initial investment in net working capital of $60,000. No additional working capital is needed and no working capital will be returned. If your tax rate is 35% and you require a 14% return on your investment, what bid price should you submit?

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Initial Investment=1,000,000
Net working capital required=60,000
Total initial cash outflow=(1000000+60000)=1,060,000

Depreciation per year=(Initial investment-Salvage)/Useful life=(1000000-0)/5 = 200,000
Fixed Cost per year=410000
Variable cost per year=230000*8.5=1,955,000
Total Cost per ...

Solution Summary

One use of cash flow analysis is setting the bid price on a project. The bid price represents a financial break-even level for the project. Solution to given problem depicts the steps to estimate the appropriate bid price in the given case.

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Accounting Study Questions (25)

25 Accounting Study Questions

General Accounting Study Questions

1. If a company fails to record estimated bad debts expense,
A) cash realizable value is understated.
B) expenses are understated.
C) revenues are understated.
D) receivables are understated.

2. The method of accounting for uncollectible accounts that results in a better matching of expenses with revenues is the
A) aging accounts receivable method.
B) direct write-off method.
C) percentage of receivables method.
D) percentage of sales method.

3. Voight Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $1,400,000 and $70,000 (Cr.), respectively. An aging of accounts receivable indicated that $128,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is
A) $128,000.
B) $58,000.
C) $198,000.
D) $70,000.

4. Bailey Company purchases a new delivery truck for $35,000. The sales taxes are $2,000. The logo of the company is painted on the side of the truck for $1,200. The truck license is $120. The truck undergoes safety testing for $220. What does Bailey record as the cost of the new truck?
A) $38,540.
B) $38,420.
C) $37,000.
D) $36,420.

Use the following to answer questions 5-6:

On October 1, 2006, Dole Company places a new asset into service. The cost of the asset is $40,000 with an estimated 5-year life and $10,000 salvage value at the end of its useful life.

5. What is the depreciation expense for 2006 if Dole Company uses the straight-line method of depreciation?
A) $1,500.
B) $8,000.
C) $2,000.
D) $4,000.

6. What is the book value of the plant asset on the December 31, 2006, balance sheet assuming that Dole Company uses the double-declining-balance method of depreciation?
A) $26,000.
B) $30,000.
C) $36,000.
D) $38,000.

7. A company would not likely use subsidiary ledgers for
A) inventory.
B) retained earnings.
C) equipment.
D) accounts receivable.

8. The relationship between current liabilities and current assets is
A) useful in determining income.
B) useful in evaluating a company's liquidity.
C) called the matching principle.
D) useful in determining the amount of a company's long-term debt.

6 points
9. Marsh Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $14,310. If the sales tax rate is 6%, what amount must be remitted to the state for February's sales taxes?
A) $858.60.
B) $810.00.
C) $807.08.
D) cannot be determined.

10. Santo Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 30,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?

11. Bonds with a face amount of $1,000,000 and a contractual interest rate of 8% are sold to yield 7.5%. The annual interest expense recorded for the bonds will be
A) $5,000
B) $40,000
C) $75,000
D) $80,000.

12. On January 1, 2003, $1,000,000, 5-year, 10% bonds, were issued for $970,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is
A) $5,808.
B) $6,000.
C) $484.
D) $500.

13. The statement that "Bond prices vary inversely with changes in the market rate of interest" means that if the
A) market rate of interest increases, the contractual interest rate will decrease.
B) contractual interest rate increases, then bond prices will go down.
C) market rate of interest decreases, then bond prices will go up.
D) contractual interest rate increases, the market rate of interest will decrease.

14. Lisa Ball's regular rate of pay is $15 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. She worked 48 hours last week. Therefore, her gross wages were
A) $720.
B) $600.
C) $780.
D) $1,080.

6 points
15. Assuming a FICA tax rate of 8% on the first $87,000 in wages, and a federal income tax rate of 20% on all wages, what would be an employee's net pay for the year if he earned $95,000?
A) $88,040
B) $68,400
C) $76,000
D) $69,040

16. A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a
A) corporation is organized for the purpose of making a profit.
B) corporation is subject to numerous federal and state government regulations.
C) corporation is an accounting economic entity.
D) corporation's temporary accounts are closed at the end of the accounting period.

17. Dividends are declared out of
A) Capital Stock.
B) Paid-in Capital in Excess of Par Value.
C) Retained Earnings.
D) Treasury Stock.

18. If Vickers Company issues 1,000 shares of $5 par value common stock for $70,000,
A) Common Stock will be credited for $70,000.
B) Paid-In Capital in Excess of Par Value will be credited for $5,000.
C) Paid-In Capital in Excess of Par Value will be credited for $65,000.
D) Cash will be debited for $65,000.

19. The best measure of a company's ability to generate sufficient cash to continue as a going concern is net cash provided by
A) financing activities.
B) investing activities.
C) operating activities.
D) processing activities.

20. Meyer Company reported net income of $30,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is
A) $25,000.
B) $45,000.
C) $29,000.
D) $30,000.

21. If a liability is dependent on a future event, it is called a
A) potential liability.
B) hypothetical liability.
C) probabilistic liability.
D) contingent liability.

Use the following to answer questions 22-23:

Waters Department Store had net credit sales of $8,000,000 and cost of goods sold of $6,000,000 for the year. The average inventory for the year amounted to $2,000,000.

22. Inventory turnover for the year is
A) 4 times.
B) 7 times.
C) 3 times.
D) 2 times.

23. The average number of days to sell the inventory during the year was
A) 183 days.
B) 122 days.
C) 91 days.
D) 52 days.

Use the following to answer questions 24-25:

Augusten Enterprises reported the following current asset account balances: Cash, $12,000; Accounts Receivable, $24,000; Prepaid Expenses, $2,000; and Inventory, $42,000. The company reported current liabilities of $20,000.

24. What is the company's current ratio?
A) .5:1
B) 1.8:1
C) 4:1
D) 2.1:1

25. What is the company's acid-test ratio?
A) .5:1
B) 1.8:1
C) 4:1
D) 2.1:1

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