eginning work-in-process inventory is 30 percent complete as to conversion. Ending work-in-process inventory is 40 percent complete as to conversion. Materials are added at the end of the process. How many units were completed in June?

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The objectives of cost allocation are to:

Motivate, provide incentives, and determine fair awards.
Accurately define, divide and spread direct costs.
Value, measure, and interpret cost data.
Connect, communicate, and discern information.
Define, refine, and re-define indirect costs.

3 points

Question 2

A key ethical issue in cost allocation involves costing in an international context, because the choice of a cost allocation method can affect:

Management reward systems.
Management fraud.
Taxes in domestic and foreign countries.
The firm’s financial statements.
The fair share of cost by a governmental unit.

3 points

Question 3

The most effective basis for cost allocation exists when which one of the following can be determined?

Cost shifting.
Benefit received.
Equity share.
Cause and effect relationship.
Ability to bear.

3 points

Question 4

An alternative concept of fairness in cost allocation, absent the cause-and-effect basis, include(s):

Ability-to-bear.
Efficiency.
Different costs for different purposes.
Consistency.

3 points

Question 5

The most important reason cost allocation is an important strategic issue for U.S. manufacturing firms with foreign subsidiaries:

The tax implications.
Quality concerns.
Import restrictions.
Cultural differences.
The company’s desire to grow.

3 points

Question 6

Which of the following methods considers all reciprocal flows between service departments through simultaneous equations?

Dual method.
Step method.
Reciprocal method.
Direct method.
The net realizable value method.

3 points

Question 7

Cost allocation provides a services firm a basis for evaluating the:

Cost and profitability of its services.
Cost of its services only.
Profitability of its services only.
Manufacturing costs for the company.
Profitability of its customers.

3 points

Question 8

Which one of the following methods uses units of output to allocate joint costs to joint products?

Net realizable value method.
Physical units method.
Net sales value method.
Sales value at split-off method.
Activity-based costing.

3 points

Question 9

The reciprocal method can be solved using the Excel function:

Goal Seek
Regression
Solver
Scenarios
Pivot Tables

3 points

Question 10

Cost allocation of shared facilities cost is intended to remind managers of:

The cost of using a shared resource.
Both the cost and value of using shared resources.
How much capacity a firm has.
Why the firm invests in these facilities.
How dependent the managers are for these facilities.

3 points

Question 11

An overhead cost that can be traced directly to either a service or production department:

Is called a “flow through” cost.
Requires less allocation effort.
Is charged directly to that department.
Must be variable.
Must be fixed.

3 points

Question 12

Allocation of service department costs to producing departments is the most complex of the allocation phase of departmental cost allocation because of the likely presence of:

Manager bias.
Formula distracters.
Repetitive steps.
Reciprocal flows.
Non-value adding activities.

3 points

Question 13

The direct method of departmental cost allocation ignores:

The managers’ bias.
Accrual accounting.
Tax implications
Long-term implications.
Reciprocal flows.

3 points

Question 14

The reciprocal method of departmental cost allocation is preferred over the step method because it takes into account all the reciprocal flows between:

The service departments.
The producing departments.
Multiple products.
Competing departments.
Similar, but separate, products.

3 points

Question 15

Target costing:

Determines cost based on an expected market demand for the product.
Determines cost based on a budget.
Determines cost based on standard cost.
Determines cost based upon market price and desired profit.

3 points

Question 16

If a firm decided to reevaluate and reorganize the way it did business, in hopes of creating competitive advantage, by changing or decreasing jobs, the company would be using which of the following management technique?

The value chain.
Business intelligence.
Business process improvement.
Product reevaluation.
Life cycle costing.

3 points

Question 17

A local area consulting firm is trying to increase the long-term strategic focus of its company reports. Therefore, the firm has decided to use the balanced scorecard. What type of new information that the company currently doesn’t use in its financial reports, should the company include?

Non-financial information, including customer satisfaction, innovation, etc.
Additional financial information, such as profitability measures and market value.
Product life cycle information.
Supplemental accounting reports.

3 points

Question 18

In keeping with the current trend of increased strategic planning, how have management accountants changed their use of life-cycle costing?

They have now shifted their focus from R&D costs to marketing and promotion costs.
They have turned from a sole focus on manufacturing costs to a much wider outlook, taking into account costs from the entire product life-cycle.
They stopped looking at the entire life-cycle, and now focus their attention on product design costs.
Accountants don’t use life-cycle costing, that task is left for the operations manager.

3 points

Question 19

{C}

The Institute of Management Accountants’ standards of ethical conduct for management accountants includes the elements of:

Competence, confidentiality, integrity, and relevance.
Competence, confidentiality, integrity, and credibility.
Competence, confidentiality, independence, and objectivity.
Competence, accuracy, integrity, and independence.

3 points

Question 20

The five steps for strategic decision making include all of the following except:

Identify the alternative actions
Gather, summarize, and report accounting information
Determine the strategic issues surrounding the problem
Choose and implement the desired alternative
Provide an ongoing evaluation of the effectiveness of implementation

3 points

Question 21

Which of the following types of organizations can most benefit from value chain analysis?

Service firms.
Not-for-profit organizations.
Manufacturing firms.
All types of organizations can benefit from value chain analysis.

3 points

Question 22

Which of the following would not likely be a perspective of a balanced scorecard for a consumer products retailer?

Learning and innovation.
Internal processes.
Financial performance.
Customer.
The exploration of space.

3 points

Question 23

Which of the following statements concerning value chain analysis is false?

The goal of value chain analysis is to find areas where a company can either add value or reduce cost.
The value chain focuses on the entire production process, as well as the sale of the product and service after the sale.
If a company cannot compete in a specific area of the value chain, it might consider the option of outsourcing that portion of the value chain to someone who can perform it better.
Throughout most industries, the most successful firms are the ones that operate within the entire value chain, thereby overseeing every aspect of the value chain for the customer.

3 points

Question 24

Which of the following could be considered part of the value chain in a service firm?

Inspection of product.
Advertising.
Raw materials.
Customer service.
Advertising and customer service.

3 points

Question 25

When performing value chain analysis, which of the following should a company not take into account?

The firm’s competitive position.
Opportunities to reduce cost.
Possible opportunities where value can be added.
Strengths, Weaknesses, Opportunities and Threats.

3 points

Question 26

Both cost leadership and differentiated firms can improve on execution through:

Improved automation and a higher output of products.
Benchmarking and total quality management.
Cost cutting and downsizing of personnel.
Improvements in product development.

3 points

Question 27

The following data pertains to Lam Co.’s manufacturing operations:

 

Additional information for the month of April:

 

Overhead is applied at $10 per direct labor hour.
For the month of April, conversion cost incurred was:

$30,000.
$40,000.
$70,000.
$72,000.

3 points

Question 28

The following data pertains to Lam Co.’s manufacturing operations:

 

Additional information for the month of April:

 

Overhead is applied at $10 per direct labor hour.
For the month of April, cost of goods manufactured was:

$118,000.
$115,000.
$112,000.
$109,000.

3 points

Question 29

When cost relationships are linear, total variable costs will vary in proportion to changes in:

Direct labor hours.
Total material cost.
Total overhead cost.
Volume of production.
Machine hours.

3 points

Question 30

The term relevant range as used in cost accounting means the range over which:

Costs may fluctuate.
Cost relationships are valid.
Production may vary.
Relevant costs are incurred.

3 points

Question 31

If the volume of production is increased over the level planned, the cost per unit would be expected to:

Decrease for fixed costs and remain unchanged for variable costs.
Remain unchanged for fixed costs and increase for variable costs.
Decrease for fixed costs and increase for variable costs.
Increase for fixed costs and increase for variable costs.

3 points

Question 32

When production levels are expected to decline within a relevant range, what effects would be anticipated with respect to each of the following?

A
B
C
D

3 points

Question 33

Vadis Inc. is a job-order manufacturer. The company uses a predetermined overhead rate based on direct labor hours to apply overhead to individual jobs. For 2010, estimated direct labor hours were 114,000 and estimated factory overhead was $695,400. The following information was for September 2010. Job X was completed during September, while Job Y was started but not finished.

 

The total cost of Job X is:

$153,628.
$128,220.
$151,900.
$129,672.
$140,855.

3 points

Question 34

Vadis Inc. is a job-order manufacturer. The company uses a predetermined overhead rate based on direct labor hours to apply overhead to individual jobs. For 2010, estimated direct labor hours were 114,000 and estimated factory overhead was $695,400. The following information was for September 2010. Job X was completed during September, while Job Y was started but not finished.  
The total factory overhead applied during September is:

$59,300.
$57,572.
$57,848.
$56,120.
$57,710.

3 points

Question 35

Vadis Inc. is a job-order manufacturer. The company uses a predetermined overhead rate based on direct labor hours to apply overhead to individual jobs. For 2010, estimated direct labor hours were 114,000 and estimated factory overhead was $695,400. The following information was for September 2010. Job X was completed during September, while Job Y was started but not finished.

 

The underapplied or overapplied overhead for September is:

$1,590 underapplied.
$1,590 overapplied.
$920 overapplied.
$920 underapplied.
$1,452 underapplied.

3 points

Question 36

Beckner Inc. is a job-order manufacturer. The company uses a predetermined overhead rate based on direct labor hours to apply overhead to individual jobs. For 2010, estimated direct labor hours are 133,000 and estimated factory overhead is $785,300. The following information is for September 2010. Job X was completed during September, while Job Y was started but not finished. Round calculations to two significant digits.
 

The total factory overhead applied during September is:

$79,300.
$57,572.
$73,750.
$68,120.
$51,710.

3 points

Question 37

Beckner Inc. is a job-order manufacturer. The company uses a predetermined overhead rate based on direct labor hours to apply overhead to individual jobs. For 2010, estimated direct labor hours are 133,000 and estimated factory overhead is $785,300. The following information is for September 2010. Job X was completed during September, while Job Y was started but not finished. Round calculations to two significant digits.

 

The underapplied or overapplied overhead for September is:

$2,350 underapplied.
$2,350 overapplied.
$950 overapplied.
$950 underapplied.
$1,452 underapplied.

3 points

Question 38

Beckner Inc. is a job-order manufacturer. The company uses a predetermined overhead rate based on direct labor hours to apply overhead to individual jobs. For 2010, estimated direct labor hours are 133,000 and estimated factory overhead is $785,300. The following information is for September 2010. Job X was completed during September, while Job Y was started but not finished. Round calculations to two significant digits.  



The total ending work-in-process for September is:

$68,000
$101,000
$133,450
$157,300
$53,400

3 points

Question 39

Which of the following is a benefit of activity-based costing?

Reduced overhead costs.
More accurate measures of production volume.
Facilitate better product pricing decisions.
Having fewer cost drivers than volume-based costing systems.
More streamlined manufacturing processes.

3 points

Question 40

Which of the following is not normally associated with activity-based costing?

Activity cost pools.
Multiple cost drivers.
Reduction of non-value-adding costs.
High direct labor costs relative to manufacturing overhead costs.
Improved decision making and pricing.

3 points

Question 41

Which of the following is not considered a benefit of activity-based costing?

Decreased production activity levels.
Improved product pricing decisions.
A better understanding of manufacturing overhead.
More accurate unit cost information.
Improved strategic decisions.

3 points

Question 42

Which of the following would be the most appropriate cost driver to allocate factory electricity costs to products?

Machinery depreciation expense.
Machinery maintenance work orders.
Machinery down-time.
Machine hours.
Machine productivity.

3 points

Question 43

Which of the following activity cost pools would most likely be allocated based on the number of production runs?

Machinery set-up costs.
Raw materials warehousing costs.
Factory heating costs.
Factory janitorial costs.
Indirect labor costs.

3 points

Question 44

Which of the following is most likely to be the cost driver for the packaging and shipping activity?

Number of setups.
Number of components.
Number of orders.
Hours of testing.
Number of production runs.

3 points

Question 45

Talamoto Co. manufactures a single product that goes through two processes A????1 mixing and cooking. The following data pertains to the Mixing Department for September.

 

Material P is added at the beginning of work in the Mixing Department. Material Q is also added in the Mixing Department, but not until units of product are forty percent completed with regard to conversion. Conversion costs are incurred uniformly during the process.
Total equivalent units for conversion under the weighted-average method are calculated to be:

104,000 equivalent units.
71,600 equivalent units.
85,400 equivalent units.
72,000 equivalent units.
94,000 equivalent units.

3 points

Question 46

Talamoto Co. manufactures a single product that goes through two processes A????1 mixing and cooking. The following data pertains to the Mixing Department for September.

 

Material P is added at the beginning of work in the Mixing Department. Material Q is also added in the Mixing Department, but not until units of product are forty percent completed with regard to conversion. Conversion costs are incurred uniformly during the process.
Cost per equivalent unit for Material P under the weighted-average method is calculated to be:

$5.10.
$2.60.
$2.50.
$2.30.
$5.40.

3 points

Question 47

Talamoto Co. manufactures a single product that goes through two processes A????1 mixing and cooking. The following data pertains to the Mixing Department for September.

 

Material P is added at the beginning of work in the Mixing Department. Material Q is also added in the Mixing Department, but not until units of product are forty percent completed with regard to conversion. Conversion costs are incurred uniformly during the process.
Cost per equivalent unit for Material Q under the weighted-average method is calculated to be:

$5.10.
$2.60.
$2.50.
$2.30.
$5.40.

3 points

Question 48

Talamoto Co. manufactures a single product that goes through two processes A????1 mixing and cooking. The following data pertains to the Mixing Department for September.

 

Material P is added at the beginning of work in the Mixing Department. Material Q is also added in the Mixing Department, but not until units of product are forty percent completed with regard to conversion. Conversion costs are incurred uniformly during the process.
Cost per equivalent unit for conversion under the weighted-average method is calculated to be:

$5.10.
$2.60.
$2.50.
$2.30.
$5.40.

3 points

Question 49

Talamoto Co. manufactures a single product that goes through two processes A????1 mixing and cooking. The following data pertains to the Mixing Department for September.

 

Material P is added at the beginning of work in the Mixing Department. Material Q is also added in the Mixing Department, but not until units of product are forty percent completed with regard to conversion. Conversion costs are incurred uniformly during the process.
The cost of goods completed and transferred out under the weighted-average method is calculated to be:

$885,000.
$882,000.
$888,000.
$891,000.
$887,000.

3 points

Question 50

Roussey Co. had the following information for the month of June:

 

Beginning work-in-process inventory is 30 percent complete as to conversion. Ending work-in-process inventory is 40 percent complete as to conversion. Materials are added at the end of the process.
How many units were completed in June?

12,000.
10,000.
9,600.
9,000.
7,000.






Blueprint Problem: Statement of Cash Flows

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Blueprint Problem: Statement of Cash Flows

Statement of Cash Flows and Business Activities

The statement of cash flows provides information about the cash inflows and cash outflows for a company. It is considered to be a complement to the other three financial statements. A company’s cash flows are generated from operating, investing, and financing activities. (Click on the activity name in the image for definitions.)

In the table below, review the transaction and select the appropriate type of activity and cash flow.

TransactionActivity and flow
Paying commissions to sales forceSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 1 of Item 1
Selling goods to customersSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 2 of Item 1
Buying equipment for use in manufacturingSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 3 of Item 1
Selling common stock to an investorSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 4 of Item 1
Borrowing cash from a bankSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 5 of Item 1
Selling equipment used in the company’s manufacturingSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 6 of Item 1
Purchasing goods to sell to customersSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 7 of Item 1
Buying land for a future plant siteSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 8 of Item 1
Paying back the principal of a loanSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 9 of Item 1
Paying utility billsSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 10 of Item 1
Paying dividends to ownersSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 11 of Item 1
Buying a display case for items to be soldSelectFinancing, inflowInvesting, inflowOperating, inflowFinancing, outflowInvesting, outflowOperating, outflowCorrect 12 of Item 1

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Operating Activities and the Indirect Method

The first section of the statement of cash flows is the operating activities section. There are two methods to prepare this section: the direct method and the indirect method. Both methods calculate the same result. Under the indirect method, net income is adjusted to determine cash flows from operating activities.

Why is net income not equal to the increase in cash? Recall that under GAAP, net income is calculated on Selectan accruala cashCorrect 1 of Item 2 basis.

There are four types of adjustments to net income:

1.Non-cash effects on net income:Non-cash expenses are Selectadded tosubtracted fromCorrect 2 of Item 2 net income and
non-cash revenues are Selectadded tosubtracted fromCorrect 3 of Item 2 net income.
2.Gains and losses from investing or financing activities:Gains are Selectadded tosubtracted fromCorrect 4 of Item 2 net income and
losses are Selectadded tosubtracted fromCorrect 5 of Item 2 net income.
3.Changes in current assets:Increases in current assets are Selectadded tosubtracted fromCorrect 6 of Item 2 net income and
decreases in current assets are Selectadded tosubtracted fromCorrect 7 of Item 2 net income.
4.Changes in current liabilitiesIncreases in current liabilities are Selectadded tosubtracted fromCorrect 8 of Item 2 net income and
decreases in current liabilities are Selectadded tosubtracted fromCorrect 9 of Item 2 net income.

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HideAPPLY THE CONCEPTS: Prepare the operating activities sectionThe income statement and comparative balance sheets for Leonardo Inc. can be viewed by clicking on the links below. No depreciable assets were purchased or sold during the period; therefore, the increase in Accumulated Depreciation is due to depreciation expense for the period. Complete the operating activities section of the statement of cash flows. Use a minus sign (-) to indicate an outflow of cash. No sign is needed to indicate an inflow of cash.+ Income StatementLeonardo Inc.Income StatementFor the Year Ended December 31, 2013Sales$244,800Cost of merchandise sold127,296Gross profit$117,504Operating expenses:Depreciation expense$2,560Other operating expenses80,672Total operating expenses83,232Income from operations$34,272Other revenue and expenses:Interest revenue$480Gain on sale of land2,2402,720Income before taxes$36,992Income taxes9,792Net income$27,200+ Comparative Balance SheetLeonardo Inc.Balance SheetsDecember 31, 201320132012AssetsCash$28,800$20,800Accounts receivable (net)7,20010,400Inventories76,32072,800Current assets$112,320$104,000Note Receivable135,52059,200Land47,04088,800Equipment192,400192,400Less: Accumulated depreciation46,96044,400Total assets$440,320$400,000LiabilitiesAccounts payable$4,480$8,800Wages payable20,64017,600Current liabilities$25,120$26,400Note payable61,60061,600Total liabilities$86,720$88,000Stockholders’ EquityCommon stock$68,800$62,400Additional paid-in capital153,200140,400Retained earnings131,600109,200Total equity$353,600$312,000Total liabilities and equity$440,320$400,000Leonardo Inc.Statement of Cash FlowsFor the Year Ended December 31, 2013Cash flows from operating activities:Accounts ReceivableGross profitSalesNet incomeCorrect 5 of Item 3$Correct 6 of Item 3Adjustments to net income:Common StockDepreciation expenseInterest RevenueOther Operating ExpensesCorrect 8 of Item 3Correct 9 of Item 3Additional paid-in capitalCommon StockGain on sale of landLandCorrect 10 of Item 3Correct 11 of Item 3Increase in Interest RevenueIncrease in Accounts ReceivableDecrease in InventoryDecrease in Accounts ReceivableCorrect 12 of Item 3Correct 13 of Item 3Increase in Retained EarningsIncrease in Accounts ReceivableDecrease in InventoryIncrease in InventoryCorrect 14 of Item 3Correct 15 of Item 3Increase in Income TaxesIncrease in Accounts PayableDecrease in Wages PayableIncrease in Wages PayableCorrect 16 of Item 3Correct 17 of Item 3Increase in Common StockIncrease in Accounts PayableDecrease in Wages PayableDecrease in Accounts PayableCorrect 18 of Item 3Correct 19 of Item 3Net cash provided by operating activitiesNet cash used by operating activitiesCorrect 20 of Item 3$Correct 21 of Item 3

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HideAPPLY THE CONCEPTS: Prepare the investing activities sectionInvesting ActivitiesInvesting activities include inflows and outflows of cash related to noncurrent assets. Additional data related to noncurrent assets and liabilities may need to be collected to correctly calculate the cash flows from investing activities. Inflows of cash from investing activities may include a gain or loss in the sale of a noncurrent asset.Additional information for investing activities:
1. One of Leonardo’s suppliers experienced a devastating loss due to a tornado. Leonardo loaned the company $76,320 cash to help restore its operations. The loan is interest-free.
2. Leonardo sold one of its parcels of land for $44,000.Use a minus sign (A????1) to indicate an outflow of cash. No sign is needed to indicate an inflow of cash.Cash flows from investing activities:Cash received from principal of loanCash received from sale of landCash received from accounts receivableCash received from common stockCorrect 5 of Item 4$Correct 6 of Item 4Cash loaned to supplierCash paid for cost of merchandise soldCash paid for operating expensesCash paid for common stockCorrect 7 of Item 4Correct 8 of Item 4Net cash provided by investing activitiesNet cash used by investing activitiesCorrect 9 of Item 4Correct 10 of Item 4

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HideFinancing ActivitiesFinancing activities include inflows and outflows of cash from transactions that either generate capital or repay capital provided to the company. As with investing activities, you must review the changes to equity accounts and noncurrent liabilities as well as collect any additional data related to equity accounts and noncurrent liabilities to correctly calculate the cash flows from financing activities.APPLY THE CONCEPTS: Prepare the financing activities sectionAdditional financing activities data:1. On February 1, 2013, Leonardo Inc. issued 6,400 shares of its $1 par value stock. The company received the par value for the shares and $12,800 in excess of par value.
2. Leonardo paid dividends of $4,800 to its stockholders on June 30, 2013.Use a minus sign (A????1) to indicate an outflow of cash. No sign is needed to indicate an inflow of cash.Cash flows from financing activities:Cash received from salesCash received from interest revenueCash received from issuance of stockCash paid for issuance of stockCorrect 5 of Item 5$Correct 6 of Item 5Cash paid for merchandise soldCash paid for dividendsCash paid for operating expensesCash paid for income taxesCorrect 7 of Item 5Correct 8 of Item 5Net cash provided by financing activitiesNet cash used by financing activitiesCorrect 9 of Item 5Correct 10 of Item 5

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HideComplete the Statement of Cash FlowsAfter determining the cash flows from the operating, investing, and financing activities, the net change in cash can be calculated by totaling the cash flows from each of the activities. The net change in Cash is added to the Cash balance at the beginning of the period. The sum should be equal to the balance in Cash at the end of the year.APPLY THE CONCEPTS: Complete the statement of cash flowsUse a minus sign (A????1) to indicate an outflow of cash. No sign is needed to indicate an inflow of cash.Net decrease in cashNet increase in cashCorrect 4 of Item 6$Correct 5 of Item 6Cash, beginning of the yearCash, end of the yearCorrect 6 of Item 6Correct 7 of Item 6Cash, beginning of the yearCash, end of the yearCorrect 8 of Item 6$Correct 9 of Item 6

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Additional Disclosures

Often a company will engage in significant investing or financing transactions that involve no cash flow. For example, a company may sign a long-term note payable in exchange for an asset, such as a building or equipment. Or, perhaps common stock is issued to retire bonds. These activities are not reported on the statement of cash flows because there is no cash flow in the current period.

These transactions should be Selectdisclosed in a separate schedule.ignored because there is no current cash flow.removed from the balance sheet to prevent confusion.Correct 1 of Item 7 Reporting significant noncash investing and financing activities follows the Selectfull-disclosurematchinghistorical costCorrect 2 of Item 7 principle.

Suppose the same facts as above, except that Kimberly-Clark incurred legal fees resulting from the execution of the lease of $5,000, and received a lease incentive from Sheffield to enter the lease of $1,000. How would the initial measurement of the lease liability and right-of-use asset be affected under this situation?

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Exercise 21A-4 a-dAssume that on December 31, 2016, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement.
1.The agreement requires equal rental payments of $66,599 beginning on December 31, 2016.2.The fair value of the building on December 31, 2016 is $487,267.3.The building has an estimated economic life of 12 years, a guaranteed residual value of $10,000, and an expected residual value of $7,500. Kimberly-Clark depreciates similar buildings on the straight-line method.4.The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.5.Kimberly-Clark’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not known by Kimberly-Clark.
Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2016, 2017, and 2018. Kimberly-Clark’s fiscal year-end is December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)
DateAccount Titles and ExplanationDebitCredit12/31/16(To record the lease)(To record first lease payment)12/31/17(To record amortization of the right-of-use asset)(To record interest expense)12/31/18(To record amortization of the right-of-use asset)(To record interest expense)
Suppose the same facts as above, except that Kimberly-Clark incurred legal fees resulting from the execution of the lease of $5,000, and received a lease incentive from Sheffield to enter the lease of $1,000. How would the initial measurement of the lease liability and right-of-use asset be affected under this situation?
Right-of-use asset$
Suppose that in addition to the $66,599 annual rental payments, Kimberly-Clark is also required to pay $5,000 for insurance costs each year on the building directly to the lessor, Sheffield Storage. How would this executory cost affect the initial measurement of the lease liability and right-of-use asset?(Round answer to 0 decimal places, e.g. 5,275.)
Lease liability$
Now suppose that, at the end of the lease term, Kimberly-Clark took good care of the asset and Sheffield agrees that the fair value of the asset is actually $10,000. Record the entry for Kimberly-Clark at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made). (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
Account Titles and ExplanationDebitCreditClick if you would like to Show Work for this question:Open Show Work

Does a rights offering cause share prices to decrease? How are existing shareholders affected by a rights offering?

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The Rights Offerings Puzzle

In the United States, firms use general cash offers much more often than rights offerings. IN Table 16.10, of the 578 total issues represented, about 94 (or 16 percent) were rights offers. This reliance on general cash offers in the United States is something of a mystery because rights offerings are usually much cheaper in terms of flotation costs.

Cash Offers
CompensationOtherTotal Cost as
as aExpenses asa Percentage
Size of Issue ($ in millions)Percentage of Proceedsa Percentage of Proceedsof Proceeds
Number
Under 0.500———
.50– 0.9966.96%6.78%13.74%
1.00– 1.991810.404.8915.29
2.00– 4.99616.592.879.47
5.00– 9.99665.501.537.03
10.00– 19.99914.84.715.55
20.00– 49.991564.30.374.67
50.00– 99.99703.97.214.18
100.00–500.00163.81.143.95
Total/average4845.02%1.15%6.17%
Rights with Standby UnderwritingPure Rights
Compensationas aPercentageof ProceedsOtherPercentageof Proceeds
Total Cost asTotal Cost as
a Percentagea Percentage
Numberof ProceedsNumberof Proceeds
0———38.99%
23.43%4.80%8.24%24.59
56.364.1510.51%54.90
95.202.858.0672.85
43.922.186.1061.39
104.141.215.353.72
123.84.904.741.52
93.96.744.702.21
53.50.504.009.13
564.32%1.73%6.05%382.45%

To give an idea of the relative flotation costs, Table 16.10 shows these costs from one study expressed as a percentage of the amount raised for different issue sizes and selling procedures. Overall, general cash offers had average flotation costs equal to 6.17 percent of the amount raised. For rights offerings with standby underwriting, total costs were 6.05 percent. For pure rights offerings (those involving no underwriter), these costs were only 2.45 percent of the amount raised, representing a significant savings. Overall, Table 16.10 suggests that pure rights offerings have a pronounced cost advantage. Furthermore, rights offerings protect the proportionate interest of existing shareholders. No one knows why rights offerings are not used more often, and it is an intriguing anomaly. Various arguments in favor of general cash offers with underwriting have been put forth:

1. Underwriters increase the stock price. This is supposedly accomplished because of the selling effort of the underwriting group.

2. Underwriters provide insurance against a failed offering. This is true. If the market price goes below the offer price, the firm does not lose, because the underwriter has bought the shares at an agreed-upon price. However, this insurance cannot be worth much, because the offer price is not set (in most cases) until within 24 hours of the offering, when the final arrangements are made and underwriters have made a careful assessment of the market for the shares.

3. Other arguments include the following: (a) the proceeds of underwritten issues are available sooner than those of a rights offer, (b) underwriters provide a wider distribution of ownership than would be possible with a rights offering, and (c) consulting advice from investment bankers may be beneficial. All of the preceding arguments are pieces of the puzzle, but none seems very convincing. One study found that firms making underwritten rights offers suffered substantially larger price drops than did firms making underwritten cash offers.9 This is a hidden cost, and it may be part of the reason that underwritten rights offers are uncommon in the United States.

C O N C E P T Q U E S T I O N S

a How does a rights offering work?

b What are the questions that financial management must answer in a rights offering?

c How is the value of a right determined?

d When does a rights offering affect the value of a company’s shares?

e Does a rights offering cause share prices to decrease? How are existing shareholders affected by a rights offering?