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Chapter 3 - Problems

The document contains 5 problems related to accounting concepts. Problem 1 involves calculating depreciation schedules for two assets purchased by a company. Problem 2 asks the accounting cash flow given earnings, depreciation, and amortization amounts. Problem 3 involves calculating MACRS depreciation expense and accounting cash flow given additional information. Problem 4 asks for expected cash receipts given sales amounts and collection periods. Problem 5 provides information to create a cash disbursements schedule for a company over 3 months.

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Layla Main
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85 views

Chapter 3 - Problems

The document contains 5 problems related to accounting concepts. Problem 1 involves calculating depreciation schedules for two assets purchased by a company. Problem 2 asks the accounting cash flow given earnings, depreciation, and amortization amounts. Problem 3 involves calculating MACRS depreciation expense and accounting cash flow given additional information. Problem 4 asks for expected cash receipts given sales amounts and collection periods. Problem 5 provides information to create a cash disbursements schedule for a company over 3 months.

Uploaded by

Layla Main
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 3 – Problems

3-1 Depreciation On March 20, 2003, Norton Systems acquired two new assets. Asset A was

research equipment costing $17,000 and having a 3-year recovery period. Asset B was

duplicating equipment having an installed cost of $45,000 and a 5-year recovery period. Using

the MACRS depreciation percentages in Table 3.2 on page 100, prepare a depreciation schedule

for each of these assets.

3-2 Accounting cash flow A firm had earnings after taxes of $50,000 in 2003. Depreciation

charges were $28,000, and a $2,000 charge for amortization of a bond discount was incurred.

What was the firm’s accounting cash flow from operations (see Equation 3.1) during 2003?

3-3 MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a

maker of precision telescopes, expects to report pre-tax income of $430,000 this year. The

company’s financial manager is considering the timing of a purchase of new computerized lens

grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5

years. They will be depreciated using the MACRS schedule.

a. If the firm purchases the grinders before year end, what depreciation expense will it be

able to claim this year? (Use Table 3.2 on page 100.)

b. If the firm reduces its reported income by the amount of the depreciation expense

calculated in part a, what tax savings will result?

c. Assuming that Pavlovich does purchase the grinders this year and that they are its only

depreciable asset, use the accounting definition given in Equation 3.1 to find the firm’s

cash flow from operations for the year.


3-4 Cash receipts A firm has actual sales of $65,000 in April and $60,000 in May. It expects

sales of $70,000 in June and $100,000 in July and in August. Assuming that sales are the only

source of cash inflows and that half of them are for cash and the remainder are collected evenly

over the following 2 months, what are the firm’s expected cash receipts for June, July, and

August?

3-5 Cash disbursements schedule Maris Brothers, Inc., needs a cash disbursement schedule for

the months of April, May, and June. Use the format of Table 3.9 and the following information

in its preparation.

Sales: February = $500,000; March = $500,000; April = $560,000; May = $610,000;

June = $650,000; July = $650,000

Purchases: Purchases are calculated as 60% of the next month’s sales, 10% of purchases

are made in cash, 50% of purchases are paid for 1 month after purchase, and the

remaining 40% of purchases are paid for 2 months after purchase.

Rent: The firm pays rent of $8,000 per month.

Wages and salaries: Base wage and salary costs are fixed at $6,000 per month plus a

variable cost of 7% of the current month’s sales.

Taxes: A tax payment of $54,500 is due in June.

Fixed asset outlays: New equipment costing $75,000 will be bought and paid for in

April. Interest payments: An interest payment of $30,000 is due in June. Cash dividends:

Dividends of $12,500 will be paid in April. Principal repayments and retirements: No

principal repayments or retirements are due during these months.

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