ADM 1340 Chapter Notes - Chapter 11: Capitalization Rate, Financial Statement, Ddb Worldwide
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SILVER CLOUD COMPUTING
ACCT 551 Midterm Case Study
Due: Monday, March 21, 2016
Total Points Available: 150
You are a member of the board of directors of Silver Cloud Computing, a new company that provides cloud computing services. The company began operations on January 1. It acquired financing from the issuance of common stock for $60,000,000 and long-term debt for $80,000,000. The following projected income statement and balance sheet was prepared by the external accountant prior to the start of operations. All amounts are in thousands.
| Silver Cloud Computing | ||
| Projected Income Statement | ||
| First Year of Operations | ||
| Sales | $105,000 | |
| Expenses: | ||
| Wages and salaries | $30,000 | |
| Bad debt expense | 4,000 | |
| Depreciation | 50,000 | |
| Research and development | 12,000 | 96,000 |
| Operating income before bonus | $ 9,000 | |
| Bonus | 900 | |
| Operating income | $ 8,100 | |
| Interest expense | 4,000 | |
| Income before taxes | $ 4,100 | |
| Income taxes (40%) | 1,640 | |
| Net income | $ 2,460 | |
| Silver Cloud Computing | |
| Projected Balance Sheet | |
| December 31 of First Year | |
| Assets: | |
| Cash | $ 4,560 |
| Accounts receivable, net of allowance of 4,000 | 32,000 |
| Net computers | 150,000 |
| Total assets | $186,560 |
| Liabilities & Shareholders' Equity: | |
| Accounts payable | $ 4,100 |
| Long-term debt | 80,000 |
| Common stock | 100,000 |
| Retained earnings | 2,460 |
| Total liabilities and shareholders' equity | $186,560 |
A CEO was hired just prior to the commencement of operations. After examining the projections for the first year, the CEO presented the following suggestions and revised projected income statement to the board of directors at their meeting at the beginning of the year.
1. Slash research and development expenditures, which are paid in cash, from $12 million to $5 million.
2. Double the estimated life of the computers from 4 years to 8 years, which will decrease depreciation expense from $50 million to $25 million. Because identical accounting procedures are used for taxes, no deferred taxes will be generated.
3. Reduce the allowance for doubtful accounts by 50%.
Following is the revised projected income statement for Year 1 proposed by the CEO using the alternative accounting procedures and operating decisions.
(in thousands)
| Sales | $105,000 | |
| Expenses: | ||
| Wages and salaries | $ 30,000 | |
| Bad debt | 2,000 | |
| Depreciation | 25,000 | |
| Research and development | 5,000 | 62,000 |
| Operating income before bonus | $ 43,000 | |
| Bonus | 4,300 | |
| Operating income | $ 38,700 | |
| Interest expense | 4,000 | |
| Income before taxes | $ 34,700 | |
| Income taxes (40%) | 13,880 | |
| Net income | $ 20,820 |
Additional notes:
The presidentâs compensation package at Silver Cloud Computing is a $1,000,000 salary with a cash bonus of 10% of operating income before the bonus.
Original depreciation of the computers was calculated using straight-line depreciation over a 4 year period with no salvage value.
The taxes and bonus are paid with cash.
Required:
From the viewpoint of a member of the board of directors that addresses the proposed changes, the future ramifications of those changes on the company, and any ethical issues related to the proposed changes.
This assignment has to be 10 pages long, can someone please just give me alist of talking points to go off of? I really don't even know where to start.
6. Hasbrooke Corporation has 50,000 shares of $1 par value commonstock and 20,000 shares of cumulative 8%, $100 par preferred stockoutstanding. Hasbrooke has not paid a dividend for the prior year.If Hasbrooke declares a $1.50 per share dividend this year, whatwill be the total amount they must pay their shareholders?
A) $30,000
B) $320,000
C) $395,000
D) $75,000
7. Retained earnings represents:
A) Cash available for dividends.
B) The amount initially invested in the business bystockholders.
C) Cash available for expansion and growth.
D) Income that has been reinvested in the business rather thandistributed as dividends to stockholders.
8. On January 1,2006, Lane Corporation had 50,000 shares of $5 par value commonstock outstanding. On March 31, 2006, Lane issued an additional8,000 shares in exchange for a building. What number of shares willbe used in the computation of basic EPS for the year 2006?
A) 50,000.
B) 58,000.
C) 56,000.
D) 52,000.
9. Mirage Corporation's financial statements for the current yearinclude the following:
Income from continuingoperations............................................................... | $620,000 |
Prior period adjustment (increase in prior year net | 190,000 |
Cash dividends paid to preferredstockholders............................................................ | 202,000 |
Gain on sale of discontinued operations (net oftaxes)...................................................................... | 410,000 |
Operating loss on discontinued operations (net of taxes) | 320,000 |
Extraordinary loss (net of taxbenefit)................................................................... | 95,000 |
On the basis of this information, net income for the current yearis:
A) $1,007,000.
B) $ 620,000.
C) $1,445,000.
D) $ 615,000.
10. During the year 2007,Moonglow Corporation suffered a $600,000 loss when its factory wasdestroyed in a flood. Assuming the corporate income tax rate is34%, what amount will Moonglow report as an extraordinary loss onits income statement for 2007? Assume floods are not common in thisarea.
A) $600,000
B) $396,000
C) $204,000.
D) Nothing, since this does not qualify as an extraordinaryitem.
11. Galaxy Corporation was organized on January 1 and issued 500,000shares of common stock on that date. On July 1, an additional200,000 shares were issued for cash. Net income for the year was$2,160,000. Net earnings per share amounted to:
A) $4.32.
B) $3.75.
C) $3.09.
D) $3.60.
18. Kims Corporation plansto invest $100 million to earn about 20% before income taxes. Thecompany is considering whether it should raise the $100 million byissuing 10% bonds payable or capital stock. If the company issuesthe bonds, it will probably report:
A) Lower net income and lower income taxes expense than if itissues capital stock.
B) Higher net income and higher income taxes expensethan if it issues capital stock.
C) Lower net income and higher income taxes expensethan if it issues capital stock.
D) Higher net income and lower income taxes expense than if itissues capital stock.
19. The amortization of a bonddiscount:
A) Decreases the carrying value of a bond and increases interestexpense.
B) Decreases the carrying value of a bond and decreasesinterest expense.
C) Increases the carrying value of a bond and increasesinterest expense.
D) Increases the carrying value of abond and decreases interest expense.
