Summer CH2 Solutions

# Summer CH2 Solutions - MIME 310 ENGINEERING ECONOMY...

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1 M I M E 3 1 0 E N G I N E E R I N G E C O N O M Y SOLUTIONS TO PROBLEM EXERCISES – PRINCIPLES OF ACCOUNTING 1. Novotech has \$1 million worth of bonds issued. The annual interest payment on the bonds is therefore: 1 000 000 (0.08) = \$80 000 i) Novotech's Income Statement next year would be as follows: Sales 3 000 000 Less: Cost of goods sold 1 750 000 Depreciation 500 000 General, marketing and administrative expenses 250 000 Operating profit 500 000 Less: Interest expenses 80 000 Income before provision for income taxes 420 000 Less: Provision for income taxes @ 42% 176 400 Net income \$243 600 Therefore, Novotech's projected earnings per share (EPS) would be: EPS = Net Income / # shares = 243 600 / 20 000 = \$12.18 ii) The funds available for reinvestment purposes is the sum of that part of net income retained in the business (i.e. retained earnings) and the depreciation allowance (because this item is not a cash expense). a. If no dividends are paid, the funds available for reinvestment are: 243 600 + 500 000 = \$743 600 b. If the company has a payout ratio of 25 percent, the funds available for reinvestment are: 243 600 (1 - 0.25) + 500 000 = \$682 700 2. i) T accounts for Glendale Market Incorporated are given below. A trial balance is pre- pared subsequently to ensure that all transactions were recorded properly.

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2 C a s h Capital (common stock) Notes Payable 13 000 10 000 5 000 2) 800 10 000 11) 2 000 4) 200 2 000 5 000 5) 2 000 bal. 3 000 6) 1 000 8) 500 S a l e s M o r t g a g e 11) 2 050 2) 800 5) 8 000 13) 450 3) 900 6) 4 000 15 250 4 750 13) 450 4 000 8 000 bal. 10 500 2 150 bal. 4 000 Merchandise Inventory L a n d Withdrawals 2 000 5) 10 000 8) 500 1) 2 000 6) 5 000 9) 400 9) 400 10 000 5 000 900 4 000 400 bal. 5 000 Bal. 3 600 14) 1 400 Prepaid Insurance Accounts Receivable 2 200 4) 200 3) 900 200 900 Accounts Payable Interest Expenses Cost of Goods Sold 1) 2 000 11) 50 14) 1 400 2 000 50 1 400 Income Taxes Taxes Payable 15) 280 15) 280 280 280 GLENDALE MARKET INCORPORATED Trial Balance at 31 January, 1992 Account Debit Credit Cash 10 500 Capital (common stock) 10 000 Notes Payable 3 000 Accounts Payable 2 000 Accounts Receivable 900 Merchandise Inventory 2 200 Sales 2 150 Mortgage 4 000
3 Prepaid Insurance 200 Land 5 000 Withdrawals 900 Cost of Goods Sold 1 400 Interest Expenses 50 Income Taxes 280 Taxes Payable 280 Total \$21 430 \$21 430 Notes : § Events 7, 10 and 12 do not affect the business accounts and are therefore not recorded as transactions in the books. The fact that the business had apparently gained some market value, as indicated in event 7, is irrelevant. Because a business is considered a going con- cern and its assets are recorded at cost, its potential market value is not of concern in ac- counting practice. Event 10 is immaterial because assets must be recorded at cost. Event 12 only affects the amount of shares owned by George, not the amount of shares issued by his business. There are now 2 shareholders, but the capital issued by Glendale Market Inc. still amounts to \$10 000.

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## This note was uploaded on 10/06/2009 for the course MIME 310 taught by Professor Bilido during the Summer '08 term at McGill.

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Summer CH2 Solutions - MIME 310 ENGINEERING ECONOMY...

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