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Unformatted text preview: ears. Finally, the market value approach ties the fleet expense to the drop in market value of the fleet assets, producing a fluctuating annual net income (that nonetheless totals the same $250,000 over the life of the fleet). PROBLEMS P13–1 a. 1. 2. 3. 4. 5. 6. 7. 8. 9. Operating Operating Operating Financing Operating Operating Operating Financing Operating & Investing b. 1. 2. 3. 4. 5. 6. 7. 8. Normal and recurring Normal and recurring Other revenues and expenses Issues and payments of debt Normal and recurring Other revenues and expenses Changes in accounting principles Exchanges with stockholders The sale of the securities would be classified as purchases, sales, and exchanges of assets, and the loss would be classified as other revenues and expenses. 9. c. Items (2), (3), (5), (6), (7), and (9) would all be disclosed on the income statement as follows. (2 ) The $500,000 would be disclosed as operating revenues, and the $375,000 would be disclosed as cost of goods sold, which is an operating expense. (3 ) Minor earthquakes are not infrequent in San Francisco, although they are unusual. Thus, the $100,000 would be disclosed as part of other revenues and expenses. (5 ) The $143,000 would be disclosed as operating expenses. (6 ) Lawsuits are unusual, but it appears that the company is frequently sued. Thus, the $10,000 would be disclosed as part of other revenues and expenses. (7 ) The effect of the change in accounting methods would be disclosed, net of any tax effect, after extraordinary items and before net income. (9 ) The amount of the loss would be disclosed as part of other revenues and expenses. P13–2 a. Bonus = 25% (Income from Operations Before Interest Expense – Interest Expense) = 25% [$1,200,000 – ($1,000,000 8% Interest Rate)] = $280,000 b. Bonus = 25% (Income from Operations Before Interest Expense – Interest Expense) = 25% ($1,200,000 – $0) = $300,000 c. The decision whether to finance the plant expansion through an equity issue or through a debt issue is worth $20,000 to the managers because the managers will receive an additional $20,000 in bonuses if the company issues equity instead of debt. Although issuing equity is in the best interest of the managers, this option may not be in the best interest of the existing stockholders. It is possible that issuing additional stock would dilute the ownership interests of the existing stockholders. Further, the interest payments on debt are tax deductible. Hence, issuing debt would reduce cash outflows for taxes. d. If interest expense was not considered to be an operating expense, the managers' bonus would be the same whether the company issued debt or equity. In either case the bonus would be 25% of $1,200,000, or $300,000. In this situation, the managers would, hopefully, base their decision on factors that are more relevant to the stockholders. P13–3 a. 7. 1. Financing 2. Operating 3. Financing 4. Operating 5. Investing 6. Financing Investing & Financing b. Raleigh Corporation Income Statement For the Year Ended December 31, 2012 Fees earned $ 580,000 Expenses: Wage expense $ 125,000 Supplies expense 35,000 Deprec...
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