Assume no floatation costs on all financing a the 200

Info icon This preview shows pages 339–341. Sign up to view the full content.

the amount of the change and if the change increases or decreases the account. Assume no floatation costs on all financing. a. The $200 million investment in fixed assets will be made on January 1 and will be depreciated on a 10-year straight-line basis for financial statement and income tax purposes. b. On January 1, $75 million of 10-year bonds will be issued at par with annual interest of 10% payable December 31 with principle to be repaid at maturity. c. On January 1, $25 million of Preferred Stock will be issued with an annual dividend rate of 14% payable December 31. d. On January 1, 4 million new shares of common stock will be issued to net the firm $25 per share. Common stock dividends are expected to be $0.50 payable December 31, as in the original forecast. e. During the initial year of operation, the new product is expected to produce cash revenue of $60 million and have cash expenses (other than depreciation) of $30 million. 2. Assume the tax rate is expected to remain at 40% and taxes are paid on December 31, calculate the change in net income resulting from the transactions in question A.
Image of page 339

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

340 Question 1.18 – Borealis Industries Borealis Industries has two operating divisions – Sandstone Books, and Corus Games. Each division maintains its own accounting system and method of revenue recognition. Sandstone Books Sandstone Books sells novels to regional distributors who then sell to independent bookstores and retail chains in their territory. The distributors are allowed to return up to 25% of their purchases to Sandstone, and the distributors have the same return allowance with the bookstores. The returns from distributors have averaged 20% over the past five years. During the fiscal year just ended, Sandstone’s sales to distributors totaled $15,000,000. At year end, $6,800,000 of sales are still subject to return privileges over the next six months. The balance of the book sales, $8,200,000, had actual returns of 19%. Sales from the previous fiscal year totaling $5,500,000 were collected in the current fiscal year, with 21% of sales returned. Sandstone records revenue in accordance with the method referred to as revenue recognition when the right of return exists as the company’s operations meet all the applicable criteria for use of this method. Corus Games Corus Games supplies video arcades with new games and updated versions of standard games. The company works through a network of sales agents in various cities. Orders are received from the sales agents along with down payments; Corus then ships the product directly to the customer, f.o.b. shipping point. The customer is billed for the balance due plus the actual shipping costs. During the fiscal year just ended, Corus received orders for $12,000,000 from the sales agents along with $1,200,000 in down payments. Customers were billed $150,000 in freight costs and $9,180,000 for goods shipped. After an order has been shipped, the sales agent receives a 12% commission on the product price. The goods are warranted for 90 days after sales, and warranty returns have been about 3% of sales. Corus recognizes revenue at the point of sale.
Image of page 340
Image of page 341
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern