Motorcross, Inc. identified the following selected transactions that occurred during 2016: a. Issued 850 shares of $5 par common stock for cash of$21,000. b. Issued 5,600 shares of $5 par common stock for a building with a fair market value of$99,000. c. Purchased new truck with a fair market value of $36,000. Financed it 100% with a long-term note. d. Retired shon-term notes of$26,000 by issuing 2,500 shares of $5 par common stock. e. Paid long-term note of$8,500 to Bank of Tallahassee. Issued new long-term note of $17,000 to Bank of Trust. Identify any non-cash transactions that occurred during the year, and show how they would be reported in the non-cash investing and financing activities section of the statement of cash flows.

What are two theories about migration to the Americas?

Interstate Automobiles Corporation leased 40 vans to VIP Transport under a four-year noncancelable lease on January 1, 2018. Information concerning the lease and the vans follows:

a. Equal annual lease payments of $\$ 300,000$ are due on January 1, 2018, and thereafter on December 31 each year. The first payment was made January 1, 2018. Interstate's implicit interest rate is $10 \%$ and known by VIP. b. VIP has the option to purchase all of the vans at the end of the lease for a total of $\$ 290,000$. The vans' estimated residual value is $\$ 300,000$ at the end of the lease term and $\$ 50,000$ at the end of 7 years, the estimated life of each van. c. VIP estimates the fair value of the vans to be $\$ 1,240,000$. Interstate's cost was $\$ 1,050,000$. d. VIP's incremental borrowing rate is $9 \%$. e. VIP will pay the maintenance fees not included in the annual lease payments of $\$ 1,000$ per year. The depreciation method is straight-line. Your instructor will divide the class into two to six groups depending on the size of the class. The mission of your group is to assess the proper recording and reporting of the lease described.

Required:

1. Each group member should deliberate the situation independently and draft a tentative argument prior to the class session for which the case is assigned.
2. In class, each group will meet for 10 to 15 minutes in different areas of the classroom. During that meeting, group members will take turns sharing their suggestions for the purpose of arriving at a single group treatment.
3. After the allotted time, a spokesperson for each group (selected during the group meetings) will share the group's solution with the class. The goal of the class is to incorporate the views of each group into a consensus approach to the situation.

Specifically, you should address: a. Identify potential advantages to VIP of leasing the vans rather than purchasing them. b. How should the lease be classified by VIP? by Interstate? c. Regardless of your response to previous requirements, suppose VIP recorded the lease on January 1,2018 , as a finance lease in the amount of $\$ 1,100,000$. What would be the appropriate journal entries related to the finance lease for the second lease payment on December $31,2018 ?$

Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. Hence, the company’s financial records are not well maintained.

 The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company has made surf-boards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.

Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders along with some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Wolfe to evaluate the performance of the company over the past year.

 After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the following information:

Sunset Boards currently pays out 40% of net income as dividends to Tad and the other original investors, and it has a 30% tax rate. You are Christina’s assistant, and she has asked you to prepare the following:

1. An income statement for 2014 and 2015.

2. A balance sheet for 2014 and 2015.

3. Operating cash flow for each year.

4. Cash flow from assets for 2015.

5. Cash flow to creditors for 2015.

6. Cash flow to stockholders for 2015.

QUESTION

In light of your discussion in the previous question, what do you think about Tad’s expansion plans?

Use the closing costs to calculate the (a) total closing costs and (b) total amount of the mortgage if the closing costs are financed. Jeremy Roberts purchases a condo with a mortgage loan of $50,000.$

$$\begin{array}{c}\\ \text{Closing Cost}\\ \begin{array}{|l|c|} \hline \text { Application Fee } & \$ 252 \\ \hline \text { Borrower's Credit Check } & 65 \\ \hline \text { Points } & 2.00 \% \text { of Mortgage } \\ \hline \text { Appraisal Fee } & \$ 325 \\ \hline \text { Title Search } & 212 \\ \hline \text { Title Insurance } & 410 \\ \hline \text { Inspection } & 350 \\ \hline \text { Attorney Fee } & 450 \\ \hline \text { Documentation Stamp } & 0.30 \% \text { of Mortgage } \\ \hline \text { Processing Fee } & 1.10 \% \text { of Mortgage } \\ \hline \end{array} \end{array}$$

$

The Robinson Corporation has $\$ 43$ million of bonds outstanding that were issued at a coupon rate of $113 / 4$ percent seven years ago. Interest rates have fallen to $10^{3 / 4}$ percent. Mr. Brooks, the vice president of finance, does not expect rates to fall any further. The bonds have 17 years left to maturity, and Mr. Brooks would like to refund the bonds with a new issue of equal amount also having 17 years to maturity. The Robinson Corporation has a tax rate of 30 percent. The underwriting cost on the old issue was $2.4$ percent of the total bond value. The underwriting cost on the new issue will be $1.7$ percent of the total bond value. The original bond indenture contained a five-year protection against a call, with a 9 percent call premium starting in the sixth year and scheduled to decline by one-half percent each year thereafter. (Consider the bond to be seven years old for purposes of computing the premium.) Assume the discount rate is equal to the aftertax cost of new debt rounded up to the nearest whole number. Calculate the present value of total inflows.

You have been at your job with S&S Air for a week now and have decided you need to sign up for the company’s 401(k) plan. Even after your discussion with Audrey Sanborn, the Bledsoe Financial Services representative, you are still unsure as to which investment option you should choose. Recall that the options available to you are stock in S&S Air, the Bledsoe S&P 500 Index Fund, the Bledsoe Small-Cap Fund, the Bled-soe Large-Company Stock Fund, the Bledsoe Bond Fund, and the Bledsoe Money Market Fund. You have decided that you should invest in a diversified portfolio, with 70% of your investment in equities, 25% in bonds, and 5% in the money market fund.

 You have also decided to focus your equity investment on large-cap stocks, but you are debating whether to select the S&P 500 Index Fund or the Large-Company Stock Fund. In thinking it over, you understand the basic difference in the two funds. One is a purely passive fund that replicates a widely followed large-cap index, the S&P 500, and has low fees. The other is actively managed with the intention that the skill of the portfolio manager will result in improved performance relative to an index. Fees are higher in the latter fund. You’re just not certain which way to go, so you ask Chris Guthrie, who works in the company’s finance area, for advice.

 After discussing your concerns, Chris gives you some information comparing the performance of equity mutual funds and the Vanguard 500 Index Fund. The Vanguard 500 is the world’s largest equity index mutual fund. It replicates the S&P 500, and its return is only negligibly different from the S&P 500. Fees are very low. As a result, the Vanguard 500 is essentially identical to the Bledsoe S&P 500 Index Fund offered in the 401(k) plan, but it has been in existence for much longer, so you can study its track record for over two decades. Chris recommends that you study the figure in this chapter and answer the following questions.

QUESTION

What investment decision would you make for the equity portion of your 401(k) account? Why?

Having saved $\$ 1,000$ from her summer job, Sasha responded to an ad for "Like New! OneOwner Used Cars." A salesperson for A-$1$ Used Cars watched Sasha wander around the lot until she was attracted to a bright-red compact car. Sasha told the salesperson that this car looked just right for her. He replied, "You've made a good choice. This is an excellent car. It will give you many years of good service." Although the sticker price was $\$ 3,550$, the salesperson thought that he might be able to get Sasha a $\$ 50$ discount because she was "a nice young kid getting her first car." After conferring with the sales manager, he explained to Sasha that she could have the car for $\$ 3,500$ and that the dealer could arrange to finance the car and sell her all the necessary auto insurance. Sasha knew that she would need a loan and that auto insurance was required by law. Her excitement increased as it appeared that all her needs could be met in one stop. Sasha saw a sticker on the car's window indicating that this car came with a warranty. The salesperson told her that A-$1$ Used Cars would make any repairs to the engine for damage not caused by her misuse for $30$ days or $10,000$ miles, whichever came first. Now she felt confident about using all of her savings as a down payment. After all, what repair bills could she have with such a nice car accompanied by a terrific warranty?

Taking into account your lists, role-play Sasha's encounter with the salesperson.

A person purchased a house 10 years ago for $160,000. The house was financed by paying 20% down and signing a 30-year mortgage at 7.75% on the unpaid balance. Equal monthly payments were made to amortize the loan over a 30-year period. The owner now (after the 120th payment) wishes to refinance the house due to a need for additional cash. If the loan company agrees to a new 30-year mortgage of 80% of the new appraised value of the house, which is$225,000, how much cash (to the nearest dollar) will the owner receive after repaying the balance of the original mortgage?

The Flatiron Pub provides catering services to local businesses. The following information was available for The Flatiron Pub for the years ended December 31, 2019 and 2020.

Flatiron management is preparing for a meeting with its bank concerning renewal of a loan and has collected the following information related to the above balances.

1. The cash reported at December 31, 2020, reflects the following items: petty cash $1,575 and postage stamps$110. The other current assets balance at December 31, 2020, includes the checking account balance of $4,000.

2. On November 30, 2020, Flatiron agreed to accept a 6-month,$5,000 note bearing 12% interest, payable at maturity, from a major client in settlement of a $5,000 bill. The above balances do not reflect this transaction.

3. Flatiron factored some accounts receivable at the end of 2020, It transferred accounts totaling$10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Flatiron's customers and will retain 2% of the balances. Final Factor assesses Flatiron a finance charge of 3% on this transfer. The fair value of the recourse liability is $400. However, management has determined that the amount due from the factor and the fair value of the resource obligation have not been recorded, and neither are included in the balances above.

4. Flatiron charged off uncollectible accounts with balances of$1,600. On the basis of the latest available information, the 2020 provision for bad debts is estimated to be 2.5% of accounts receivable.

Accounting

a. Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allow- ance for Doubtful Accounts at December 31, 2020.

b. Prepare the current assets section of The Flatiron Pub's balance sheet at December 31, 2020.

Analysis

a. Compute Flatiron's current ratio and accounts receivable turnover for December 31, 2020. Use these measures to analyze Flatiron's liquidity. The accounts receivable turnover in 2019 was 4.37.

b. Discuss how the analysis you did above of Flatiron's liquidity would be affected if Flatiron had trans- ferred the receivables in a secured borrowing transaction.

Principles

What is the conceptual basis for recording bad debt expense based on the percentage-of-receivables ap- proach at December 31, 2020?

Did you know that you can get lots of financial information free of charge? Go to finance.yahoo.com. Use the quote lookup located on the left side to get financial information about any publicly traded company. 1. For your company of choice, obtain the most recent income statement and balance sheet information by clicking on the financials in the bottom left hand corner. 2. Click on competitors to obtain a direct competitor comparison with your company of choice. Select a competing company and obtain their most recent income statement and balance sheet information. 3. Calculate the following risk ratios for both companies for the most recent year. Based on these calculations, which company appears to be more risky? a. Receivables turnover ratio. b. Inventory turnover ratio. c. Current ratio. d. Acid-test ratio. e. Debt to equity ratio. 4. Calculate the following profitability ratios for both companies for the most recent year. Based on these calculations, which company appears to be more profitable? a. Gross profit ratio. b. Return on assets. c. Profit margin. d. Asset turnover. e. Return on equity.

L.W. Clement and his brother Charles formed a partnership in the 1920s to run a plumbing business. The partnership lasted some 40 years. However Charles ultimately became suspicious of the way L.W., who had total control over the partnership finances, was handling partnership funds. He filed an equity suit maintaining that L.W. had used partnership funds to invest in personal real estate and insurance policies. The chancellor of equity heard the case and awarded Charles one-half interest in the real estate and insurance policies in question. The appellate court reversed the chancellor’s decision saying that Charles had no claim as he could not trace the flow of partnership funds into L.W.’s investments. The Supreme Court of Pennsylvania then agreed to hear the case. The issue as perceived by the Pennsylvania Supreme Court was whether L.W. owed to Charles the duty of negating the inference that the source of the funds for the investment was the partnership coffers. Decide. (Clement v. Clement, 260 A.2d 728)

The proper asset allocation for an investor planning for retirement changes dramatically over time. Investors who do not frequently update their asset allocation could be caught in a tragic investment scenario that significantly delays retirement. This is exactly what occurred in 2008, when many investors planning for retirement realized they had not reallocated their portfolios away from stocks and into fixed-income securities over the years, as they should have. Go to money.cnn.com and under the Personal Finance tab, select Calculators. Then choose the Asset Allocation calculator in the Investing category. Calculate an asset allocation for the following two scenarios: A. Need the money: 20 + years How much risk: As much as possible How flexible: If I miss my goal . . . OK During market sell-offs: See an opportunity to buy B. Need the money: 3–5 years How much risk: Not much at all How flexible: I can’t afford to miss my target During market sell-offs: Do nothing How frequently do you think investors should examine their asset allocation? What else should investors review on a periodic basis in addition to asset allocation?

Benchmark Metrics, Inc. (BMI), an all-equity financed firm, just reported EPS of $\$ 4.43$ in $2008$. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial crisis, BMI does not wish to fund these investments externally. The Board has therefore decided to suspend its stock repurchase plan and cut its dividend to $\$ 1.44$ per share (vs. almost $\$2$ per share in $2007$), and retain these funds instead. The firm has just paid the 2008 dividend, and BMI plans to keep its dividend at $\$ 1.44$ per share in $2009$ as well. In subsequent years, it expects its growth opportunities to slow, and it will still be able to fund its growth internally with a target $45 \%$ dividend payout ratio, and reinitiating its stock repurchase plan for a total payout rate of $58 \%$. (All dividends and repurchases occur at the end of each year.) Suppose BMI's existing operations will continue to generate the current level of earnings per share in the future. Assume further that the return on new investment is $15 \%$, and that reinvestments will account for all future earnings growth (if any). Finally, assume BMI's equity cost of capital is $10 \%$.

a. Estimate BMP's EPS in $2009$ and $2010$ (before any share repurchases).

b. What is the value of a share of BMI at the start of $2009$ ?