# Accounting Help Needed – MUST BE COMPLETE AND CORRECT FOR GOOD RATING

MUST COMPLETE BOTH PARTS IN THEIR ENTIRETY!
Course Project A
For Project A, you will need to review the Course Project Instructions in Document Sharing. An Excel template file can be also found in Doc Sharing. Use it to do your master budget and supporting schedules. This project will help you learn and understand what a master budget is and how it is prepared. When you have completed Project A, upload it into the Dropbox. There will be a discussion thread area in Weeks 4 and 5 that you can use to ask questions about the project.
See Syllabus, Due Dates for Assignments & Exams, for due date information.
Course Project B
Clark Paints: The Production Department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchasing them. The equipment needed would cost \$200,000, with a disposal value of \$40,000, and it would be able to produce 5,500,000 cans over the life of the machinery. The Production Department estimates that approximately 1,100,000 cans would be needed for each of the next five years.
The company would hire three new employees. These three individuals would be full-time employees, working 2,000 hours per year and earning \$12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages, in addition to \$2,500 of health benefits.
It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
It is expected that cans would cost 45¢ each if purchased from the current supplier. The company’s minimum rate of return (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for a gallon of paint, as well as the number of units sold, will not be affected by this decision. The unit-of-production depreciation method would be used if the new equipment is purchased.
Required:
1. Based on the above information and using Excel, calculate the following items for this proposed equipment purchase:
Annual cash flows over the expected life of the equipment;
Payback period;
Annual rate of return;
Net present value; and
Internal rate of return.
2. Would you recommend the acceptance of this proposal? Why or why not? Prepare a short, double-spaced Word paper elaborating and supporting your answer.

2

>Solution

5

in 5 years

per can

,100,000 cans per year

Other variable production costs

Amount

Annual rate of return

Annual cash savings

income

Net

Before Tax After tax

Present

Item

Amount

Amount

Value

0

0

Annual cash savings

Tax savings due to depreciation 1-5
Disposal value 5
Before Tax After tax

Present

Item Year Amount Tax % Amount Factor Value
Cost of machine 0
Cost of training 0
Annual cash savings 1-5
Tax savings due to depreciation 1-5
Disposal value 5
Net Present Value

Before Tax After tax Present

Item Year Amount Tax % Amount Factor Value
Cost of machine 0
Cost of training 0
Annual cash savings 1-5
Tax savings due to depreciation 1-5
Disposal value 5
Net Present Value
Before Tax After tax Present
Item Year Amount Tax % Amount Factor Value

Cost of machine
Cost of training

Annual cash savings
Tax savings due to depreciation

Disposal value

Net Present Value

After Tax
Item Year Amount

0

1

2

3

4

5

 AC 5 0 Part B Capital Budgeting problem Clark Paints Data: Cost of new equipment Expected life of equipment in years Disposal value Life production – number of cans Annual production or purchase needs Initial training costs Number of workers needed Annual hours to be worked per employee Earnings per hour for employees Annual health benefits per employee Other annual benefits per employee-% of wages Cost of raw materials per can Other variable production costs Costs to purchase cans – per can Required rate of return Tax rate Make Purchase Cost to produce Annual cost of direct material: Need of 1 Annual cost of direct labor for new employees: Wages Health benefits Other benefits Total wages and benefits Total annual production costs Annual cost to purchase cans Part 1 Cash flows over the life of the project Before Tax After Tax Item Amount Annual cash savings Tax savings due to depreciation Total annual cash flow Part 2 Payback Period Part 3 Accounting income as result of decreased costs Less Depreciation Before tax income Tax at 35% rate After tax Part 4 Present Value 12% PV Year Tax % Factor Cost of machine Cost of training 1-5 Net Present Value Part 5 Internal Rate of Return 18% PV Excel Function method to calculate IRR Cost of machine and training Year 1 inflow Year 2 inflow Year 3 inflow Year 4 inflow Year 5 inflow The IRR function will require the range of cash flows beginning with the initial cash outflow for the investment and progressing through each year of the project. You also have to include an initial “guess” for the possible IRR. The formula is: =IRR(values,guess) IRR Function

COURSE PROJECT A INSTRUCTIONS

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—\$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid \$4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase \$16,000 in new equipment during May and \$40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of \$15,000 each quarter, payable in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:

The company maintains a minimum cash balance of \$50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of \$1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of \$1,000), while still retaining at least \$50,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

· 1.

· a. A sales budget, by month and in total.

· b. A schedule of expected cash collections from sales, by month and in total.

· c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

· d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

· 2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of \$50,000.

· 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

· 4. A budgeted balance sheet as of June 30.

## Project A Case 9-30

April May June Quarter

Collections

April May June Quarter
Budgeted unit sales

April May June Quarter

April May June Quarter

EARRINGS UNLIMITED

– 0

Commissions – 0 – 0

– 0

Rent – 0
Salaries – 0
Utilities – 0

– 0

– 0 – 0

– 0

– 0

– 0

EARRINGS UNLIMITED

JUNE 30
Cash

assets

Total

Total

 PROJECT A – Case 9-30 Student Name: SALES BUDGET: April May June Quarter Budgeted unit sales Selling price per unit Total Sales SCHEDULE OF EXPECTED CASH COLLECTIONS: February sales March sales April sales May sales June sales Total Cash MERCHANDISE PURCHASES BUDGET: Add desired ending inventory Total needs Less beginning inventory Required purchases Cost of purchases @ \$4 per unit BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES: Accounts payable April purchases May purchases June purchases Total cash payments EARRINGS UNLIMITED CASH BUDGET FOR THE THREE MONTHS ENDING JUNE 30 Cash balance Add collections from customers Total cash available Less Disbursements Merchandise purchases Advertising Rent Salaries Commissions Utilities Equipment purchases Dividends paid Total Disbursements Excess (deficiency) of receipts over disbursements Financing: Borrowings Repayments Interest Total financing Cash balance, ending BUDGETED INCOME STATEMENT FOR THE THREE MONTHS ENDED JUNE 30 Sales – 0 Variable expenses: Cost of goods sold Contribution Margin Fixed expenses: Insurance Depreciation Net operating income Interest expense Net income BUDGETED BALANCE SHEET Assets: Accounts receivable (see below) Inventory Prepaid insurance Property and equipment, net Total Liabilities and Stockholders’ Equity Accounts payable, purchases Dividends payable Capital stock Retained earnings (see below) Total liabilities and stockholders’ equity Accounts receivable at June 30: May sales x ?% June sales x ?% Retained earnings at June 30: Balance, March 31 Add net income Less dividends declared Balance, June 30

## Sheet3

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