Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Chapter 21, Problem 21.33E
Selling a plant, income taxes. (CMA, adapted) The Cook Company is a national portable building manufacturer. Its Benton plant will become idle on December 31, 2017. Mary Carter, the corporate controller has been asked to look at three options regarding the plant:
- Option 1: The plant, which has been fully depreciated for tax purposes, can be sold immediately for $750,000.
- Option 2: The plant can be leased to the Timber Corporation, one of Cook’s suppliers, for 4 years. Under the lease terms, Timber would pay Cook $175,000 rent per year (payable at year-end) and would grant Cook a $60,000 annual discount from the normal price of lumber purchased by Cook. (Assume that the discount is received at year-end for each of the 4 years.) Timber would bear all of the plant’s ownership costs. Cook expects to sell this plant for $250,000 at the end of the 4-year lease.
- Option 3: The plant could be used for 4 years to make porch swings as an accessory to be sold with a portable building. Fixed
overhead costs (acash outflow ) before any equipment upgrades are estimated to be $22,000 annually for the 4-year period. The swings are expected to sell for $45 each. Variable cost per unit is expected to be $22. The following production and sales of swings are expected: 2018, 12,000 units; 2019, 18,000 units: 2020, 15,000 units; 2021, 8,000 units. In order to manufacture the swings, some of the plant equipment would need to be upgraded at an immediate cost of $180,000. The equipment would be depreciated using thestraight-line depreciation method and zero terminal disposal value over the 4 years it would be in use. Because of the equipment upgrades, Cook could sell the plant for $320,000 at the end of 4 years. No change inworking capital would be required.
Cook Company treats all
- 1. Calculate
net present value of each of the options and determine which option Cook should select using the NPV criterion.Required
- 2. What nonfinancial factors should Cook consider before making its choice?
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The Cook Company is a national portable building manufacturer. Its Benton plant will become idle on December 31, 2017. Mary Carter, the corporate controller, has been asked to look at three options regarding the plant:
■ Option 1: The plant, which has been fully depreciated for tax purposes, can be sold immediately for $750,000.
■ Option 2: The plant can be leased to the Timber Corporation, one of Cook’s suppliers, for 4 years. Under the lease terms, Timber would pay Cook $175,000 rent per year (payable at year-end) and would grant Cook a $60,000 annual discount from the normal price of lumber purchased by Cook. (Assume that the discount is received at year-end for each of the 4 years.) Timber would bear all of the plant’s ownership costs. Cook expects to sell this plant for $250,000 at the end of the 4-year lease.
■ Option 3: The plant could be used for 4 years to make porch swings as an accessory to be sold with a portable building. Fixed overhead costs (a cash outflow) before any…
Sam Ltd owns a piece of vacant land in Broadmeadows. A substantial number of factory owners establish their manufacturing plant in this location due to its accessibility and high affordability. The management of Sam Ltd wants to adopt fair value model to measure the land on 30 June 2021.
Which of the following information is most useful in assisting management in estimating the fair value of the land?
Group of answer choices
Sam Ltd intends to lease out the land in the next financial year, and they believe they could receive an annual lease payment of $50,000.
A factory owner purchased a piece of vacant land near Broadmeadows for $1m to build a new factory plant on 21 May 2021.
The cost to build a new factory on a piece land in Broadmeadows is about $200,000.
A landowner sold a piece of vacant land in Southbank to a property developer for $1.05m on 21 May 2021.
14.ABC Company is committed to a plan to sell a building and has started looking for a buyer for that building. The company will continue to use the building until another building is completed to house the office staff located in the building. There is no intention to relocate the office staff until the new building is completed. As of Dec 31, 2021, the building has a carrying amount of P250,000 and fair value less costs to sell amounted to P235,000. How much will be presented as Assets-Held-for-Sale in the statement of financial position at Dec 31, 2021?
15.During 2021, Entity F incurred P4,000,000 in exploration costs for each of 15 oil wells drilled in 2021. Of the 15 wells drilled, 10 were dry holes. The entity uses the successful efforts method of accounting. Assuming that the entity depletes 30% of the oil discovered in 2021, what amount of these exploration costs would remain in its Dec 31, 2021 statement of financial position?
Chapter 21 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 21 - Capital budgeting has the same focus as accrual...Ch. 21 - List and briefly describe each of the five stages...Ch. 21 - Prob. 21.3QCh. 21 - Only quantitative outcomes are relevant in capital...Ch. 21 - How can sensitivity analysis be incorporated in...Ch. 21 - Prob. 21.6QCh. 21 - Describe the accrual accounting rate-of-return...Ch. 21 - Prob. 21.8QCh. 21 - Lets be more practical. DCF is not the gospel....Ch. 21 - All overhead costs are relevant in NPV analysis....
Ch. 21 - Prob. 21.11QCh. 21 - Distinguish different categories of cash flows to...Ch. 21 - Prob. 21.13QCh. 21 - How can capital budgeting tools assist in...Ch. 21 - Distinguish the nominal rate of return from the...Ch. 21 - A company should accept for investment all...Ch. 21 - Prob. 21.17MCQCh. 21 - Which of the following statements is true if the...Ch. 21 - Prob. 21.19MCQCh. 21 - Nicks Enterprises has purchased a new machine tool...Ch. 21 - Prob. 21.21ECh. 21 - Capital budgeting methods, no income taxes. Yummy...Ch. 21 - Capital budgeting methods, no income taxes. City...Ch. 21 - Prob. 21.24ECh. 21 - Capital budgeting with uneven cash flows, no...Ch. 21 - Comparison of projects, no income taxes. (CMA,...Ch. 21 - Payback and NPV methods, no income taxes. (CMA,...Ch. 21 - DCF, accrual accounting rate of return, working...Ch. 21 - Prob. 21.29ECh. 21 - Prob. 21.30ECh. 21 - Project choice, taxes. Klein Dermatology is...Ch. 21 - Prob. 21.32ECh. 21 - Selling a plant, income taxes. (CMA, adapted) The...Ch. 21 - Prob. 21.36PCh. 21 - NPV and AARR, goal-congruence issues. Liam...Ch. 21 - Payback methods, even and uneven cash flows. Sage...Ch. 21 - Replacement of a machine, income taxes,...Ch. 21 - Recognizing cash flows for capital investment...Ch. 21 - NPV, inflation and taxes. Fancy Foods is...Ch. 21 - NPV of information system, income taxes. Saina...
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