Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 5, Problem 5.14BE
Variable consideration
• LO5–6
Leo Consulting enters into a contract with Highgate University to restructure Highgate’s processes for purchasing goods from suppliers. The contract states that Leo will earn a fixed fee of $25,000 and earn an additional $10,000 if Highgate achieves $100,000 of cost savings. Leo estimates a 50% chance that Highgate will achieve $100,000 of cost savings. Assuming that Leo determines the transaction price as the expected value of expected consideration, what transaction price will Leo estimate for this contract?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
FIN 6020
v19f
Perez Company:
Mutually Exclusive Projects with Different Lives. Ch 10 (10-17)
Again, you are considering two mutually exclusive projects.
Machine A: This project costs $10 million. The expected net cash flows are $4 million per year for 4
years, when is to be replaced.
Machine B: It costs $15 million, and has expected cash flows of $3.5 per year for 8 years, when it will be
replaced.
The cost of capital is 10%. Machine prices are expected to stay steady as production efficiencies are
expected to offset inflation.
Evaluate these projects.
a. Calculate NPV, IRR, Replacement Chain, and Equivalent Annual Annuity.
b. Which project should be company accept?
10
Question
View Policies
Current Attempt in Progress
It costs Concord Company $26 per unit ($18 variable and $8 fixed)
to produce its product, which normally sells for $38 per unit. A
foreign wholesaler offers to purchase 6400 units at $21 each.
Concord would incur special shipping costs of $2 per unit if the
order were accepted. Concord has sufficient unused capacity to
produce the 6400 units. If the special order is accepted, what will
be the effect on net income?
O $6400 decrease
O $19200 increase
O $115200 increase
O $6400 increase
Homework, Chapter 25
Accept Business at Special Price
Product A is normally sold for $50 per unit. A special price of $30 is offered for the
export market. The variable production cost is $26 per unit. An additional export
tariff of 13% of revenue must be paid for all export products. Assume there is
sufficient capacity for the special order.
a. Prepare a differential analysis dated March 16 on whether to reject (Alternative
1) or accept (Alternative 2) the special order. If required, round your answers to
two decimal places. If an amount is zero, enter "0".
Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
March 16
Reject
Accept
Differential
Order
Order
Effects
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues, per unit
Costs:
Variable manufacturing costs, per unit
Export tariff, per unit
Profit (loss), per unit
b. Should the special order be rejected (Alternative 1) or accepted (Alternative 2)?
Chapter 5 Solutions
Intermediate Accounting
Ch. 5 - What are the five key steps a company follows to...Ch. 5 - What indicators suggest that a performance...Ch. 5 - What criteria determine whether a company can...Ch. 5 - We recognize service revenue either at one point...Ch. 5 - What characteristics make a good or service a...Ch. 5 - Prob. 5.6QCh. 5 - What must a contract include for the contract to...Ch. 5 - How might the definition of probable affect...Ch. 5 - When a contract includes an option to buy...Ch. 5 - Prob. 5.10Q
Ch. 5 - Prob. 5.11QCh. 5 - Is a customers right to return merchandise a...Ch. 5 - Prob. 5.13QCh. 5 - Under what circumstances should sellers consider...Ch. 5 - When should a seller view a payment to its...Ch. 5 - What are three methods for estimating stand-alone...Ch. 5 - When is revenue recognized with respect to...Ch. 5 - In a franchise arrangement, what are a franchisors...Ch. 5 - When does a company typically recognize revenue...Ch. 5 - Prob. 5.20QCh. 5 - Prob. 5.21QCh. 5 - Prob. 5.22QCh. 5 - Must bad debt expense be reported on its own line...Ch. 5 - Explain the difference between contract assets,...Ch. 5 - Explain how to account for revenue on a long-term...Ch. 5 - Prob. 5.26QCh. 5 - Prob. 5.27QCh. 5 - What are the two general criteria that must be...Ch. 5 - Explain why, in most cases, a seller recognizes...Ch. 5 - Revenue recognition for most installment sales...Ch. 5 - Prob. 5.31QCh. 5 - How does a company report deferred gross profit...Ch. 5 - Prob. 5.33QCh. 5 - Briefly describe the guidelines for recognizing...Ch. 5 - Prob. 5.35QCh. 5 - Briefly describe the guidelines provided by GAAP...Ch. 5 - Revenue recognition at a point in time LO52 On...Ch. 5 - Timing of revenue recognition LO53 Estate...Ch. 5 - Prob. 5.3BECh. 5 - Allocating the transaction price LO54 Sarjit...Ch. 5 - Existence of a contract LO5-5 Tulane Tires wrote...Ch. 5 - Prob. 5.6BECh. 5 - Prob. 5.7BECh. 5 - Performance obligations; warranties LO55 Vroom...Ch. 5 - Prob. 5.9BECh. 5 - Prob. 5.10BECh. 5 - Performance obligations; construction LO55...Ch. 5 - Prob. 5.12BECh. 5 - Prob. 5.13BECh. 5 - Variable consideration LO56 Leo Consulting enters...Ch. 5 - Variable consideration LO56 In January 2018,...Ch. 5 - Prob. 5.16BECh. 5 - Prob. 5.17BECh. 5 - Payment s by the seller to the customer LO56...Ch. 5 - Estimating stand-alone selling prices: adjusted...Ch. 5 - Estimating stand-alone selling prices: expected...Ch. 5 - Estimating stand-alone selling prices; residual...Ch. 5 - Timing of revenue recognition; licenses LO57 Saar...Ch. 5 - Prob. 5.23BECh. 5 - Prob. 5.24BECh. 5 - Timing of revenue recognition; franchises LO57...Ch. 5 - Timing of revenue recognition; bill-and-hold LO57...Ch. 5 - Prob. 5.27BECh. 5 - Prob. 5.28BECh. 5 - Contract assets and contract liabilities LO58...Ch. 5 - Prob. 5.30BECh. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Prob. 5.32BECh. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Long-term contract; revenue recognition; loss on...Ch. 5 - Installment sales method On July 1, 2018, Apache...Ch. 5 - Prob. 5.36BECh. 5 - Cost recovery method Refer to the situation...Ch. 5 - Prob. 5.38BECh. 5 - Prob. 5.39BECh. 5 - Revenue recognition; software contracts under IFRS...Ch. 5 - Prob. 5.41BECh. 5 - Prob. 5.1ECh. 5 - Prob. 5.2ECh. 5 - Allocating transaction price LO54 Video Planet...Ch. 5 - Prob. 5.4ECh. 5 - Prob. 5.5ECh. 5 - Prob. 5.6ECh. 5 - Prob. 5.7ECh. 5 - Prob. 5.8ECh. 5 - Prob. 5.9ECh. 5 - Variable considerationmost likely amount; change...Ch. 5 - Variable considerationexpected value; change in...Ch. 5 - Prob. 5.12ECh. 5 - Approaches for estimating stand-alone selling...Ch. 5 - FASB codification research LO56, LO57 Access the...Ch. 5 - Franchises; residual method LO56, LO57 Monitor...Ch. 5 - FASB codification research LO58 Access the FASB...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Income (loss) recognition; Long-term contract;...Ch. 5 - Long-term contract; revenue recognition over time;...Ch. 5 - Installment sales method Charter Corporation,...Ch. 5 - Installment sales method; journal entries [This is...Ch. 5 - Installment sales; alternative recognition methods...Ch. 5 - Journal entries; point of delivery, installment...Ch. 5 - Prob. 5.27ECh. 5 - Prob. 5.28ECh. 5 - Prob. 5.29ECh. 5 - Prob. 5.30ECh. 5 - Prob. 5.31ECh. 5 - Prob. 5.32ECh. 5 - Prob. 5.33ECh. 5 - Prob. 5.34ECh. 5 - Prob. 5.35ECh. 5 - Prob. 5.1PCh. 5 - Prob. 5.2PCh. 5 - Prob. 5.3PCh. 5 - Prob. 5.4PCh. 5 - Prob. 5.5PCh. 5 - Variable consideration; change of estimate LO53,...Ch. 5 - Prob. 5.7PCh. 5 - Prob. 5.8PCh. 5 - Prob. 5.9PCh. 5 - Long-term contract; revenue recognition over time ...Ch. 5 - Long-term contract; revenue recognition upon...Ch. 5 - Long-term contract; revenue recognized over time;...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Income statement presentation; installment sales...Ch. 5 - Prob. 5.15PCh. 5 - Installment sales; alternative recognition methods...Ch. 5 - Installment sales and cost recovery methods...Ch. 5 - Prob. 5.18PCh. 5 - Franchise sales; installment sales method Olive...Ch. 5 - Prob. 5.1BYPCh. 5 - Judgment Case 52 Satisfaction of performance...Ch. 5 - Judgment Case 53 Satisfaction of performance...Ch. 5 - Prob. 5.4BYPCh. 5 - Prob. 5.5BYPCh. 5 - Prob. 5.6BYPCh. 5 - Prob. 5.8BYPCh. 5 - Prob. 5.9BYPCh. 5 - Prob. 5.10BYPCh. 5 - Prob. 5.11BYPCh. 5 - Prob. 5.12BYPCh. 5 - Prob. 5.13BYPCh. 5 - Prob. 5.14BYPCh. 5 - Prob. 5.15BYPCh. 5 - Prob. 5.16BYPCh. 5 - Prob. 5.19BYPCh. 5 - Prob. 1CCTC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Question 45 Assume a division of HP Inc currently makes 50,000 circuit boards per year used in producing diagnostic electronic instruments at the cost of 150 per board, considering of variable costs per unit of $35 and feed costs per unit of $15. Further, assume Sarmina Corporation offers to sell HP the 50.000 circuit boards for $50 each if HP accepts this offer the facilities currently used to make the boards could be rented to one of HP's suppliers for $75,000 per year. In addition, $8 per unit of the fixed overhead applied to the circuit boards would be totally eliminated. Should HP outsource this component from Sanmina Corporation Support your answer with relevant cost calculations. Make-or-Buy) Decision.arrow_forwardExercise 14-3 (Algo) Internal Rate of Return [LO14-3] Wendell’s Donut Shoppe is investigating the purchase of a new $42,800 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $5,700 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.50 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? 2. What discount factor should be used to compute the new machine’s internal rate of return? (Round your answers to 3 decimal places.) 3. What is the new machine’s internal rate of return? (Round your final answer…arrow_forwardExercise 14-3 (Algo) Internal Rate of Return [LO14-3] Wendell’s Donut Shoppe is investigating the purchase of a new $34,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of $6,500 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 2,500 dozen more donuts each year. The company realizes a contribution margin of $1.60 per dozen donuts sold. The new machine would have a six-year useful life. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? 2. What discount factor should be used to compute the new machine’s internal rate of return? (Round your answers to 3 decimal places.) 3. What is the new machine’s internal rate of return? (Round your final answer…arrow_forward
- PROBLEM 11A-4 Transfer Price with an Outside Market [LO11–5] Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the pro- duction of various paper goods. Revenue and costs associated with a ton of pulp follow: Selling price Expenses: $70 Variable $42 Fixed (based on a capacity of 50,000 tons per year) 18 60 Net operating income $10 Hrubec Products has just acquired a small company that manufactures paper cartons. This company will be treated as a division of Hrubec with full profit responsibility. The newly formed Carton Division is currently purchasing 5,000 tons of pulp per year from a supplier at a cost of $70 per ton, less a 10% purchase discount. Hrubec's president is anxious for the Carton Division to begin purchasing its pulp from the Pulp Division if an acceptable transfer price can be worked out. Required: For (1) and (2) below, assume that the Pulp Division can sell all of its pulp to outside customers for $70 per ton. Are the managers of…arrow_forwardQuestion 2 Kako Ltd is considering introducing a new product unto the market. This will require the injection of capital to the tune of GH¢20,000 for the purchase of the equipment for production. The cost of the building that Kako Ltd intends to use for the project is GH¢30,000. The Production and Marketing department has presented the information in the table below: 2019 Variable cost per unit of the product GH¢2 Selling price per unit GH¢6 Quantity 4000 units per annum Again the following information should be taken not of: Feasibility studies cost the company GH¢2000 Test marketing expenses amounts to GH¢3000 Variable cost will increase by 5% per annum Selling price will increase by 10% per annum Marketing expense will be 5% of sales revenue per year An initial working capital investment of GH¢2000 will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the…arrow_forwardExercise 14-6 (Algo) Simple Rate of Return Method [LO14-6] The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $57,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. The new machine would cost $7,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a salvage value of $24,000. The new machine would have a useful life of 10 years with no salvage value. Required: 1. What is the annual depreciation expense associated with the new bottling machine? 2. What is the annual incremental net operating income provided by the new bottling machine? 3. What is the amount of the initial investment associated with this project that should be used for calculating the simple rate of return? 4. What is the simple rate of return on the new bottling machine? (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)arrow_forward
- Project A - 10,000 Project B - 10,000 4000 3000 10,000 5000 4000 3000 A. Project A B. Project B C. Neither project, - both have a NPV of 0. Project C - 10,000 3000 4000 5000 Time 0 Time 1 Time 2 Time 3 If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 8%, which should the company choose? D. Both projects, - both have positive NPV. E. Neither project,- both have negative NPV. Project D - 10,000 4000 4000 4000 Project E - 10,000 2000 6000 10,000arrow_forwardPROBLEM 11A-4 Transfer Price with an Outside Market [LO11-5] Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the pro- duction of various paper goods. Revenue and costs associated with a ton of pulp follow: Selling price . Expenses: $70 Variable .. $42 Fixed (based on a capacity of 50,000 tons per year) . 18 60 Net operating income $10 Hrubec Products has just acquired a small company that manufactures paper cartons. This company will be treated as a division of Hrubec with full profit responsibility. The newly formed Carton Division is currently purchasing 5,000 tons of pulp per year from a supplier at a cost of $70 per ton, less a 10% purchase discount. Hrubec's president is anxious for the Carton Division to begin purchasing its pulp from the Pulp Division if an acceptable transfer price can be worked out.arrow_forwardProblem 10-23 Comparing Mutually Exclusive Projects [LO1] Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $305,000, has a four-year life, and requires $105,000 in pretax annual operating costs. System B costs $385,000, has a six-year life, and requires $99,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 23 percent and the discount rate is 11 percent. Calculate the NPV for both conveyor belt systems. (A negative answer should be İndicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) System A System B ces Which conveyor belt system should the firm choose? O system B System Aarrow_forward
- Exercise 14A-4 (Algo) Basic Present Value Concepts [LO14-7] Fraser Company will need a new warehouse in eighteen years. The warehouse will cost $410,000 to build. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: What lump-sum amount should the company invest now to have the $410,000 available at the end of the eighteen-year period? Assume that the company can invest money at: (Round your final answer to the nearest whole dollar amount.)arrow_forward--/1 Question 15 es View Policies tions Current Attempt in Progress US Support The Heating Division of Kobe International produces a heating element that it sells to its customers for $44 per unit. Its variable cost per unit is $25, and its fixed cost per unit is $12. Top management of Kobe International would like the Heating Division to transfer 14,600 heating units to another division within the company at a price of $30. The Heating Division is operating at full capacity. What is the minimum transfer price that the Heating Division should accept? tral 65 Minimum transfer price $ 8:48 PM 49) 11/18/2019 Chp fo fn ins prt sc f12 4 home delete end pg up 9 num backspace lock 7 8arrow_forwardLO 11.3Grummet Company is acquiring a new wood lathe with a cash purchase price of $80,000. The Wood Master Industries (the manufacturer) has agreed to accept $23,500 at the end of each of the next 4 years. Based on this deal, how much interest will Grummet pay over the life of the loan?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
Depreciation -MACRS; Author: Ronald Moy, Ph.D., CFA, CFP;https://www.youtube.com/watch?v=jsf7NCnkAmk;License: Standard Youtube License