Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues, and expenses. Required: For each transaction, select whether the related account would be classified as an asset, liability, or stockholders’ equity to be reported in the balance sheet; a revenue or expense to be reported in the income statement; or a dividend to be reported in the statement of stockholders’ equity.

Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues, and expenses.

Required:

For each transaction, select whether the related account would be classified as an asset, liability, or stockholders’ equity to be reported in the balance sheet; a revenue or expense to be reported in the income statement; or a dividend to be reported in the statement of stockholders’ equity.

Internal service funds are reported as a. business-type activities in government-wide statements and governmental funds in funds statements b. proprietary funds in funds statements and governmental activities in government-wide statements c. business-type activities in government-wide statements and proprietary funds in funds statements d. governmental funds in funds statements and governmental activities in government-wide statements

Internal service funds are reported as
a. business-type activities in government-wide statements and governmental funds in funds statements
b. proprietary funds in funds statements and governmental activities in government-wide statements
c. business-type activities in government-wide statements and proprietary funds in funds statements
d. governmental funds in funds statements and governmental activities in government-wide statements

Answer


proprietary funds in funds statements and governmental activities in government-wide statements

“Major” funds include a. all governmental funds plus proprietary funds that have fund balances greater than 10% of those of all proprietary funds combined b. the general fund, special revenue funds, capital projects funds, and debt service funds c. the general fund plus all funds having assets greater than 50% of those of the general fund d. the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

“Major” funds include
a. all governmental funds plus proprietary funds that have fund balances greater than 10% of those of all proprietary funds combined
b. the general fund, special revenue funds, capital projects funds, and debt service funds
c. the general fund plus all funds having assets greater than 50% of those of the general fund
d. the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

                                       

Answer
the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

Problem 8-1 Calculating Payback [LO 1] Consider the following cash flows: Year Cash Flow 0 –$6,800 1 1,950 2 4,100 3 1,750 4 1,450

Problem 8-1 Calculating Payback [LO 1]

Consider the following cash flows:

Year	Cash Flow
0	–$6,800
1	1,950
2	4,100
3	1,750
4	1,450

Required:

What is the payback period for the above set of cash flows? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Payback period

years

Explanation:

To calculate the payback period, we need to find the time the project needs to recover its initial investment. After two years, the project has created:

$1,950 + 4,100 = $6,050

in cash flows. The project still needs to create another:

$6,800 – 6,050 = $750

in cash flows. During the third year, the cash flows from the project will be $1,750. So, the payback period will be 2 years, plus what we still need to make divided by what we will make during the third year. The payback period is:

Payback = 2 + ($750 / $1,750)

Payback = 2.43 years

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent.

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent.

Year	Project F		Project G
0	–$	139,000	–$	209,000
1		58,000		38,000
2		52,000		53,000
3		62,000		92,000
4		57,000		122,000
5		52,000		137,000

Required:

(a)	Calculate the payback period for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Payback period
Project F	years
Project G	years

(b)	Calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Net present value
Project F	$
Project G	$

(c)	Which project should the company accept?
	Project G

Explanation:

(a)

The payback period for each project is:

F:     2 + ($29,000 / $62,000) = 2.47 years

G:    3 + ($26,000 / $122,000) = 3.21 years

The payback criterion implies accepting project F because it pays back sooner than project G. Project G does not meet the minimum payback of three years.

(b)

The NPV for each project is:

F:     NPV = – $139,000 + $58,000 / 1.11 + $52,000 / 1.112 + $62,000 / 1.113 + $57,000 / 1.114

+ $52,000 / 1.115

NPV = $69,197.62

G:    NPV = – $209,000 + $38,000 / 1.11 + $53,000 / 1.112 + $92,000 / 1.113

+ $122,000 / 1.114 + $137,000 / 1.115

NPV = $97,187.84

The NPV criterion implies we should accept project G because project G has a higher NPV than project F.

(c)

Even though Project G does not meet the payback period of three years, it does provide the largest increase in shareholder wealth, therefore, choose Project G. Payback period should generally be ignored in this situation.

    

Calculator Solution:

 

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

   

Project F		Project G
CFo	–$139,000	CFo	–$209,000
C01	$58,000	C01	$38,000
F01	1	F01	1
C02	$52,000	C02	$53,000
F02	1	F02	1
C03	$62,000	C03	$92,000
F03	1	F03	1
C04	$57,000	C04	$122,000
F04	1	F04	1
C05	$52,000	C05	$137,000
F05	1	F05	1
I = 11		I = 11
NPV CPT		NPV CPT
$69,197.62		$97,187.84

Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent. Year Project M Project N 0 –$140,000 –$355,000 1 63,500 152,500 2 81,500 180,000 3 72,500 137,500 4 58,500 110,000

Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent.

Year	Project M	Project N
0	–$140,000	–$355,000
1	63,500	152,500
2	81,500	180,000
3	72,500	137,500
4	58,500	110,000

Required:
(a)	What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

	IRR
Project M	%
Project N	%

(b)	What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	NPV
Project M	$
Project N	$

(c)	Which, if either, of the projects should the company accept?
	Project M

Explanation: (a)

The IRR for each project is:

M:	$140,000 = $63,500 / (1 + IRR) + $81,500 / (1 + IRR)2 + $72,500 / (1 + IRR)3 + $58,500 / (1 + IRR)4

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 34.47%

N:	$355,000 = $152,500 / (1 + IRR) + $180,000 / (1 + IRR)2 + $137,500 / (1 + IRR)3 + 110,000 / (1 + IRR)4

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 24.61%

The IRR decision rule implies we accept project M because the IRR for M is greater than the IRR for N.

(b)

The NPV for each project is:

M:	NPV = – $140,000 + $63,500 / 1.19 + $81,500 / 1.192 + $72,500 / 1.193 + $58,500 / 1.194
	NPV = $43,108.55

N:	NPV = – $355,000 + $152,500 / 1.19 + $180,000 / 1.192 + $137,500 / 1.193 + $110,000 / 1.194
	NPV = $36,709.17

The NPV criterion implies we accept project M because project M has a higher NPV than project N.

(c)

Accept project M since the NPV is higher. IRR cannot be used to rank mutually exclusive projects.

   

Calculator Solution:

 

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

    

Project M
CFo	–$140,000	CFo	–$140,000
C01	$63,500	C01	$63,500
F01	1	F01	1
C02	$81,500	C02	$81,500
F02	1	F02	1
C03	$72,500	C03	$72,500
F03	1	F03	1
C04	$58,500	C04	$58,500
F04	1	F04	1
CPT IRR		I = 19
34.47%		NPV CPT
		$43,108.55

   

Project N
CFo	–$355,000	CFo	–$355,000
C01	$152,500	C01	$152,500
F01	1	F01	1
C02	$180,000	C02	$180,000
F02	1	F02	1
C03	$137,500	C03	$137,500
F03	1	F03	1
C04	$110,000	C04	$110,000
F04	1	F04	1
CPT IRR		I = 19
24.61%		NPV CPT
		$36,709.17

Problem 8-9 Calculating NPV [LO 4] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

Problem 8-9 Calculating NPV [LO 4]

Consider the following cash flows:

Year	Cash Flow
0		–$	32,000
1			14,200
2			17,500
3			11,600

Requirement 1:

What is the NPV at a discount rate of zero percent? (Do not round intermediate calculations.) Net present value $   Requirement 2: What is the NPV at a discount rate of 10 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)   Net present value $   Requirement 3: What is the NPV at a discount rate of 20 percent? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.Round your answer to 2 decimal places (e.g., 32.16).)   Net present value $   Requirement 4: What is the NPV at a discount rate of 30 percent? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)   Net present value $   Explanation: 1: The NPV of a project is the PV of the outflows plus the PV of the inflows. At a zero discount rate (and only at a zero discount rate), the cash flows can be added together across time. So, the NPV of the project at a zero percent required return is:   NPV = – $32,000 + 14,200 + 17,500 + 11,600 NPV = $11,300   2: The NPV at a 10 percent required return is:   NPV = – $32,000 + $14,200 / 1.10 + $17,500 / 1.102 + $11,600 / 1.103 NPV = $4,087.15   3: The NPV at a 20 percent required return is:   NPV = – $32,000 + $14,200 / 1.20 + $17,500 / 1.202 + $11,600 / 1.203 NPV = –$1,300.93   4: And the NPV at a 30 percent required return is:   NPV = – $32,000 + $14,200 / 1.30 + $17,500 / 1.302 + $11,600 / 1.303 NPV = – $5,441.97   Notice that as the required return increases, the NPV of the project decreases. This will always be true for projects with conventional cash flows. Conventional cash flows are negative at the beginning of the project and positive throughout the rest of the project.     Calculator solution:   Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.    CFo  –$32,000 CFo  –$32,000 C01  $14,200 C01  $14,200 F01  1 F01  1 C02  $17,500 C02  $17,500 F02  1 F02  1 C03  $11,600 C03  $11,600 F03  1 F03  1   I = 0%   I = 10%   NPV CPT   NPV CPT   $11,300.00   $4,087.15     CFo  –$32,000 CFo  –$32,000 C01  $14,200 C01  $14,200 F01  1 F01  1 C02  $17,500 C02  $17,500 F02  1 F02  1 C03  $11,600 C03  $11,600 F03  1 F03  1   I = 20%   I = 30%   NPV CPT   NPV CPT   –$1,300.93   –$5,441.97