in the proper accounting treatment for the various costs incurred during 2015?
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Extreme Inc. is a newly established enterprise. It was set up by an entrepreneur who is generally interested in the business of providing engineering and operational support services to aircraft manufacturers. Extreme Inc., through the contacts of its owner, received a confirmed order from a well- known aircraft manufacturer to develop new designs for ducting the air conditioning of their aircraft. For this project, Extreme Inc. needed funds aggregating to $1 million. It was able to convince venture capitalists and was able to obtain funding of $1 million from two Silicon Valley venture capitalists. The expenditures Extreme Inc. incurred in pursuance of its research and development project follow, in chronological order:
January 15, 2015: Paid $175,000 toward salaries of the technicians (engineers and consultants)
March 31, 2015: Incurred $250,000 toward cost of developing the duct and producing the test model June 15, 2015: Paid an additional $300,000 for revising the ducting process to ensure that product could be introduced in the market
August 15, 2015: Developed, at a cost of $80,000, the first model (prototype) and tested it with the air conditioners to ensure its compatibility
October 30, 2015: A focus group of other engineering providers was invited to a conference for the introduction of this new product. Cost of the conference aggregated to $50,000.
December 15, 2015: The development phase was completed and a
Net profit for the year 2015 was estimated to equal $900,000.
Required
Explain the proper accounting treatment for the various costs incurred during 2015?
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- Extreme Inc. is a newly established enterprise. It was set up by an entrepreneur who is generally interested in the business of providing engineering and operational support services to aircraft manufacturers. Extreme Inc., through the contacts of its owner, received a confirmed order from a wellknown aircraft manufacturer to develop new designs for ducting the air conditioning of their aircraft. For this project, Extreme Inc. needed funds aggregating to $1 million. It was able to convince venture capitalists and was able to obtain funding of $1 million from two Silicon Valley venture capitalists. The expenditures Extreme Inc. incurred in pursuance of its research and development project follow, in chronological order: January 15, 2015: Paid $175,000 toward salaries of the technicians (engineers and consultants) March 31, 2015: Incurred $250,000 toward cost of developing the duct and producing the test model June 15, 2015: Paid an additional $300,000 for revising the ducting process to…Extreme Inc. is a newly established enterprise. It was set up by an entrepreneur who is generally interested inthe business of providing engineering and operational support services to aircraft manufacturers. ExtremeInc., through the contacts of its owner, received a confirmed order from a well-known aircraft manufacturerto develop new designs for ducting the air conditioning of their aircraft. For this project, Extreme Inc.needed funds aggregating to $1 million. It was able to convince venture capitalists and was able to obtainfunding of $1 million from two Silicon Valley venture capitalists. The expenditures Extreme Inc. incurred inpursuance of its research and development project follow, in chronological order: • January 15, 20X5: Paid $175,000 toward salaries of the technicians (engineers and consultants) • March 31, 20X5: Incurred $250,000 toward cost of developing the duct and producing the test model • June 15, 20X5: Paid an additional $300,000 for revising the ducting process…XYZ Inc., the Calapan-based computer manufacturer, has developed a new all-in-one device: phone, music-player, camera, GPS, and computer. The device is called the iPip. The following data have been collected regarding the iPip project. The company has identified a prime piece of real estate and must purchase it immediately for $100,000. In addition, R&D expenditures of $175,000 must be made immediately. During the first year the manufacturing plant will be constructed. The plant will be ready for operation at the end of Year 1. The construction costs are $500,000 and will be paid upon completion. At the end of the Year 1, an inventory of raw materials will be purchased costing $50,000. Production and sales will occur during years 2 and 3. (Assume that all revenues and operating expenses are received (paid) at the end of each year.) Annual revenues are expected to be $850,000. Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales. The…
- XYZ Inc., the Calapan-based computer manufacturer, has developed a new all-in-one device: phone, music-player, camera, GPS, and computer. The device is called the iPip. The following data have been collected regarding the iPip project. The company has identified a prime piece of real estate and must purchase it immediately for $100,000. In addition, R&D expenditures of $175,000 must be made immediately. During the first year the manufacturing plant will be constructed. The plant will be ready for operation at the end of Year 1. The construction costs are $500,000 and will be paid upon completion. At the end of the Year 1, an inventory of raw materials will be purchased costing $50,000. Production and sales will occur during years 2 and 3. (Assume that all revenues and operating expenses are received (paid) at the end of each year.) Annual revenues are expected to be $850,000. Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales. The…XYZ Inc., the Calapan-based computer manufacturer, has developed a new all-in-one device: phone, music-player, camera, GPS, and computer. The device is called the iPip. The following data have been collected regarding the iPip project. The company has identified a prime piece of real estate and must purchase it immediately for $100,000. In addition, R&D expenditures of $175,000 must be made immediately. During the first year the manufacturing plant will be constructed. The plant will be ready for operation at the end of Year 1. The construction costs are $500,000 and will be paid upon completion. At the end of the Year 1, an inventory of raw materials will be purchased costing $50,000. Production and sales will occur during years 2 and 3. (Assume that all revenues and operating expenses are received (paid) at the end of each year.) Annual revenues are expected to be $850,000. Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales. The…You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report on your desk, and complains, "We owe these consultants $1 million for this report, and I am not sure their analysis makes sense. Before we spend the $25 million on the new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in thousands of dollars) for the project: Project year 1 2 … 9 10 Sales revenue 30,000 30,000 30,000 30,000 - Cost of goods sold 18,000 18,000 18,000 18,000 =Gross profit 12,000 12,000 12,000 12,000 - Gen, sales and admin expenses 2,000 2,000 2,000 2,000 - Depreciation 2,500 2,500 2,500 2,500 =Net operating income 7,500 7,500 7,500 7,500 - Income tax 2,625 2,625 2,625 2,625 =Net Income…
- Peronto’s Inc. is an asphalt contractor located in Kansas City, Mo. Peronto’s Inc. is planning on expanding into the Chicago market is budgeting that the start-up expenditures for the new Chicago facilities will be $25,000. These expenditures will be for the location of a new facility and the incremental expenditures for conducting business in a new territory. The CFO for Peronto’s believes that the $25,000 start upexpenditures should be recognized as an asset because they will benefit the company for many periods in the future. Your role as the staff accountant is to determine the correct recognition for the start up expenditures. Your interpretation of the guidance: The correct recognition of the $25,000 start up expenditures will be: a. as an asset b. as an expenseMark Sexton and Todd Story, the owners of S&S Air, Inc., were impressed by the work Chris had done on financial planning. Using Chris’s analysis, and looking at the demand for light aircraft, they have decided that their existing fabrication equipment is sufficient, but it is time to acquire a bigger manufacturing facility. Mark and Todd have identified a suitable structure that is currently for sale, and they believe they can buy and refurbish it for about $35 million. Mark, Todd, and Chris are now ready to meet with Christie Vaughan, the loan officer for First United National Bank. The meeting is to discuss the mortgage options available to the company to finance the new facility. Christie begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between S&S Air and the bank, there would be no closing costs for the loan. Christie states that the APR of the loan would be 6.1 percent. Todd…AMT, Inc., is considering the purchase of a digital camera for maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineers. Solve, a. You have been asked by management to determine the PW of the EVA of this equipment, assuming the following estimates: capital investment = $345,000; market value at end of year six = $120,000; annual revenues = $120,000; annual expenses = $8,000; equipment life = 6 years; effective income tax rate = 50%; and after-tax MARR = 10% per year. MACRS depreciation will be used with a five-year recovery period. b. Compute the PW of the equipment’s ATCFs. Is youranswer in Part (a) the same as your answer in Part (b)?
- Alshamsi Ltd is a manufacturer of machine equipment product. The senior management has proposed to invest in a newmanufacturing plant that would aid in revolutionizing the machine equipment manufacturing process, and also thecompany’s products. A consultant has been engaged by the company, and has provided the following information: New equipment if purchased will cost $25,112,0 Old equipment–currently planned to be sold for $2,500,000 in four years – could be sold immediately for asalvage value of $5,250,00 If the new equipment is purchased, then this will increase the level of inventory immediately by $3,500,000, accounts receivable will increase by $1,444,500 and accounts payable increase by $3,500,000. The new equipment is estimated to have a useful life of four years and will depreciated using straight-linedepreciati At the end of four years, it is estimated that the salvage value on the new equipment will be$5,850,000. The cost of capital of the company is…NhyiraCapital Limited began research into the software it has used over a period. The software has been operational for the generation of economic benefits over the years. The company decided to research the development of the software. The company assigned four researchers who were paid R10,000 in total for the period of the research. Transportation and feeding costs incurred in carrying out the research amounted to R4,000. The company further acquired four tablets with research software for R25,000 each to enable them to ascertain accurate findings.The company’s software is separately identified and has a commercial value. The research was completed and there is a need for developing the company’s software. A development cost of R125,000 was reliably measured and incurred. The economic useful life of the software was estimated to be 10 years from the date of completing its development. Show how the software and its related expenses are to be capitalized in the financial statements…You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and complains, "We owe these consultants $ 1.1 million for this report, and I am not sure their analysis makes sense. Before we spend the $ 29 million on new equipment needed for this project, look it over and give me your opinion." You open the report and find the following estimates (in millions of dollars): Project Year Earnings Forecast ($ million) 1 2 . . . 9 10 Sales revenue 28.00028.000 28.00028.000 28.00028.000 28.00028.000 minus−Cost of goods sold 16.80016.800 16.80016.800 16.80016.800 16.80016.800 equals=Gross profit 11.20011.200 11.20011.200 11.20011.200 11.20011.200 minus−Selling, general, and administrative expenses 2.3202.320 2.3202.320 2.3202.320 2.3202.320…
