Question

1. Crane Company purchased machinery that was installed and ready for use on January 3, 2020, at a total cost of $234000. Salvage value was estimated at $28000. The machinery will be depreciated over five years using the double-declining balance method. For the year 2021, Crane should record depreciation expense on this machinery of

a

$93600.

b

$49440.

c

$56160.

d

$60640.

2.Pharoah Corporation incurred the following costs in 2021:

Acquisition of R&D equipment with a useful life of
4 years in R&D projects	$640000
Start-up costs incurred when opening a new plant	132000
Advertising expense to introduce a new product	540000
Engineering costs incurred to advance a product to full
production stage	448000

What amount should Pharoah report as research & development expense in 2021?

a

$608000

b

$1088000

c

$1220000

d

$864000

3. Teal Company has been operating for several years, and on December 31, 2020, presented the following balance sheet.

TEAL COMPANY BALANCE SHEET DECEMBER 31, 2020
Cash		$39,900		Accounts payable		$82,700
Receivables		75,100		Mortgage payable		129,000
Inventory		90,100		Common stock ($1 par)		146,500
Plant assets (net)		231,700		Retained earnings		78,600
		$436,800				$436,800

The net income for 2020 was $23,700. Assume that total assets are the same in 2019 and 2020.

(a) Compute each of the following ratios. (Round answers to 2 decimal places, e.g. 1.59 or 45.87%.)

(a)		Current ratio		enter the Current ratio rounded to 2 decimal places
(b)		Acid-test ratio		enter the Acid-test ratio rounded to 2 decimal places
(c)		Debt to assets ratio		enter the Debt to assets ratio in percentages rounded to 2 decimal places	%
(d)		Return on assets		enter the Return on assets in percentages rounded to 2 decimal places	%

Answer 1

1. For the year 2021, Crane should record depreciation expense on this machinery of

The double declining balance method of depreciation, also known as the double percentage of declining balance method of depreciation.

Ans. (C ) $56160 is right.

So first find out normal rate of depreciation

= 100 % / Estimated life

= 100 % / 5 years

= 20 %

So, as per double declining method depreciation rate will be 40% ( 20% *2)

Year	Opening balance	Depreciation @ 40%	Book value
2020	$234000	$ 93,600	$ 140,400

So, Depreciation for 2021 = $ 140,400 * 40%

                                            = $ 56,160

2. What amount should Pharoah report as research & development expense in 2021?

Research & development expense is the expenses of searching for new idea and improved products , new application of equipment, or new or improved methods in production.

Ans. (b) $1088000 is right

4 years in R&D projects	$ 640,000
Engineering costs incurred to advance a product to full production stage	$ 448,000
Total	$1,088,000

Explanation:

Start-up costs incurred when opening a new plant is opening cost in nature of capital expenditure which is not include in research & development expense.

Advertising expense to introduce a new product is related to sales of product.

3. Following ratio find with calculation.

a	Current ratio	2.48
b	Acid-test ratio	1.39
c	Debt to assets ratio	48.47 %
d	Return on assets	17.99 %

a. Current ratio

Current Assets		Current Liabilities
Cash	$ 39,900	Accounts payable	$82,700
Receivables	$ 75,100
Inventory	$ 90,100
Total	$ 205,100	Total	$82,700

Current ratio is a liquidity ratio that measures a firm’s / company capacity to pay its short-term obligation or those due within one year. The current ratio is calculated by dividing current assets by current liabilities:

Current Assets	$ 205,100
Divided by : Current Liabilities	/ $82,700
Current Ratio	2.48

b. Acid-test ratio

The formula for acid test ratio is a measure of liquidity which is calculated by dividing the outline of the most liquid assets like cash, cash equivalents, and marketable securities by the total current liabilities.

Quick Assets		Current Liabilities
Cash	$ 39,900	Accounts payable	$82,700
Receivables	$ 75,100
Total	$ 115,00	Total	$82,700

Formula

Acid-test ratio = Current Liabilities ÷ Current Liabilities

                          = $ 115,00 ÷ $82,700

Acid-test ratio = 1.39

c. Debt to assets ratio

The debt to asset ratio is a leverage ratio that measures the amount of total assets that are financed by short term creditors and long term creditors.

Debt to assets ratio = (short-term debt + long-term debt) / Total Assets *100

Total Debt		Total Assets
Accounts payable	$ 82,700	Current Assets	$ 205,100
Mortgage payable	$ 129,000	Plant assets (net)	$ 231,700
Total	$ 211,700	Total	$ 436,800

          Debt to assets ratio = $ 211,700 ÷ $ 436,800 * 100

                                            = 48.47 %

d. Return on assets

Return on assets ratio is a financial ratio that indicates the results of profit a company earns in relation to its overall resources available in particular period. This ratio find out on the basis of net earning divided by total assets.

In this example ration find out on the basis of retain earning and balance of assets.

Return on assets = Net earning *100 / Total Assets

                             = $ 78,600 * 100 / $436,800

                             = 17.99 %