Accounting Problem Solving (Math Problem Sample)

Name of Student Course Code Course Title Date of Submission Problem 1 Constructing a bottling facility Loan by bank = $800,000 Deposit = $200,000 Total Capital = $1,000,000 Cost of Capital = 10% Interest rate = 10% Tax rate = 40% Interest December 31, 2022 = 110% * 800,000 = $880,000 December 31, 2023 = 110% * 880,000 = $968,000 December 31, 2024 = 110% * 968,000 = $1,064,800 December 31, 2025 = 110% * 1,064,800 = $1,171,280 December 31, 2026 = 110% * 1,171,280 = $1,288,408 Total Amount due in 5 years = $1,288,408 Total annual instalments = 1,288,408/5 = $257,681.6 Salvage Value = $400,000 Total costs = 1,288,408 + 200,000 – 400,000 = $1,088,408 Leasing a bottle facility First five year lease = $100,000 per year Total first five year lease amount = 100,000 * 5 $500,000 Last five year lease = $120,000 per year Total last five year lease amount = 120,000 * 5 = $600,000 Total lease amount = 500,000 + 600,000 = $1,100,000 Transportation costs = 5cents per bottle Available capacity = 2,000,000 Capacity used yearly = 1,200,000 Total transportation expense = 1,200,000 * 0.05 = $60,000 per year Total transportation costs = 60,000 * 10 = $600,000 Total Costs = 1,100,000 + 600,000 = $1,700,000 * I should construct my own bottling facility instead of leasing one. This is because constructing a facility will reduce costs incurred by almost $700,000. Assuming that in both instances the sales I make are the same, then constructing a facility will make more profits due tolower costs especially the transportation costs that will be incurred yearly. Building my own facility will therefore reduce costs and therefore make more profits. At the end of the 10 years, I can sell the facility off at $400,000 and if I wish to continue with the bottling facility I can. In the lease option, after 10 years the contract has to be terminated due to the construction of the highway. Consytructing my own facility to use for 10 years is therefore the better option as compared toleasing it for 10 years. * Under the 2022 US GAAP, lease of the bottling facility would be a finance lease. This is because even if there is no transfer of ownership in the contract above, at the end of the 10th year, there will be a highway constructed. This means that the at the end of the lease, the leased asset will have no alternative use to the lessor at the end of the lease. * On December 31, 2022 the lease liability amount on the balance sheet would be: $100,000. The total amount that I would record relating to the lease for the year ending December 31, 2022 would be: $1,000,000 * No. This is because regardless of how much I produce per year, in both instances, the revenue generated would be the same. The costs in leasing are dependent on the production units due to transportation costs. Increasing the production units raises the revenue as well as the costs in a similar ratio. The decision is therefore not sensitive to the expected production capacity since revenue and transportation cost is a function of the expected production capacity. * Total costs for building a facility = 1,288,408 + 200,000 – 600,000 = $888,408 Total costs for leasing a facility = 500,000 + 300,000 = $800,000 Yes. The option to terminate or not terminate the lease is valuable. This is because terminating the lease at the end of 5 years lowers the costs below that of constructing a facility. This could change the decision that I make if I decide to carry out the operation for five years I would therefore lease instead of constructing. Problem 2 Depreciation Expense = (20,000,000 – 0)/32 = $625,000 per year Appreciation = 2% annually Capital gains tax rate = 20% of the difference between the selling price and the remaining “cost basis”. Tax rate = 40% * Initial investment yr 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -2E+07 3225000 3225000 3225000 3225000 3225000 3225000 3225000 3225000 3225000 3225000 IRR = 10% The client is required to pay a lease of $3,850,000 per year for 10 years. * Yr 0 yr 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 Pretax -2E+07 3225000 3225000 3225000 3225000 3225000 3225000 3225000 3225000 3225000 3225000 After tax -2E+07 1935000 1935000 1935000 1935000 1935000 1935000 1935000 1935000 1935000 1935000 Pretax IRR 10% After Tax IRR -1% * Yr 0 yr 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 3850000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 -625000 Interest Expense -345428 -345428 -345428 -345428 -345428 -345428 -345428 -345428 -345428 -345428 Pretax -2E+07 2879572 2879572 2879572 2879572 2879572 2879572 2879572 2879572 2879572 2879572 After tax -2E+07 1727743 1727743 1727743 1727743 1727743.2 1727743 1727743 1727743 1727743 1727743 Pretax IRR 7% After Tax IRR -3% The IRR decreases by 2% if 80% of the money is borrowed instead. Problem 3 * If there is no transfer of risks and rewards from Tesla(Lessor) to the buyer (Lessee), the car remains on the balance sheet of the lessor and the payments to the lease should be recorded in the income statement and this is a lease. However, if the seller (Tesla) has transferred thr risks and rewards to the buyer and does not repurchase car, then this is a sale. * Yes it does. This is because the expected value of the vehicle at the time of the repurchase compared to the guaranteed resale value matters in accounting as this is a part of a minimum lease payment. Since when calcula...