A. Acme Manufacturing is a decentralized corporation. Divisions are treated as investment centers. In recent years, Acme has been running about 11% ROA for the corporation as a whole, and has a cost of capital of 8%. One of their most profitable divisions is Walker Products, which last year had ROA of 20% ($1,600,000 operating income on assets of $8,000,000). Walker has an opportunity to expand one of its plants to produce a promising new product. The expansion will cost two million dollars, and is expected to increase operating earnings to $1,900,000. What factors should Walker’s manager and her supervisor, the VP of operations, consider in deciding whether to go forward with the expansion?
B. Connor Company, a manufacturer of small tools, has a new bookkeeper.
During a recent month, the bookkeeper made the following entries, among
others. For each, state whether the entry is correct or incorrect under US GAAP,
and explain briefly. If incorrect, specify the correct entry.
1. Connor purchased manufacturing equipment, and issued a two-year note
to the seller in payment. The bookkeeper debited Manufacturing Equipment,
and credited Notes Payable.
2. It was determined that an account receivable from a customer was uncollectible
due to the bankruptcy of the customer, and needed to be written off. The
bookkeeper debited Bad Debt Expense and credited Accounts Receivable.
3. The county assessor determined that the value of the land on which Connor’s
factory sits had increased by $50,000. The bookkeeper debited Land and
Gain on Land for $50,000.
4. Connor repurchased shares of stock from one of its investors. The bookkeeper
debited Treasury Stock and credited Cash.
5. The electric utility sent a bill for current use of electric power