39)
Team Instructions
: Divide the class into teams of three or four people. Give the students time in class to work with their teammates and put together a final correct copy of the problem. Each team should turn in only one copy of the problem for grading. All team members will receive the same grade.
Acme Enterprise just paid $280,000 to buy ten new company cars for its salespeople to use. Acme expects to use these cars for two or three years and then replace them.
1.If Acme uses the ten cars for three years, it then expects to be able to sell them for $10,000 each. How much depreciation expense will Acme record each year using the straight-line method?
2.If Acme uses the ten cars for only two years, it then expects to be able to sell them for $12,000 each. How much depreciation expense will Acme record each year using the straight-line method?
3.If Acme has 1,000,000 weighted-average shares of common stock outstanding, how much difference will the choice of useful life make in the company's earnings per share?
4.Which useful life would be considered aggressive?
5.Which useful life would improve the quality of Acme's earnings?
6.Explain the relationship between management's choice of accounting method and a company's quality of earnings.
40) The city of Morgantown gave a piece of land to Acme, Inc. so that the company would build its new factory in Morgantown and create many local jobs. One appraiser said the land was worth $500,000, while a second appraiser said the land was worth $520,000.
1.What effect will it have on Acme's earnings per share if it records the land at $500,000 rather than $520,000?
(circle one)increase
decrease
no effect
2.What effect will it have on Acme's total assets if it records the land at $500,000 rather than $520,000?
(circle one)increase
decrease
no effect
3.Name one ratio that will be affected by Acme's choice of value for the land. Will this ratio be higher or lower if Acme records the land at $500,000 rather than $520,000?
4.Explain the relationship between management's choice of recorded value for the land and the company's quality of earnings.
41) During the year, Core, Rupt, and Baroque, Inc. had sales revenue of $13,200. For each of the following ranges of estimates provided, indicate which percent is the more conservative choice.
a.Estimated sales returns range from 1 to 2% of total sales
b.Bad debts are expected to be between 1 and 2% of net sales
c.Estimated warranty costs are 1 to 2% of net sales
d.Straight-line depreciation rate could be 10% or 20% for its buildings