ACT 325 Portfolio Project Description Your portfolio

ACT 325 Portfolio Project Description

Your portfolio
project is due by the end of Week 8. Please complete the following seven
problems based on the serial problem presented in the textbook beginning with
Chapter 13. You are encouraged to use the working papers to create your
answers. Please make sure to cite all sources that support your overall
conclusions. You should paste any required Excel tables and type your answers
into a Microsoft Word document, clearly labeling label each problem.

Problem 1

Santana Rey created Business Solutions on October
1, 2011. The company has been successful and Santana plans to expand her
business. She believes that an additional $86,000 is needed and is
investigating these funding sources.

Santana’s
sister Cicely is willing to invest $86,000 in the business as a common
shareholder. Since Santana currently had about $129,000 invested in the
business, Cicely’s investment will mean that Santana will maintain about
60% ownership and Cicely will have 40% ownership of Business Solutions.

Santana’s Uncle Marcello is willing
to invest $86,000 in the business as a preferred stockholder. Marcello
would purchase 860 shares of $100 par value, 7% preferred stock.

Santana’s banker is willing to lend
her $86,000 on a 7%, 10-years not payable. She would make monthly payments
of $1,000 per month for 10 years.

Questions:

1. Prepare the journal entry to reflect the initial
$86,000 investment under each of the options (a), (b), and (c).

2. Evaluate the three proposals for expansion, providing
the pros and cons of each option.
3. Which option did you recommend Santana adopt?
Explain.

Problem 2

While reviewing the March 31, 2012, balance sheet
of Business Solutions, Santana Rey notes that the business has built a large
cash balance of $68,057. Its most recent bank money market statement shows that
the funds are earning an annualized return of 0.75%, so Rey decided to make
several investments with the desire to earn a higher return on the idle cash
balance. Accordingly, in April, 2012, Business Solutions makes the following
investments in trading solutions:

April 16 – Purchase 400 shares of Johnson &
Johnson at $50 per share plus $300 commission. April 30 – Purchase 200 shares
of Starbucks Corporation at $22 per share plus $250 commission.

Questions:

Prepare journal entries to record the April
purchases of trading securities by Business Solutions.

On June 30, 2012, the per share
market price (fair value) of the Johnson & Johnson shares is $55 and
the Starbucks shares is $19. Prepare the adjusting entry to record any
necessary fair value adjustment to its portfolio of trading securities.

Problem 3

Use the following selected data from Business
Solutions’ income statement for the three months ended March 31, 2012, and from
its March 31, 2012, balance sheet to complete the requirements before computer
services revenue, $25,307; net sales (of goods), $18,693; total sales and
revenue, $44,000; cost of goods sold, $14,052; net income, $18,833; quick
assets, $90,924; current assets, $95,568; total assets, $120,268; current
liabilities, $875; total liabilities, $875, and total equity, $119,393.

Questions:

Compute the gross margin ratio (both with
and without services revenues) and net profit margin ratio.

Compare the current ratio and acid-test
ratio.

Compute the debt ratio and equity ratio.
What percent of its assets are current? What
percent are long term?

Problem 4

The computer workstation furniture manufacturing
that Santana Rey started January is progressing well. As of the end of June,
Business Solutions’ job cost sheets show the following total costs accumulated
on three furniture jobs.

Job 6.02

Job 6.03

Job 6.04

Direct materials

$1500

$3300

$2700

Direct labor

800

1420

2100

Overhead

400

710

1050

Job 6.02 was started in production in May, and
these costs were assigned to it in May: direct materials, $600; direct labor,
$180; and overhead, $90. Job 6.03 and 6.04 were started in June. Overhead costs
is applied with a predetermined rate based on direct labor costs. Jobs 6.02 and
6.03 are finished in June, and Job 6.04 is expected to be finished in July. No
raw materials are used indirectly in June. (Assume this company’s predetermined
overhead rate did not change over three months).

Questions:

What is the cost of the raw materials used
in June for each of the three jobs and in total?

How much total direct labor cost is incurred
in June?

What predetermined overhead rate is used in
June?

How much cost is transferred to finished
goods inventory in June?

Problem 5

After reading an
article about activity-based costing in a trade journal for the furniture
industry, Santana Rey wondered if it was time to critically analyze overhead costs
at Business Solutions. In a recent month, Rey found that setup costs,
inspection costs, and utility costs made up most of its overhead. Additional
information about overhead follows:

Activity

Cost

Driver

Setting up machines

$20,000

25
batches

Inspecting components

$7,500

5,000
parts

Providing utilities

$10,000

5,000
machine hours

Overhead has been
applied to output at a rate of 50% if direct labor costs. The following data
pertain to Job 6.15.

Direct materials

$2500

Number of Parts

400 parts

Direct labor

$3500

Machine Hours

600 machine hours

Batches

2 batches

Questions:

What is the total cost of Job 6.15
if Business Solutions applies overhead at 50% of direct labor cost?
What is the total cost of job 6.15 is
Business Solutions uses activity based costing?

Which approach to assigning overhead
gives a better representation of the costs incurred to produce Job 6.15?
Explain.

Problem 6

Santana Rey expects second quarter 2012 sales of
her new line of computer furniture to be the same as the first quarter sales
(reported below) without any changes in strategy. Monthly sales averaged 40
desk units (sales price of $1,250) and 20 chairs (sales price of $500).
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Business Solutions
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Segment Income Statement*
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For Quarter Ended March 31,
2012
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Sales †

$180,000

Cost of goods sold‡

115,000

Gross Profit

65,000

Expenses

Sales commissions (10%)

18,000

Advertising expenses

9,000

Other fixed expenses

18,000

Total expenses

45,000

Net income

$20,000

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*Reflect revenue and expense activity
only related to the computer furniture segment.

†Revenue: (120 desks X $1,250)+ (60
chairs X $500) = $150,000+$30,00 + $180,000
‡ Cost of goods
sold: (120 chairs C $750) + (60 chairs X $250) + $10,000 = $115,000

Santana Rey
believes that sales will increase each month for the next three months (April –
48 desks, 32 chairs: May – 52 desks, 35 chairs: June – 56 desks, 38 chairs) if
selling prices are reduced to $1,150 for desks and $450 for chairs, and
advertising expenses are increased by 10% and remain at that level for all
three months. The products’ variable cost will remain at $750 for desks and
$250 for chairs. The sales

staff will continue to earn a 10% commission, the
fixed manufacturing costs per month will remain at $10,000 and other fixed
expenses will remain at $6,000 per month.

Questions:

Prepare
budgeted income statements for each of the months of April, May, and June
that show the expected results from implementing the proposed changes. Use
a three-column format, with one column for each month.

Use the budgeted income statements
from part 1 to recommend whether Santana Rey should implement the proposed
changes. Explain.

Problem 7

Santana Rey is
considering the purchase of equipment for Business Solutions that would allow
the company to add a new product to its computer furniture line. The equipment
is expected to cost $300,000 and to have a six-year life and no salvage value.
It will be depreciated on a straight line basis. Business Solutions expects to
sell 100 units of the equipment’s products each year. The expected annual
incomes related to this equipment follows.

Sales

$375,000

Costs

Materials, labor, and overhead (except
for depreciation)

200,000

Depreciation of new equipment

50,000

Selling and administrative expenses

37,500

Total costs and

287,500

expenses

Pretax income

87,500

Income taxes (30%)

26,250

Net income

$61,250

Question:

Compute the (1) payback period and
(2) accounting rate of return for this equipment. (Record answers as
percents, rounded to one decimal.)

Submit your portfolio project through the
assignment link by Sunday midnight of Week 8.