Markel Corporation"s balance sheet at December 31, 2011, is presented below.

MARKEL CORPORATION
Balance Sheet
December 31, 2011

Cash

$ 30,000

Accounts payable

$ 13,750

Inventory

30,750

Interest payable

2,500

Prepaid insurance

5,600

Bonds payable

50,000

Equipment

38,000

Common stock

25,000

$104,350

Retained earnings

$ 13,100

$104,350

During 2012, the following transactions occurred.

1. Markel paid $2,500 interest on the bonds on January 1, 2012.

2. Markel purchased $241,100 of inventory on account.

3. Markel sold for $480,000 cash inventory which cost $265,000. Markel also collected $28,800 sales taxes.

4. Markel paid $230,000 on accounts payable.

5. Markel paid $2,500 interest on the bonds on July 1, 2012.

6. The prepaid insurance ($5,600) expired on July 31.

7. On August 1, Markel paid $10,200 for insurance coverage from August 1, 2012, through July 31, 2013.

8. Markel paid $17,000 sales taxes to the state.

9. Paid other operating expenses, $91,000.

10. Retired the bonds on December 31, 2012, by paying $48,000 plus $2,500 interest.

11. Issued $90,000 of 8% bonds on December 31, 2012, at 103. The bonds pay interest every June 30 and December 31.

Adjustment data:

1. Recorded the insurance expired from item 7.

2. The equipment was acquired on December 31, 2011, and will be depreciated on a straight-line basis over 5 years with a $3,000 salvage value.

3. The income tax rate is 30%. (Hint: Prepare the income statement up to income before taxes and multiply by 30% to compute the amount.)

Instructions

(You may want to set up T accounts to determine ending balances.)

(a) Prepare journal entries for the transactions listed above and adjusting entries.

(b) Prepare an adjusted trial balance at December 31, 2012.

(c) Prepare an income statement and a retained earnings statement for the year ending

December 31, 2012, and a classified balance sheet as of December 31, 2012.

  CASE 10–36 Behavioural Impact of Standard Costs and Variances [LO1]

José Flores is the manufacturing supervisor of Newmarket Manufacturing Company, which pro- duces a variety of plastic products. Some of these products are standard items that are listed in the company’s catalogue, while others are made to customer specifications. Each month, Flores receives a performance report showing the budget for the month, the actual activity, and the variance between budget and actual. Part of Flores’s annual performance evaluation is based on his depart- ment’s performance against budget. Newmarket’s purchasing manager, Adriana Goster, also receives monthly performance reports, and she, too, is evaluated in part on the basis of these  reports.

The monthly reports for June had just been distributed when Flores met Goster in the hallway outside their offices. Scowling, Flores began the conversation, “I see we have another set of monthly performance reports hand-delivered by that not-very-nice junior employee in the budget office. He seemed pleased to tell me that I’m in trouble with my performance again.”

Goster: I got the same treatment. All I ever hear about are the things I’ve done wrong. Now I’ll have to spend a lot of time reviewing the report and preparing explanations. The worst part is that it’s now July 21, so the information is almost a month old and we have to spend all this time on history.

Flores: My biggest gripe is that our production activity varies a lot from month to month, but we’re given an annual budget that’s written in stone. Last month we were shut down for three days when a strike delayed delivery of the basic ingredient used in our plastic formulation, and we had already exhausted our inventory. You know about that problem, though, because we asked you to call all over the country to find an alternative source of supply. When we got what we needed on a rush basis, we had to pay more than we normally do.

Goster: I expect problems like that to pop up from time to time—that’s part of my job—but now we’ll both have to take a careful look at our reports to see where the charges are reflected for that rush order. Every month I spend more time making sure that I really should be charged for each item reported than I do making plans for my department’s daily work. It’s really frustrating to see charges for things I have no control over.

Flores: The way we get information doesn’t help, either. I don’t get copies of the reports you get, yet a lot of what I do is affected by your department, and by most of our other depart- ments. Why do the budget and accounting people assume that I should be told only about my operations, even though the president regularly gives us pep talks about how we all need to work together as a team?

Goster: I seem to get more reports than I need, and I am never asked to comment on them until top management calls me onto the carpet about my department’s shortcomings. Do you ever hear comments when your department shines?

Flores:  I guess they don’t have time to review the good news. One of my problems is that all the reports are in dollars and cents. I work with people, machines, and materials. I need information  to  help  me  solve  this  month’s  problems—not  another  report  of  the  dollars expended last month or the month before.

Required:

1.              Based on the conversation between Flores and Goster, describe the likely motivation and behaviour of these two employees resulting from Newmarket Manufacturing Company’s standard cost and variance reporting system.

2.              When it is properly implemented, both employees and companies should benefit from a system involving standard costs and variances.

a.       Describe the benefits that can be realized from a standard costing system.

b.       Based on the situation presented above, recommend ways for Newmarket Manufacturing Company to improve its standard cost and variance reporting system so as to increase employee motivation.

(CMA, adapted)

 

American Greetings Corporation manufactures and sells greeting cards and related items such as gift wrapping paper. CSX Corporation is one of the largest railway networks in the nation. The following data were taken from one of the companies December 25, 2015, annual report and from the other s February 28, 2015, annual report. Revealing which data relate to which company was intentionally omitted. For one company, the dollar amounts are in thousands, while for the other they are in millions. Required a. Calculate depreciation costs as a percentage of sales for each company. (Round to three decimal places.) b. Calculate property, plant, and equipment as a percentage of total assets for each company. (Round to three decimal places.) c. Based on the information now available to you, decide which data relate to which company. Explain the rationale for your decision. d. Which company appears to be using its assets most efficiently? Explain your answer.

The Jones Petro Company reports the following consolidated statement of income:

Operating revenues

$2,989

Costs and expenses:

Cost of rentals and royalties

543

Cost of sales

314

Selling, service, administrative,

and general expense

1,424

Total costs and expenses

2,281

Operating income

708

Other income

27

Other deductions (interest)

60

Income before income taxes

675

Income taxes

309

Income before outside shareholders’ interests

366

Outside shareholders’ interests

66

Net income

$ 300

Note: Depreciation expense totals $200; operating lease payments total $150; and preferred dividends total

$50. Assume that 1/3 of operating lease payments is for interest.

Required a. Compute the times interest earned.

b. Compute the fixed charge coverage.