TABLE 15.2 Use the Information to Answer Following Question(s)

question 50

Multiple Choice

TABLE 15.2
Use the information to answer following question(s) .

-Refer to Table 15.2. Which of the following are viable rates for the swap agreements with Barclay's Bank by Shell and Merck?

• A) Shell borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Shell variable LIBOR + 1% while Shell pays Barclay's fixed 7 1/4%. At the same time, Merck borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Merck 6.00% while Merck pays Barclay's LIBOR plus 1/4%.
• B) Merck borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Merck variable LIBOR + 1% while Merck pays Barclay's fixed 7 1/4%. At the same time, Shell borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%.
• C) Merck borrows at a fixed rate of 7.5% and enters into a swap with Barclay's that pays Merck variable LIBOR + 1% while Merck pays Barclay's fixed 7 1/4%. At the same time, Shell borrows at the variable rate of LIBOR + 1/2% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%.
• D) Merck borrows at a variable rate of LIBOR + 1% and enters into a swap with Barclay's that pays Merck a fixed rate of 7% while Merck pays Barclay's variable LIBOR +1%. At the same time, Shell borrows at the fixed rate of 6.00% and enters into a swap agreement with Barclay's that pays Shell 6.00% while Shell pays Barclay's LIBOR plus 1/4%.

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Definitions:

Predetermined Overhead Rate

The rate used to allocate manufacturing overhead to products, calculated before the period begins based on estimated costs and activity levels.

Direct Labor-Hours

A measure used in accounting to allocate costs, referring to the total hours worked by employees directly involved in the manufacturing process.

Job-Order Costing System

A cost accounting system that accumulates costs incurred according to each job or project, suitable for industries where goods or services are produced on a custom basis.

Predetermined Overhead Rate

is calculated before a period begins and is used to allocate manufacturing overhead costs to products based on a chosen activity basis, such as labor hours or machine hours.