1997 MISSOURI YOUNG FARMERS ASSOCIATION FARM BUSINESS MANAGEMENT CONTEST Columbia, Missouri February 1, 1997 Please place your answers in the appropriate box on the answer sheet provided. There is only one correct answer to each question. 1. A farmer has $150,000 of principal remaining on a mortgage at the end of this fiscal year. The annual principal payment is $15,000. Accrued interest at the end of the year amounts to $8,500. The year-end balance sheet will show: A. non-current liabilities of $158,500. B. current liabilities of $158,500. C. non-current liabilities of $150,000 and current liabilities of $8,500. D. non-current liabilities of $135,000 and current liabilities of $23,500. E. None of the above 2. A producer sells 8 feeder steers for $71/cwt. The average weight per steer is 680 pounds. There is a 2.5% sales commission and yardage fees of $2.30 per head. The net amount received for the pen of steers would be A. $3,844.00 B. $3,765.84 C. $3,747.44 D. $468.43 E. None of the above 3. Wheat yields 45 bushels per acre and the price is $3.50 per bushel. The price of canola is $0.12 per pound. The cost of production is $100 per acre for wheat and $120 per acre for canola. What yield would be needed from canola to give the same net returns as wheat? A. 1,521 pounds B. 1,479 pounds D. 1,312 pounds D. 1,104 pounds E. None of the above 4. A farmer is studying the sunflower enterprise. Assuming the farmer is trying to get the maximum returns above variable costs, the farmer should produce where A. marginal cost is equal to marginal revenue. B. marginal cost is equal to average total cost. C. marginal revenue is equal to average variable cost. D. average variable costs are lowest. E. average total cost is equal to average total revenue. 5. For tax year 1996, the social security wage base is A. $12,500 B. $17,500 C. $50,000 D. $62,700 E. None of the above 6. To consider the time value of money in analyzing alternative farm investments, one should choose the investment with the A. highest net present value. B. largest net cash flow over the lifetime of the investment. C. highest average profits over the investment lifetime. D. lowest cost. E. None of the above 7. A feedlot operator buys feeder steers, finishes them, and sells them. The operator estimates that finished steers will sell for $66 per cwt. and that it will cost $230 per head to bring them from the 675 pound purchase weight to the 1100 pound selling weight. What is the highest price the operator can pay for 675 pound feeder steers to break even? A. $107.56/cwt. B. $78.15/cwt. C. $73.48/cwt. D. $70.67/cwt. E. None of the above 8. What will the breakeven bid price for 675 pound feeder steers be in the above question if high priced corn causes feeding costs to increase to $300 per head? A. $320 per head. B. $73.48/cwt. C. $63.11/cwt. D. $51.18/cwt. E. None of the above 9. A soybean producer decides to store his soybeans in the local elevator for four months. The price at harvest is $7.00 per bushel and the elevator charges 2› per bushel per month for storage plus a 5› per bushel handling charge. He has 5,000 bushels to sell and must borrow $35,000 at 8.5% annual interest while he stores the soybeans. What price must he receive for his soybeans to break even and cover his storage and opportunity costs? A. $7.48 B. $7.33 C. $7.20 D. $7.13 E. None of the above 10. You are having a good business year and it looks as if taxable income is going to be a lot more than it was last year. Which of the following steps would be the best tax management before the end of the tax year? A. Buy $20,000 of feeder steers B. Postpone buying the $45,000 tractor until next year C. Sell 5,000 bushels of corn right now D. Put up a $15,000 pole barn this year E. Buy $15,000 worth of fertilizer for the next crop year 11. A $50,000 loan amortized at 8% interest for 20 years yields annual payments of $5,092.61. How much of the first year's payment is principal? A. $1,092.61 B. $2,500.00 C. $2,592.61 D. $4,000.00 E. None of the above 12. For the above loan of $50,000, if the 20th and final payment includes $377.23 of interest, what was the outstanding principal balance after the 19th payment? A. $5,469.84 B. $4,715.38 C. $4,622.77 D. $377.23 E. None of the above 13. For the above loan of $50,000, how much total interest is paid over the life of the loan? A. $101,852.20 B. $51,852.20 C. $30,691.78 D. $7,544.60 E. None of the above 14. During the year, a farmer pays $1,800 principal and $500 interest on a tractor loan. His annual depreciation is $2,000. His deductible operating expenses (fuel, oil, repairs, etc.) associated with operating the tractor totaled $500. His marginal tax rate is 25%. What is his after-tax cost of using the tractor for the year? A. $750 B. $2,050 C. $2,800 D. $3,000 E. None of the above 15. The financial progress being made in a farm business from one year to the next year is best shown by A. a change in assets. B. a change in net worth. C. a change in liabilities. D. a cash basis income tax statement. E. None of the above 16. A grain farmer who normally stores his soybeans at a local elevator has decided to use the options market to create a synthetic storage. To do so he will sell his beans at harvest and A. buy a put option. B. sell a put option. C. buy a call option. D. sell a call option. E. None of the above 17. A part-time farmer has 160 acres of land, 30 cows and can only work 400 hours per year on his farm. An acre of corn requires 3 hours of labor and yields 80 bushels. An acre of beans take 2.2 hours and yields 30 bushels. Each cow needs 7 hours of labor, 3 acres of land, and consumes 16 bushels of corn. What is the maximum number of acres of soybeans he can grow if the farmer keeps 30 cows and does not buy any corn? A. 64 B. 94 C. 104 D. 110 E. None of the above 18. If the interest rate is 10%, what is the present value of a dollar to be received by a producer two years from now? A. $0.826 B. $0.900 C. $1.100 D. $1.210 E. None of the above 19. Farmer Brown purchases a new tractor. A record keeping system which records both the addition to equipment and the reduction of cash is called A. an income statement. B. dual effect. C. a balance sheet. D. double entry. E. None of the above 20. Specialization in crops or livestock in a farm business tends to A. increase income and increase risk. B. decrease income and increase risk. C. decrease risk and increase income. D. decrease risk and decrease income. 21. In 1996, Pat Parker had net farm income of $25,000. Pat had total business assets of $760,000 and total liabilities of $350,000. Pat paid $32,800 in interest. Rate of return on assets for 1996 would be A. 3.3% B. 4.3% C. 7.6% D. 14.1% E. None of the above 22. If corn silage as fed contains 62% moisture and 2.5% protein, the dry mater would be what percent of protein? A. 2.80 B. 3.08 C. 5.71 D. 6.58 E. None of the above 23. A farmer purchases 500-pound feeder steers for 68› per pound and plans to sell the steers at 800 pounds. The farmer estimates the total cost of gain to be 60› per pound. The nearest breakeven price when the steers are sold at 800 pounds is A. 66.41›/pound B. 65.00›/pound C. 64.11›/pound D. 62.78›/pound E. None of the above 24. The main difference between cash and accrual accounting is that accrual accounting includes A. a charge for unpaid family labor. B. depreciation. C. an adjustment for changes in inventory. D. sales of assets. E. None of the above 25. At the beginning of last year, a farmer had an outstanding loan for $155,000. The interest rate was 9% APR. If the farmer made one loan payment at the end of the year of $20,500, what was the outstanding balance at the end of the year? A. $134,500 B. $137,605 C. $140,550 D. $148,450 E. None of the above 26. The nearby corn futures contract closed at $2.70 with a local basis of $0.15 under the board. The local cash market was A. $2.850 B. $2.685 C. $2.550 D. $2.295 E. None of the above 27. An enterprise system of accounts A. separates taxable income from nontaxable income. B. differentiates between the value of the operator's labor, management, and capital. C. involves keeping separate records of receipts and expenses for each individual product or class of products. D. is required for income tax purposes. 28. A farmer has total assets of $600,000 of which land is $300,000. The farmer's debt:equity ratio is 0.5. What will the farmer's debt:equity ratio be if the value of land inflates by 10%? A. 0.575 B. 0.465 C. 0.450 D. 0.400 E. None of the above 29. A $1 deductible expense (before tax) will cost ______ after tax if the farmer's marginal tax rate is 40%. A. $0.00 B. $0.40 C. $0.60 D. $1.00 E. None of the above 30. A synthetic hedge can be created by A. buying a put and buying a call at the same strike price. B. buying a put and selling a call at the same strike price. C. selling a put and buying a call at the same strike price. D. selling a put and selling a call at the same strike price. E. None of the above 31. For 1996, the self-employment tax rate for Social Security and Medicare is A. 4.58%. B. 7.65%. C. 15.30%. D. 25.00%. E. None of the above 32. On April 1, 1996, Lynn borrowed $25,000 to buy seed and fertilizer. On December 1, 1996, she repaid the $25,000 along with $1533.25 interest. What annual interest rate did she pay? A. 9.20% B. 9.75% C. 10.50% D. 11.75% E. None of the above 33. The Chicago Mercantile Exchange has changed its hog futures contract from a delivery system to a cash settlement system. The reason for this change was to A. improve convergence. B. prevent convergence. C. comply with CFTC regulations. D. reduce Exchange paperwork. E. None of the above 34. A farmer is purchasing a new baler at a cost of $24,000. His dealer will finance the baler under the following terms: 10% down payment with the balance repaid in equal payments over the next five years at 9% APR. The farmer expects the baler to last for 10 years and have a salvage value of $4,000. How much interest will the farmer pay the first year of the loan? A. $1,944 B. $2,160 C. $2,800 D. $3,120 E. None of the above 35. A farmer has a debt:worth ratio of 2:1. The current liabilities total $50,000 and the non-current liabilities total $110,000. What is the value of the assets? A. $240,000 B. $210,000 C. $160,000 D. $80,000 E. None of the above 36. A cattle feeding operation has sales of $88,000, feed purchases of $40,000, other costs of $30,000, an opening inventory of $40,000, and a closing inventory of $32,000. What is the net farm income for this operation on an accrual basis? A. $2,000 B. $10,000 C. $18,000 D. $20,000 E. None of the above 37. Net farm income for a farm is $50,000. The charge for unpaid labor and management is $30,000. What is the farmer's return to equity? A. - $30,000 B. - $20,000 C. 0 D. + $20,000 E. None of the above 38. The tax you owe on each additional dollar of taxable income is called the A. Section 179 deduction. B. straight-line tax rate. C. marginal tax rate. D. federal adjusted taxable income. E. None of the above 39. A feedlot operator purchases a pen of 100 feeder steers with an average weight of 788 pounds and sells them at an average weight of 1041 pounds. Total feed cost for the pen is $16,420. Feed cost per pound of gain is equal to A. $0.440 B. $0.515 C. $0.649 D. $0.720 E. None of the above 40. A farmer should issue an IRS Form 1099 for which of the following? A. $750 paid to a neighbor for hay. B. $500 paid to a neighbor for custom work. C. $1500 paid to a neighbor for a bull. D. $650 paid to a neighbor for land rent. E. All of the above 41. When required, you must send an IRS Form 1099-MISC to the individual paid by A. December 31. B. January 31. C. March 1. D. April 15. E. 90 days after payment. 42. When the size of the soybean harvest exceeds locally available farm and elevator storage, what happens to the basis? A. Basis widens B. Basis narrows C. Basis goes out of existence D. Basis is usually the same all year long 43. If the U.S. wheat industry has an inelastic demand curve, a reduction in the amount of wheat supplied to the market would A. have no effect on total revenues in the wheat industry. B. increase the total revenues in the wheat industry. C. decrease the total revenues in the wheat industry. D. cause a sharp increase in the demand for wheat. E. None of the above 44. Which of the following is considered Schedule F farm income? A. Cull breeding stock B. Crop sales C. Sales of farm equipment D. Sale of land E. All of the above 45. A farmer who wants to have the right, but not the obligation, to sell a particular commodity at a specified price level, would use a A. cash forward contract. B. basis contract. C. call option. D. put option. E. None of the above 46. How many total acres are included in "SW 1/4 of NE 1/4 and SE 1/4 of Section 15, Twp. 10N, R4W of the 5th Principle Meridian"? A. 80 acres B. 120 acres C. 160 acres D. 200 acres E. None of the above 47. How much perimeter fence would be required to completely enclose the parcel of land described in question 46? A. 1.0 mile B. 1.5 miles C. 2.0 miles D. 2.5 miles E. None of the above 48. An increase in the value of the U.S. dollar relative to the currency of other countries should result in A. more costly imports. B. less costly imports. C. increased exports. D. no effect on imports or exports. Use the following information to answer Questions 49-56. Present Future Present Value of Value of Value of N a $1 a $1 Annuity 1 0.913 1.095 0.913 2 0.834 1.199 1.747 3 0.762 1.312 2.509 4 0.696 1.437 3.205 5 0.635 1.575 3.840 6 0.580 1.724 4.420 49. A vineyard will produce no income during the first year, $1,000 at the end of each year for the next 4 years and $2,000 at the end of the sixth year. What is the present value of this income stream? A. $3,987 B. $4,087 C. $5,000 D. $6,000 E. None of the above 50. A beef cow produces after-tax returns at the end of the year of $80/year for 6 years and can be sold for $400 at the end of the sixth year. Assume the above table uses the appropriate discount rate and determine the current value of the cow. A. $345.60 B. $585.60 C. $663.10 D. $836.50 E. None of the above 51. With three years of income remaining in a beef cow, how much should she be worth using the above tables? A. $305.42 B. $398.17 C. $479.12 D. $505.52 E. None of the above 52. If the farmer expects interest rates to decrease, but no change in net returns to cattle, what impact is this likely to have on the present value of the beef cow? A. Decrease the present value B. Increase the present value C. Would not change the present value D. Cannot tell 53. If the average tax rate is expected to increase over the next three years so that the cow no longer nets $80/year after taxes. What impact would this have on your answer to question 50? A. Increases the value B. Decreases the value C. No change in the value D. Can not tell 54. What is the annual payment on a $10,000 loan amortized over 5 years? A. $2,500.00 B. $2,604.17 C. $3,840.00 D. $6,350.00 E. None of the above 55. What discount rate is used in the above table? A. 8.7% B. 9.1% C. 9.5% D. 10.9% E. None of the above 56. Use the table to determine the present value of $1 to be received 7 years in the future? A. $0.495 B. $0.530 C. $0.555 D. $0.562 E. None of the above 57. A Subchapter S corporation can have no more than A. 10 shareholders. B. 15 shareholders. C. 35 shareholders. D. 75 shareholders. E. There is no limit on number of shareholders. 58. The money you must deposit with a broker to insure performance in order to trade in the futures market is called A. basis. B. margin. C. commission. D. spread. E. None of the above 59. An LLC (Limited Liability Company) is usually A. taxed like a corporation. B. taxed like a partnership. C. not for profit and therefore not taxed. D. illegal in Missouri. E. None of the above 60. A feeder cattle producer has 57 head of 750 pound steers and can sell them for $72 per cwt. or send them to a custom feedlot which guarantees the feeder 55› per pound cost of gain. What price per cwt. will the producer have to receive if he sends them to the feedlot in order to break even with the offer he has at $72 per cwt. when they weigh 750 pounds? Assume he plans to feed them to a weight of 1100 pounds. Disregard the opportunity cost of capital, death loss, and shrink. A. $66.59 per cwt. B. $72.05 per cwt. C. $73.41 per cwt. D. $79.25 per cwt. E. None of the above 61. The IRS form used to calculate self-employment tax is A. Schedule D. B. Form 4797. C. Form 4562. D. Schedule SE E. None of the above 62. Corn has an expected yield of 120 bushels per acre and has a production cost of $140.00 per acre. Current market prices are $2.50 per bushel for corn and $7.25 per bushel for soybeans. Soybeans can be raised at a production cost of $110 per acre. At what breakeven yield per acre would soybeans generate the same net return per acre as dryland corn? A. 22.1 bushels B. 31.9 bushels C. 38.2 bushels D. 48.7 bushels E. None of the above 63. The maximum amount that a child can inherit from a parent without owing any federal estate tax is A. $10,000. B. $182,000. C. $600,000. D. unlimited. E. None of the above 64. The main difference between a joint tenancy and tenancy in common is A. the surviving joint tenant will eventually own all of the land as a result of right of survivorship. B. the surviving tenant in common will eventually own all the land as a result of right of survivorship. C. only husbands and wives may be joint tenants. D. tenants in common must own equal shares of the property while joint tenants may own unequal shares (i.e., H owns 1/4 and W owns 3/4). 65. In order for limited partners to maintain their limited liability, they cannot A. share in the profits of the limited partnership. B. own more than one-third of the limited partnership. C. participate in the management of the limited partnership. D. own more than 49.9% of the limited partnership. E. Both C and D. 66. Sometime back you bought a $71.00 October live cattle future Put for $3.00. It's now late September and October futures are $65. The option expires next week and the $71.00 Puts are selling for $6.00. Your cattle are ready for market and a buyer has offered you $64.00/cwt. What is your most likely course of action? A. Sell your cattle for $64 and let the option expire B. Hold the cattle until the cash price equals the futures price C. Sell both your cattle and your Put now D. Sell your cattle now and buy another Put 67. You are considering the purchase of a combine, rather than continuing to hire a custom operator at $22.00 per acre. If you purchase the machine, the annual fixed costs (interest, depreciation, etc.) will be $18,000. The variable cost is $10 per acre including the extra labor. There would be no other changes in costs and returns associated with ownership and no savings other than the custom charges. How many acres must be harvested each year in order to justify (on a breakeven basis) purchasing the combine? A. 833.3 B. 1,000 C. 1,200 D. 1,500 E. None of the above 68. Effective 1/1/94 a cancelled check is no longer adequate proof of a charitable contribution that is greater than A. $ 250 B. $ 1000 C. $ 5000 D. $ 10,000 E. None of the above 69. Farmer Jones has $10,000 in equipment he uses exclusively for corn. He assumes that this equipment will last 5 years and have a salvage value of $0. He plans to plant 120 acres of corn each year. Assuming an interest rate of 8%, what will be his average fixed costs per year for the next 5 years (depreciation and interest) for this machinery per acre of corn? A. $10 B. $20 C. $25 D. $30 E. None of the above 70. The maximum amount that can be claimed as a Section 179 expense deduction on your 1996 tax return is A. $5,000 B. $10,000 C. $15,000 D. $17,500 E. None of the above 71. Individuals age 55 and over can exclude from income up to $________ of gain from the sale of their principal residence. A. $25,000 B. $50,000 C. $100,000 D. $125,000 E. None of the above 72. A farmer traded a tractor with an adjusted tax basis of $15,000. The new tractor had a list price of $50,000. The dealer allowed a $20,000 trade-in for the old tractor. The farmer paid $10,000 of his own money and borrowed $20,000 to pay the balance. What is the tax basis of the new tractor? A. $15,000 B. $35,000 C. $45,000 D. $50,000 E. None of the above 73. How many pounds of 48% protein supplement must be mixed with 8% protein corn to make a ton of 14% protein feed? A. 300 pounds B. 400 pounds C. 550 pounds D. 600 pounds E. None of the above 74. If during this or the preceding calendar year you, as a farmer-employer, paid cash wages of $20,000 or more to farm workers in any calendar quarter or if you employed 10 or more farm workers for some part of a day during 20 different weeks of the year, then you A. must pay Federal Unemployment Tax on your workers. B. are eligible for the Farm Employer Tax Credit. C. are exempt from paying self-employment tax. D. have to file on Schedule C rather than Schedule F. E. None of the above 75. The capital gains taxes that would be due should a farmer sell his land is an example of a A. current liability. B. long-term liability. C. deductible expense. D. contingent liability. E. None of the above 1997 MISSOURI YOUNG FARMERS ASSOCIATION FARM BUSINESS MANAGEMENT CONTEST February 1, 1997 KEY 1. D 21. C 41. B 61. D 2. C 22. D 42. A 62. E 3. B 23. B 43. B 63. C 4. A 24. C 44. B 64. A 5. D 25. D 45. D 65. C 6. A 26. C 46. D 66. C 7. C 27. C 47. D 67. D 8. C 28. B 48. B 68. A 9. B 29. C 49. B 69. B 10. E 30. B 50. B 70. D 11. A 31. C 51. D 71. D 12. B 32. A 52. B 72. C 13. B 33. A 53. B 73. A 14. B 34. A 54. B 74. A 15. B 35. A 55. C 75. D 16. C 36. B 56. B 17. A 37. D 57. D 18. A 38. C 58. B 19. D 39. C 59. B 20. A 40. D 60. A