During 2018, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated by the following amounts:

   
WMC uses the periodic inventory system and the FIFO cost method.

Required:
1-a. Determine the effect of 2016 errors on retained earnings at January 1, 2018, before any adjustments. (Ignore income taxes.)
1-b. Determine the effect of 2017 errors on retained earnings at January 1, 2018, before any adjustments. (Ignore income taxes.)
2. Prepare a journal entry to correct the error made in 2017.

Wardell Company purchased a mini computer on January 1, 2016, at a cost of $45,100. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an estimated residual value of $4,600. On January 1, 2018, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900.

Required:
1. Prepare the appropriate adjusting entry for depreciation in 2018 to reflect the revised estimate.
2. Prepare the appropriate adjusting entry for depreciation in 2018 to reflect the revised estimate. Assuming that the company uses the sum-of-the-years'-digits method instead of the straight-line method.

Berry Company is an architectural firm located in Toronto, Ontario. The company works with small and medium-size construction businesses to prepare building plans according to client contract. Berry employs 10 professionals and 5 staff. The following data are provided for last year:

Number of designs completed and sold                      700

Beginning inventory of direct materials                $20,000

Beginning inventory of designs in process          $60,000

Ending inventory of direct materials                                 $0

Ending inventory of designs in process                $100,000

Purchases, direct materials                                    $40,000

Direct labour                                                             $800,000

Manufacturing overhead                                         $100,000

Administrative expense                                           $150,000

Selling expense                                                        $60,000

Required:

1. Calculate the cost of services sold.

2. Assume that the average fee for a design is $2,100 Prepare an income statement for Berry Company.

3. Refer to the cost of services sold (calculated in Requirement 1). What is the dominant cost Will this always be true of service organizations? If not, provide an example of an exception

4. Why does Berry Company show zero inventory of finished plans? What change(s) in the company could result in a positive finished goods inventory?

Please answer all questions

Select the best answer for each of the following unrelated items.

1. Why have several research studies failed to find strong evidence of the usefulness of the information content of reserve recognition accounting (RRA)?
   1. The relevance of RRA information is low.
   2. The reliability of RRA information is low.
   3. RRA is supplementary information.
   4. RRA uses a 10% discount factor for all oil and gas firms.

2. Which of the following statements best describes the characteristics of the measurement and the information approaches to financial reporting?
   1. The measurement approach uses RRA to recognize assets and liabilities in the statement of financial position.
   2. The information approach has always had a measurement component.
   3. The information approach uses value in use to recognize the year-end values of assets in statements of financial position.
   4. IFRS does not permit assets to be re-valued when a firm uses the measurement approach.

3. Which of the following situations best characterizes the owner-manager agency problem in a firm?
   1. The owner cannot observe the manager’s effort
   2. The availability of managerial talent is scarce in the economy
   3. Managers do not have control over owners’ sales of firm shares to other parties
   4. Managers are often compensated by a combination of salary, bonus, and stock options

4. When regulation does not indicate the nature of disclosure, which of the following statements is correct?

1. Accountants need to behave ethically and encourage firms to produce high-quality information.
2. Accountants need not take an active role in encouraging full disclosure because regulation does not prescribe how to report.
3. Full disclosure will lead to lowering of share prices.
4. Voluntary disclosures will eliminate efficient market anomalies.

6. Why is it important for firms to disclose low-persistence accounting items?
   1. Because investors are interested in the extent to which current reported earnings will persist into the future.
   2. Because managerial bonuses are typically based on low-persistence components of net income.
   3. Because low-persistence items reverse.
   4. Because low-persistence items are valued by investors.

7. Which of the following actions of the manager of a borrowing firm might cause a moral hazard problem between the manager and the lender?
   1. The manager pays excessive dividends to the shareholders.
   2. The manager undertakes low-risk projects.
   3. The manager pays off the loan prior to the maturity date.
   4. The manager decides to smooth its net income over time.

8. One of the problems that might cause market failure in the production of financial accounting information is said to be lack of unanimity. Which of the following statements best characterizes the notion of lack of unanimity that might lead to market failures?
   1. Investors disagree amongst themselves about how much information should be produced.
   2. Managers disagree amongst themselves about how much information should be produced.
   3. Managers and auditors disagree about how much information should be produced.
   4. Investors and managers disagree about how much information should be produced.

1. Managerial compensation is often based on the net income of a firm (or bonus) as well as share prices of the firm (or employee stock options, ESOs). Which of the following statements about the efficiency of the resulting managerial compensation plan is correct?
   1. The higher the correlation between net income and share prices, the more efficient the management compensation contract.
   2. When management compensation consists of only a bonus or only ESOs, this leads to an efficient management compensation contract.
   3. The lower the correlation between net income and share prices, the more efficient the management compensation contract.
   4. Using a fixed salary and a bonus to compensate managers results in a more efficient management compensation contract than having a bonus and employee stock options in the contract.

10. Which of the following statements provides the best description of agency cost in a situation where an owner of a firm has entered into an employment contract with the manager of the firm?
    1. The agency cost of a contract is the manager’s total annual compensation as a percentage of the market value of assets plus the book value of debt.
    2. Agency cost is the amount by which the owner’s utility from the contract is less than the owner’s utility for the first-best contract.
    3. The agency cost of a contract is the proportion of the manager’s total compensation as a percentage of the firm’s revenues.
    4. The agency cost of a contract equals the manager’s reservation utility.

Haas Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

During its first year of operations, Haas produced 60,000 units and sold 60,000 units. During its second year of operations, it produced 75,000 units and sold 50,000 units. In its third year, Haas produced 40,000 units and sold 65,000 units. The selling price of the company’s product is $61 per unit.

1. Compute the company’s break-even point in unit sales.

2. Assume the company uses variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

List 5 ways companies increase their income that is not per GAAP and may be construed as fraudulent.

Implementation of Activity-based costing (ABC) The case of a Juice Company John Orland, controller of the Juice Company, has been concerned over the erosion of the recent financial results especially for the standard flavors (A and B) which used to earn a hefty 20 per cent of profit margin.

Recently, Dan Brun, the sales manager has expanded the lines of products to encompass new flavors (B & C) which were in high demand by customers who were willing to pay 5 to 10 % premium.

Richard Dunn, the manufacturing manager, was also excited to introduce the new flavors since they were expected to generate higher margins while using the same technology as standard flavors. However, he noticed that the introduction of new flavors added some technical complexities to the production process. For instance, unlike Flavors A & B, which were produced in huge volume and in long production runs, difficulties started to arise with the new flavors which were produced in smaller batches but required more changeovers and more production runs (see Exhibit 3).

The Juice Company produced the different flavors in the same factory. Each flavor had a bill of materials that determines the quantity and cost of direct materials used for the production of each flavor. Additionally, a cost sheet was used to track the direct labor expenses incurred at each operating step for each of the four flavors. All overhead costs were grouped at the plant level and allocated to each flavor on the basis of direct labor cost. The rate was set at 400 % of direct labor costs (see Exhibit 2).

John was intrigued by the behavior of their main competitors who were more interested in competing in, what appears according to the company’s current costing system, to be low profit margin flavors (A and B) than in high profit margins (Flavors C &D). Such behavior has led the controller to question the accuracy of that costing system and to conclude that the current method of allocation of indirect costs is distorting their product costs thereby causing inappropriate pricing.

To remedy the distortions caused by the traditional method of costing based on one single cost pool of indirect costs, John decided to implement Activity-based costing (ABC) method which focuses on the activities, how they are performed, and the resources they consumed and to assign activities costs to products based on how much demand each of these products puts on these activities. After careful analysis of the company’s operations, the controller identified four main activities: process production run, set up equipment, manage products, and run machines. The demand on these activities by different flavors is illustrated in Exhibit 3.

He began by identifying the resources that were being consumed by activities. These resources were grouped in six categories as shown in Exhibit 1. 2

After interviewing the department heads in charge of support staff wages and benefits and insurance, he found out that their services are used by three activities: process production run (40%), set up (40%), and the remaining 20 % consumed to manage products.

Next, the controller tackled the information system item and determines, after interview with the head of the information system department, that process production runs accounts for 30 % of their services while 70 % are used to manage products.

The results of his investigations about the usage of the equipment revealed that it was entirely used to run machines. Maintenance services were shared equally between the production run activity and run machine activity. Finally, utility was shared equally by the four activities.

Questions

1. Describe the problem the company is facing

. Calculate the costs for the four favors using ABC

3. Explain why, in this case, the ABC costs are different from those calculated under the traditional method based one single cost pool of indirect costs and provide examples from the case that support your analysis.

4. What would you do as a manager?

Exhibit 1

Exhibit 1 Resources Used Costs of Resources

Support staff wages $ 30,000

Benefits and insurances 12,000

Information Systems 10,000

Equipment 7,000

Maintenance 4,000

Utilities 3,000

Total $ 66,000

Exhibit 2:

Traditional Income Statement

Flavor A Flavor B Flavor C Flavor D Total

Sales $ 86,000.00 $ 52,000 $ 16,000 $ 3,600 $157,600.00

Direct Material costs 28000 20000 5500 400 53900

Direct labor costs 9500 5000 1500 500 16500

Overhead costs at 400%

of Direct labor costs 38000 20000 6000 2000 66000

Operating Income $10,500.00 $7,000.00 $ 3,000.00 $ 700.00 $ 21,200.00

Profit margin 12% 13% 19% 19% 13%

Exibit 3: direct costs and and activity cost drivers

Flavor A Flavor B Flavor C Flavor D Total

Sales in units 60,000 50,000 10,000 2,000 122,000

Sales in Dlollars $ 86,000.00 $ 52,000 $ 16,000 $ 3,600 $ 157,600.00

Unit selling price $ 1.43 $ 1.04 $ 1.60 $ 1.80

Machine hours per unit 0.1    0.1 0.1 0.1 12200

Production runs 50 50 38 12 150

Set up times ( hours) 150 120 200 100 570

Manage products 1 1 1 1 4

The following balance sheet items, listed in alphabetical order, are available from the records of Ruth Corporation at December 31, 2017: Accounts payable $16,590 Income taxes payable $5,900 Accounts receivable 21,240 Interest payable 1,415 Accumulated depreciation - automobiles 20,870 Inventory 43,765 Accumulated depreciation - buildings 43,730 Land 269,000 Automobiles 104,350 Long-term investments 82,235 Bonds payable, due December 31, 2021 148,000 Notes payable, due June 30, 2018 9,000 Buildings 218,650 Office supplies 2,325 Capital stock, $10 par value 150,000 Paid-in capital in excess of par value 55,000 Cash 12,240 Patents 43,000 Prepaid rent 1,615 Retained earnings 343,440 Salaries and wages payable 4,475 Required: 1. Prepare in good form a classified balance sheet as of December 31, 2017. Ruth Corporation Balance Sheet December 31, 2017 Assets Current assets: $ Total current assets $ Property, plant, and equipment: $ $ $ Total property, plant, and equipment Intangible assets: Total assets $ Liabilities Current liabilities: $ Total current liabilities $ Long-term debt: Total liabilities $ Stockholders' Equity Contributed capital: $ Total contributed capital $ Total stockholders' equity Total liabilities and stockholders' equity $ 2. Compute Ruth's current ratio. Round your answer to two decimal places. to 1 3. On the basis of your answer to (2), does Ruth appear to be liquid?

Identify major threats in the revenue cycle, and evaluate the adequacy of various control procedures for dealing with those threats.

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that date, Abernethy has the following trial balance:

During 2017, Abernethy reported net income of $97,000 while declaring and paying dividends of $12,000. During 2018, Abernethy reported net income of $141,250 while declaring and paying dividends of $48,000.

Assume that Chapman Company acquired Abernethy’s common stock for $919,830 in cash. Assume that the equipment and long-term liabilities had fair values of $471,000 and $131,120, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment.

Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1-Prepare entry S to eliminate stockholders' equity accounts of subsidiary

2-Prepare entry A to recognize allocations determined above in connection with acquisition-date fair values.

3-Prepare entry I to eliminate intra-entity dividend declarations recorded by parent as income

4-Prepare entry E to recognize 2017 amortization expense.

5-Prepare entry *C to convert parent company figures to equity method by recognizing subsidiary's increase in book value for prior year [$97,000 net income less $12,000 dividend declaration] and excess amortizations for that period [$12,420].

Profit-Linked Productivity Measurement

In 20x2, Choctaw Company implements a new process affecting labor and materials.

Choctaw Company provides the following information so that total productivity can be valued:

Required:

1. Calculate the cost of inputs in 20x2, assuming no productivity change from 20x1 to 20x2. If required, round your answers to the nearest dollar.

2. Calculate the actual cost of inputs for 20x2. If required, round your answers to the nearest dollar.

What is the net value of the productivity changes? If required, round your answers to the nearest dollar.
$

How much profit change is attributable to each input's productivity change? If an item is negative, use a minus (-) sign to indicate.

3. What if a manager wants to know how much of the total profit change from 20x1 to 20x2 is attributable to price recovery? Calculate the total profit change.
$

Calculate the price-recovery component.
$

During 2016 (its first year of operations) and 2017, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2018, Batali decided to change to the average method for both financial reporting and tax purposes.

Income components before income tax for 2018, 2017, and 2016 were as follows ($ in millions):

Dividends of $34 million were paid each year. Batali’s fiscal year ends December 31.

Required:
1. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle. (Ignore income taxes.)
2. Prepare the 2018–2017 comparative income statements.
3. & 4. Determine the balance in retained earnings at January 2017 as Batali reported using FIFO method and determine the adjustment of balance in retained earnings as on January 2017 using average method instead of FIFO method.

Part A

Mr Li, Mr Tong, Miss Chow and Mr Yu are directors and shareholders of Quick Profit Limited (‘the Company’), a Hong Kong private limited company. The Company has an issued and paid-up share capital of HK$30,000,000. Each of them holds 4,000,000 shares in the Company.

The Company has adopted the Model Articles as its articles of association, which were subsequently modified to include the following clauses:

1 every director must subscribe at least 3,000,000 shares in the Company within two months after appointment; and

2 the quorum of directors’ and shareholders’ meetings is three.

As the company secretary of the Company, advise Mr Li, the chairman of the board, on the course of actions to be taken by the Company (giving reasons for your answers) in the following circumstances:

a Mr Tong informed the Company that he intended to sell 1,100,000 shares to Mrs Wong who will then hold those shares in trust for her husband, Mr Wong.
b Miss Chow informed the Company that she would sell all her shares in the Company to her friend, Mr Lo and resign as director of the Company with effect from 1 April 2018.

c The Company received a photocopy of the power of attorney from Mr Chan, who is the attorney for Mr Lam, who holds 500,000 shares in the Company.

d Ms Tang, who holds 10,000 shares in the Company, informed the Company that she had married and requested the Company to amend her name on the register of members from Tang Mei Mei to Au Tang Mei Mei.

e The Company received a letter from MCC Limited, which holds 200,000 shares in the Company, informing the Company that MCC Limited has commenced liquidation on 1 March 2018 and Mr Black has been appointed as liquidator of MCC Limited.

f Mrs Yu informed the Company that her husband, Mr Yu, had passed away on 30 March 2018.

Part B

a A pre-emption clause governing transfer of shares may be found in the articles of association of some private companies. Explain what a pre-emption clause is and whether it is beneficial to the shareholders of a private company. Give reasons to support your answer.

b If Quick Profit Limited is a listed company, a share registrar will deal with the matters stated in Part A. Explain the duties of/services provided by a share registrar to a listed company.

• Discuss the two main distinctions between assets on the balance sheet.
• Discuss reporting requirements for contingencies.
• Explain two examples of contingent liabilities