As the vice president of engineering of the Best Company in Buffalo, you need to

make a decision regarding how a new product is to be manufactured. You have

been offered two specific proposals. Proposal A is to set up an assembly operation

in-house and to outsource the production of all subassemblies and parts

to supply chain partners. This proposal would need a front-end investment of

$2,000,000 for the assembly operations, an investment of $300,000 for the product

design and development efforts, and another $100,000 for managing and coordinating

the supply chain partners. The projected net profits for the products

manufactured by this method are $0, $300,000, $600,000, $900,000, $1,200,000,

and $600,000 in the first, second, third, fourth, fifth and sixth year, respectively.

There is no salvage value of the assembly equipment at the end of the sixth year,

at which time the sales of this product will be terminated. Interest is at 5.0%.

Proposal B is to build a production facility to manufacture all subassemblies

and assemble the products in-house. This proposal would need a front-end investment

of $3,000,000, which includes facility, equipment, engineering, and all other

required efforts. The projected net profits for the products manufactured by this

method are $200,000, $400,000, $800,000, $1,200,000, $1,000,000, and $600,000 for

the first, second, third, fourth, fifth, and sixth year, respectively. There is a salvage

value of $400,000 of the facility at the end of the sixth year. Interest is also at 5%.

Which proposal should you accept, and why?

SHOW INCOME STATEMENT AND ASSUME STRAIGHT LINE DEPRECIATION

You have recently graduated from your university and started work with an accounting firm. You meet an old school friend, Kim, for dinner—you haven’t seen each other for several years. Kim is surprised that you are now working as an auditor because your childhood dream was to be a ballet dancer. Unfortunately, your knees were damaged in a fall and you can no longer dance. The conversation turns to your work and Kim wants to know how you do your job. Kim cannot understand why an audit is not a guarantee the company will succeed. Kim also thinks that company managers will lie to you to protect themselves, and as an auditor you would have to assume that you cannot believe anything a company manager says to you.

Compose a letter to Kim explaining the concept of reasonable assurance, and how reasonable assurance is determined. Explain why an auditor cannot offer absolute assurance. Describe the concept of professional skepticism and how it is not the same as assuming that managers are always trying to deceive auditors. Explain to Kim why her perceptions are a perfect example of the expectations gap.

The following are BAC Bhd.’s year end statement of financial position and statement of profit and loss for 2016 and 2017:

Related items:

2017 Total dividends paid $70,075 ,   Stock price per share $15.60

2016 Total dividends paid $15.60 ,   Stock price per share $21.80

Required:

1. Calculate the after tax operating income (i.e. after-tax EBIT) for 2016 and 2017.   
2. Calculate the net working capital (NWC) that is supported by non-free sources for 2016 and 2017, and the changes in NWC between these two years.                             
3. What is free cash flow (FCF)? Calculate the FCF for 2017. Is a negative FCF always a bad sign?   
4. Calculate the following for the company for 2017:
   1. Earnings per share   
   2. Dividends per share   
   3. Book value per share

25.The following information is the same as the previous question.

A Company issued a bond payable with detachable warrants on the interest payment date as follows.

1 warrant = 1 share of $1 par value stock

What is the credit to additional paid in capital at the time the warrants are exercised on June 30, 20X1?

Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 10,000 speakers per year. It has received a quote of $37 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume the Audio Division is now selling only 47,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

2. Assume the Audio Division is selling all of the speakers it can produce to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

Steve and Stephanie Pratt purchased a home in Spokane, Washington, for $535,000. They moved into the home on February 1 of year 1. They lived in the home as their primary residence until June 30 of year 5, when they sold the home for $902,500.

a.) What amount of gain on the sale of the home are the Pratts required to include in taxable income?

b.) Assume the original facts, except that Steve and Stephanie live in the home until January 1 of year 3, when they purchase a new home and rent out the original home. They finally sell the original home on June 30 of year 5 for $902,500. Ignoring any issues relating to depreciation taken on the home while it is being rented, what amount of realized gain on the sale of the home are the Pratts required to include in taxable income?

c.) Assume the same facts as in part (b), except that the Pratts live in the home until January of year 4, when they purchase a new home and rent out the first home. What amount of realized gain on the sale of the home will the Pratts include in taxable income if they sell the first home on June 30 of year 5 for $902,500?

d.)

Assume the original facts, except that Stephanie moves in with Steve on March 1 of year 3 and the couple is married on March 1 of year 4. Under state law, the couple jointly owns Steve’s home beginning on the date they are married. On December 1 of year 3, Stephanie sells her home that she lived in before she moved in with Steve. She excludes the entire $117,500 gain on the sale on her individual year 3 tax return. What amount of gain must the couple recognize on the sale in June of year 5?

Dessin Company is constructing a building. Construction began on January 1, 2012 and was completed on December 31, 2012. Expenditures were

Company borrowed $1,300,000 on January 1 on a 7-year, 11% note to help finance construction of the building. In addition, the company had outstanding all year a 12%, 4-year, $2,800,000 note payable and an 10%, 4-year, $3,400,000 note payable.

1. What were the weighted-average accumulated expenditures for 2012?

2. What is the weighted-average interest rate used for interest capitalization purposes in 2012?

3. What is the avoidable interest for the company in 2012?

4. What is the actual interest for the company in 2012?

5. What is the total amount of the interest capitalized for 2012?

6. What is the total amount of the interest expensed for 2012?

Show your computations!

1. Direct Materials and Direct Labor Variance Analysis

   Lenni Clothing Co. manufactures clothing in a small manufacturing facility. Manufacturing has 25 employees. Each employee presently provides 40 hours of productive labor per week. Information about a production week is as follows:

   Standard wage per hr.	$12.00
   Standard labor time per unit	12 min.
   Standard number of yds. of fabric per unit	5.0 yds.
   Standard price per yd. of fabric	$5.00
   Actual price per yd. of fabric	$5.10
   Actual yds. of fabric used during the week	26,200 yds.
   Number of units produced during the week	5,220
   Actual wage per hr.	$11.80
   Actual hrs. for the week	1,000 hrs.

   Required:

   a. Determine the standard cost per unit for direct materials and direct labor. Round the cost per unit to two decimal places.

   Direct materials standard cost per unit	$
   Direct labor standard cost per unit
   Total standard cost per unit	$

   b. Determine the price variance, quantity variance, and total direct materials cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

   Direct materials price variance	$
   Direct materials quantity variance
   Total direct materials cost variance	$

   c. Determine the rate variance, time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

   Direct labor rate variance	$
   Direct labor time variance
   Total direct labor cost variance	$

Part A
In late 2017, the Nicklaus Corporation was formed. The corporate charter authorizes the issuance of 4,000,000 shares of common stock carrying a $1 par value, and 1,000,000 shares of $5 par value, noncumulative, nonparticipating preferred stock. On January 2, 2018, 2,000,000 shares of the common stock are issued in exchange for cash at an average price of $12 per share. Also on January 2, all 1,000,000 shares of preferred stock are issued at $30 per share.

Required:
1. Prepare journal entries to record these transactions.
2. Prepare the shareholders' equity section of the Nicklaus balance sheet as of March 31, 2018. (Assume net income for the first quarter 2018 was $1,300,000.)

Part B
During 2018, the Nicklaus Corporation participated in three treasury stock transactions:

1. On June 30, 2018, the corporation reacquires 150,000 shares for the treasury at a price of $14 per share.
2. On July 31, 2018, 25,000 treasury shares are reissued at $17 per share.
3. On September 30, 2018, 25,000 treasury shares are reissued at $12 per share.

Required:
1. Prepare journal entries to record these transactions.
2. Prepare the Nicklaus Corporation shareholders' equity section as it would appear in a balance sheet prepared at September 30, 2018. (Assume net income for the second and third quarter was $2,750,000.)

Part C
On October 1, 2018, Nicklaus Corporation receives permission to replace its $1 par value common stock (4,000,000 shares authorized, 2,000,000 shares issued, and 1,900,000 shares outstanding) with a new common stock issue having a $.50 par value. Since the new par value is one-half the amount of the old, this represents a 2-for-1 stock split. That is, the shareholders will receive two shares of the $.50 par stock in exchange for each share of the $1 par stock they own. The $1 par stock will be collected and destroyed by the issuing corporation.

On November 1, 2018, the Nicklaus Corporation declares a $0.09 per share cash dividend on common stock and a $0.26 per share cash dividend on preferred stock. Payment is scheduled for December 1, 2018, to shareholders of record on November 15, 2018.

On December 2, 2018, the Nicklaus Corporation declares a 3% stock dividend payable on December 28, 2018, to shareholders of record on December 14. At the date of declaration, the common stock was selling in the open market at $12 per share. The dividend will result in 114,000 (0.03 × 3,800,000) additional shares being issued to shareholders.

Required:
1. Prepare journal entries to record the declaration and payment of these stock and cash dividends.
2. Prepare the December 31, 2018, shareholders' equity section of the balance sheet for the Nicklaus Corporation. (Assume net income for the fourth quarter was $2,250,000.)
3. Prepare a statement of shareholders' equity for Nicklaus Corporation for 2018.

Cash Budget

The controller of Shoe Mart Inc. asks you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

The company expects to sell about 12% of its merchandise for cash. Of sales on account, 65% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $10,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in June, and the annual property taxes are paid in October. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month. All sales and administrative expenses are paid in the month incurred.

Current assets as of January 1 include cash of $50,000, marketable securities of $71,000, and accounts receivable of $153,100 ($116,000 from December sales and $37,100 from November sales). Sales on account in November and December were $106,000 and $116,000, respectively. Current liabilities as of January 1 include a $66,000, 12%, 90-day note payable due March 20 and $10,000 of accounts payable incurred in December for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $4,000 in dividends will be received in January. An estimated income tax payment of $20,000 will be made in February. Shoe Mart's regular quarterly dividend of $10,000 is expected to be declared in February and paid in March. Management desires to maintain a minimum cash balance of $39,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for January, February, and March. Enter an increase in the month's cash balance or an excess cash amount as a positive number. Enter a decrease in the month's cash balance or a cash deficiency as a negative number. Assume 360 days per year for interest calculations.

2. The budget indicates that the minimum cash balance will not be maintained in March. This is due primarily to which of the following causes?

1. Capital expenditures
2. Note repayment
3. Depreciation
4. Income taxes
5. Decreased collection of accounts receivable

Select the correct answer

• I, II, III, IV, and V
• I and II only.
• III, IV, and V only.
• IV and V only.

Buckler Company manufactures desks with vinyl tops. In 2004, a 1,000 desk production run cost for the vinyl used per Model S desk is $27.00 based on 12 square feet of vinyl at a cost of $2.25 per square foot. A production run of 1,000 desks in 2003 resulted in the usage of 12,600 square feet of vinyl at a cost of $2.00 per square foot, a total cost of $25,200.

Resulting from the above production run what is the material volume variance ______, the materials efficiency variance_____, and the materials price variance ______?

SECTION C Case Study (Total 20 marks)
Assessing Control Risks
(A) Kumud Pty Ltd is a major manufacturer of industrial machinery. Detailed below is a
description of its purchasing and payments system.
(i) When the stores department requires items to be purchased, they issue a three-part prenumbered
purchase requisition that needs to be approved by the store’s manager. Copy 1
is sent to the purchasing department, Copy 2 is sent to the accounts payable department
and Copy 3 is filed in the stores department.
(ii) On receipt of an approved purchase requisition, the purchasing department issues a fivepart
pre-numbered purchase order. Copy 1 is sent to the supplier, Copies 2 and 3 are
forwarded to the receiving department, Copy 4 is forwarded to the accounts payable
department and Copy 5 is filed in the purchasing department.
(iii) When goods are received, the receiving department logs in the shipment by stamping
“order received” on its two copies of the purchase order, which then forms its receiving
record. One copy of the receiving record is filed in the receiving department and the other
is forwarded to the accounts payable department.
(iv) The accounts payable department checks that there is a purchase requisition, purchase
order and receiving record for each supplier invoice and then approves it for payment.
(v) The accounts payable department prepares a pre-numbered disbursement voucher and
forwards it along with the supplier’s invoice, purchase requisition, purchase order and
receiving record to the financial accountant.
(vi) The financial accountant prepares a cheque for each supplier, signs the cheque and
records it in the cash disbursements journal. The cheque is immediately mailed to the
supplier. Supporting documentation is returned to accounts payable for filing.
(vii) At the end of the month, the assistant accountant undertakes a sequence check of all
accountable forms. The financial accountant receives the monthly bank statement,
prepares a bank reconciliation and investigates any reconciling items.
11
Required:
(a) Identify any five (5) internal control weaknesses in Kumud’s internal control concerning
the purchases and payments functions. Explain why each one is a weakness.

(b) Explain the process the auditor can use in assessing control risks. ( 3 marks)
(c) What will be your assessment of internal controls relating to Kumud’s purchases and
payments system?

(B) You are the audit senior on the audit of Action Games Ltd (AGL), a large retailer of
computer games. Although each sale is of relatively low value, the company has a very high
sales volume. You have just completed your review of AGL's internal controls over sales for
your audit for the year ended 30 June 2015. Based on your review, you have concluded that
AGL's internal control over sales is excellent. As a result, you have suggested an audit strategy
for sales of extensive testing of the controls and, if they prove to be effective, relying solely on
those controls to gain reasonable assurance that the sales information is fairly stated. However,
your audit manager has asked you whether you have considered the inherent limitations of
internal control in designing your audit strategy.
Required:
(a) Explain the audit manager’s concern.
(b) What would be a more appropriate audit strategy? Justify your answer.

C4) Skinny Dippers, Inc. produces nonfat frozen yogurt. The product is sold in ten-gallon containers, which have the following price and variable costs.

Budgeted fixed overhead in 20x1, the company’s first year of operations, was $340,000. Actual production was 170,000 ten-gallon containers, of which 160,000 were sold. Skinny Dippers, Inc. incurred the following selling and administrative expenses.

Required:

1. 1. Compute the product cost per container of frozen yogurt under (a) variable costing and (b) absorption costing.

2. 2-a. Prepare operating income statements for 20x1 using absorption costing.

3. 2-b. Prepare operating income statements for 20x1 using variable costing.

4. 3. Reconcile the operating income reported under the two methods by listing the two key places where the income statements differ.

5. 4. Reconcile the operating income reported under the two methods using the shortcut method.

Tilson Corporation has projected sales and production in units for the second quarter of the coming year as follows:

Cash-related production costs are budgeted at $6 per unit produced. Of these production costs, 50% are paid in the month in which they are incurred and the balance in the following month. Selling and administrative expenses will amount to $60,000 per month. The accounts payable balance on March 31 totals $190,000, which will be paid in April.

All units are sold on account for $15 each. Cash collections from sales are budgeted at 60% in the month of sale, 25% in the month following the month of sale, and the remaining 15% in the second month following the month of sale. Accounts receivable on April 1 totaled $586,000 ($106,000 from February's sales and $480,000 from March’s sales).

Required:

a. Prepare a schedule for each month showing budgeted cash disbursements for Tilson Corporation.

b. Prepare a schedule for each month showing budgeted cash receipts for Tilson Corporation.

A company has the following accounts and account balances at the end of its first year:
   Accounts payable, $4,000
   Cash, $22,000
   Common stock, Not given
   Dividends, $4,000
   Expenses, $17,000
   Notes payable, $3,000
   Prepaid insurance, $5,000
   Revenues, $28,000
What is the balance of its common stock account at the end of the first year?