The City Sky Co is a property investment and development company. Recently the company purchased a vacant piece of land south of Brisbane on which it is planning to build 15 apartments to sell. The City Sky Co has engaged the services of the local lawyer, Maurice Blackburn, to provide the legal services required for the development for $33,000. Maurice Blackburn runs an established sole trader business and turns over revenue of $300,000 per year. Advise The City Sky Co of the input tax credit entitlements that they may be entitled to. Assume that The City Sky Co is registered for GST purposes.

Fixed and Variable Cost Allocation

Kumar, Inc., evaluates managers of producing departments on their ability to control costs. In addition to the costs directly traceable to their departments, each production manager is held responsible for a share of the costs of a support center, the Human Resources (HR) Department. The total costs of HR are allocated on the basis of actual direct labor hours used. The total costs of HR and the actual direct labor hours worked by each producing department are as follows:

*$0.25 per direct labor hour plus $100,000.

When the capacity of the HR Department was originally established, the normal usage expected for each department was 18,000 direct labor hours. This usage is also the amount of activity planned for the two departments in Year 1 and Year 2.

Required:

1. Allocate the costs of the HR Department using the direct method and assuming that the purpose is product costing.

2. Allocate the costs of the HR Department using the direct method and assuming that the purpose is to evaluate performance.

Characteristics of Production Process, Cost Measurement

Vince Melders, of EcoScape Company, designs and installs custom lawn and garden irrigation systems for homes and businesses throughout the state. Each job is different, requiring different materials and labor for installing the systems. EcoScape estimated the following for the year:

During the year, the following actual amounts were experienced:

Vince Melders, owner of EcoScape, noticed that the watering systems for many houses in a local subdivision had the same layout and required virtually identical amounts of prime cost. Vince met with the subdivision builders and offered to install a basic watering system in each house. The idea was accepted enthusiastically, so Vince created a new company, Irrigation Specialties, to handle the subdivision business. In its first three months in business, Irrigation Specialties experienced the following:

Required:

1. Should Irrigation Specialties use process costing or job-order costing?

2. If Irrigation Specialties uses an actual costing system, what is the cost of a single system installed in June? In July? In August? Round your answers to the nearest dollar.

3. Now assume that Irrigation Specialties uses a normal costing system. Estimated overhead for the year is $57,800, and estimated production is 680 watering systems. What is the predetermined overhead rate per system?

$ per system installed

What is the cost of a single system installed in June? In July? In August?

Bramble Inc. reported the following pretax income (loss) and related tax rates during the years 2019–2022. Pretax Income (loss) Tax Rate 2019 $84,800 40 % 2020 (190,800) 40 % 2021 212,000 20 % 2022 106,000 20 % Pretax financial income (loss) and taxable income (loss) were the same for all years since Bramble began business. The tax rates from 2019–2022 were enacted in 2019.

Prepare the journal entries for the years 2020–2022 to record income taxes payable (refundable), income tax expense (benefit), and the tax effects of the loss carryforward. Assume that Bramble expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year.

Prepare the portion of the income statement, starting with “Operating loss before income taxes,” for 2020.

Prepare the portion of the income statement, starting with “Income before income taxes,” for 2021.

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below:

The company has a conventional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

Required:

1-a. Compute the predetermined overhead rate based on direct labor-hours.

1-b. Using the predetermined overhead rate and other data from the problem, determine the unit product cost of each product.

2. The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools:

Determine the activity rate for each of the four activity cost pools.

3. Using the activity rates and other data from the problem, determine the unit product cost of each product.

A) What is earning per share? Discus the importance of earning per share to shareholders.

B) Discuss how investors use price earnings ratio and dividend yield ratio to evaluate investments

C) Discuss the difference between financial accounting and managerial accounting.

Job Costs Using a Plantwide Overhead Rate

Naranjo Company designs industrial prototypes for outside companies. Budgeted overhead for the year was $270,000, and budgeted direct labor hours were 27,000. The average wage rate for direct labor is expected to be $20 per hour. During June, Naranjo Company worked on four jobs. Data relating to these four jobs follow:

Overhead is assigned as a percentage of direct labor cost. During June, Jobs 39 and 40 were completed; Job 39 was sold at 115 percent of cost. (Naranjo had originally developed Job 40 to order for a customer; however, that customer was near bankruptcy and the chance of Naranjo being paid was growing dimmer. Naranjo decided to hold Job 40 in inventory while the customer worked out its financial difficulties. Job 40 is the only job in Finished Goods Inventory.) Jobs 41 and 42 remain unfinished at the end of the month.

Required:

1. Calculate the balance in Work in Process as of June 30.

$

2. Calculate the balance in Finished Goods as of June 30.

$

3. Calculate the cost of goods sold for June.

$

4. Calculate the price charged for Job 39. Round your answer to the nearest cent.

$

5. What if the customer for Job 40 was able to pay for the job by June 30? What would happen to the balance in Finished Goods?

What would happen to the balance of Cost of Goods Sold?

Joker & Wild LLC has just been sued by its audit client, Canasta, Inc., claiming the audit failed to be conducted in accordance with generally accepted auditing standards, lacked the requisite care expected in an audit, and failed to point out that internal controls were not working as intended. The facts of the case are that the auditors failed to find the accounting manager’s misappropriation of assets when he stole inventory and then improperly, knowingly, wrote down inventory for market declines.

Current market values of inventory were not provided to the auditors despite numerous requests for this information. The auditors relied on management’s representations about these values, which understated inventory by 10 percent. The plaintiff client brought the suit against the CPA firm claiming negligence, asserting the firm’s failure to find the vice president’s misappropriations of inventory and false valuations damaged the company by prematurely recognizing losses and then causing large reversals in the subsequent fiscal year when the inventory was sold for 15 percent above the original cost. The defendant CPA firm sought to blame the client, claiming Canasta did not cooperate on the audit and the vice president overrode internal controls.

1)Are the auditors guilty of malpractice? Explain.

2)What defenses are available to Joker & Wild in this case? Explain what they must prove to successfully assert these defenses.

3)Assume you are not aware of state laws on auditor legal liability. What legal concepts might a court of law use to resolve the lawsuit?

4)Do you believe the auditors should be held legally liable? Why or why not?

On January 1, 2017, Sheffield Company makes the two following acquisitions. 1. Purchases land having a fair value of $150,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $252,759. 2. Purchases equipment by issuing a 6%, 9-year promissory note having a maturity value of $180,000 (interest payable annually on January

1). The company has to pay 11% interest for funds from its bank.

(a) Record the two journal entries that should be recorded by Sheffield Company for the two purchases on January 1, 2017.

(b) Record the interest at the end of the first year on both notes using the effective-interest method.

Lubricants, Inc., produces a special kind of grease that is widely used by race car drivers. The grease is produced in two processing departments—Refining and Blending. Raw materials are introduced at various points in the Refining Department.

The following incomplete Work in Process account is available for the Refining Department for March:

The March 1 work in process inventory in the Refining Department consists of the following elements: materials, $7,700; direct labor, $4,700; and overhead, $19,900.

Costs incurred during March in the Blending Department were: materials used, $45,000; direct labor, $16,300; and overhead cost applied to production, $106,000.

Required:

1. Prepare journal entries to record the costs incurred in both the Refining Department and Blending Department during March. Key your entries to the items (a) through (g) below.

Raw materials used in production.

Direct labor costs incurred.

Manufacturing overhead costs incurred for the entire factory, $636,000. (Credit Accounts Payable.)

Manufacturing overhead was applied to production using a predetermined overhead rate.

Units that were complete with respect to processing in the Refining Department were transferred to the Blending Department, $682,000.

Units that were complete with respect to processing in the Blending Department were transferred to Finished Goods, $760,000.

Completed units were sold on account, $1,310,000. The Cost of Goods Sold was $650,000.

2. Post the journal entries from (1) above to T-accounts. The following account balances existed at the beginning of March. (The beginning balance in the Refining Department’s Work in Process is given in the T-account shown above.)

Harry’s Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecast sales figures:

Of the firm’s sales, 50 percent are for cash and the remaining 50 percent are on credit. Of credit sales, 20 percent are paid in the month after sale and 80 percent are paid in the second month after the sale. Materials cost 25 percent of sales and are purchased and received each month in an amount sufficient to cover the following month’s expected sales. Materials are paid for in the month after they are received. Labor expense is 50 percent of sales and is paid for in the month of sales. Selling and administrative expense is 15 percent of sales and is paid in the month of sales. Overhead expense is $25,000 in cash per month.

Depreciation expense is $11,800 per month. Taxes of $9,800 will be paid in January, and dividends of $11,000 will be paid in March. Cash at the beginning of January is $116,000, and the minimum desired cash balance is $111,000.

a. Prepare a schedule of monthly cash receipts for January, February, and March.
  

b. Prepare a schedule of monthly cash payments for January, February, and March.
  

c. Prepare a monthly cash budget with borrowings and repayments for January, February, and March. (Negative amounts should be indicated by a minus sign. Assume the January beginning loan balance is $0.)

For example, Adelphi, Inc., is considering the purchase of a machine that would cost $370,000 now, and would last for 8 years. At the end of 8 years, the machine would have a salvage (disposal) value of $50,000.
The machine would reduce labor and other costs by $60,000 per year. All cost savings are assumed to occur at the end of each year.
Additional working capital of $5,000 would be needed immediately. All of this working capital would be recovered in cash at the end of the life of the machine.

The company requires a minimum pretax return of 10% on all investment projects.

The company has a 21% tax rate and uses the straight-line depreciation method.

1. What is the amount of annual depreciation on the new equipment?
2. How much tax does this new investment save per year from recording depreciation expense?
3. What is the amount of periodic annual after-tax net cash-flow from the use of this new machine? [Cash from depreciation tax shield and after-tax cash flow from cost savings]
4. Is the purchase of this machine acceptable based on its NPV?

2.8 Measurement Period Adjustment with Income Effects

On November 1, 2019, Placer Corporation acquired all of the assets and liabilities of Sonata Company. The acquisition generated goodwill of $50,000,000. At the date of acquisition, Sonata’s equipment had an estimated fair value of $27,000,000, and a 4-year life, straight-line. On March 31, 2020, new information reveals that the equipment’s fair value was $36,000,000 at the date of acquisition. Placer’s accounting year ends on December 31.

Required:

Prepare the journal entry or entries to record the change in valuation of Sonata’s equipment on March 31, 2020, assuming the valuation change is within the measurement period, and depreciation has already been recorded through March 31. (Show any calculations made)