Outdoor Outfitters has created a flexible budget for the 70,000-unit and the 80,000-unit levels of activity shown as follows. Complete Outdoor Outfitters's flexible budget at the 105,000-unit level of activity. Assume that the cost of goods sold and variable operating expenses vary directly with sales and that income taxes remain at 30 percent of operating income.

Cybernetronics Inc. (Cyber) is a Canadian-owned public company which designs and manufactures communications and control systems. The company's year end is May 31. It is now June 2018.

You, CPA, are the manager for the audit of Cyber and yesterday had met with the treasurer to discuss the year-end audit. The partner responsible for this client has asked you to prepare a report for the client which discusses important financial accounting issues and a memo to him regarding the audit issues you believe are important.

Notes from the Meeting with the Treasurer

1.          In December 2017, Cyber won a $40 million contract to design autonomous robots for use in mining activities. In April 2018, the customer exercised the cancellation clause included in the contract. Cyber has capitalized design and development costs related to this contract. The cancellation clause requires the mining company to pay a penalty of $12 million. The penalty has not yet been paid to Cyber.

In June 2017, Cyber entered into an agreement with a university whereby Cyber received assistance in the development of fuzzy logic software which was to have been used in the robots designed for the contract with the mining company. The agreement requires Cyber to make an annual contribution of $0.5 million to the university for four years. The first payment of $0.5 million was made in March 2018 when the university's work was completed.

Management of Cyber is confident that the technology developed, including the fuzzy logic software, can be applied to future contracts involving the design of robots.

Cyber entered into a five-year lease on June 1, 2017 for facilities dedicated to the design and future manufacture of the robots for the mining company. Management of Cyber is presently negotiating a buy-out of the lease and has offered to make lump-sum payment of $750,000 to the lessor on September 1, 2018. The annual lease payment is $500,000.

The draft balance sheet prepared for Cyber's May 31 year end included capitalized design and development costs in the amount of $8.2 million. This amount includes the $0.5 million paid to the university. The draft income statement includes the $12 million cancellation penalty as 'other income -- gain on cancellation of contract'.

*Identify the accounting and auditing issues*

Flexible Budget

In an attempt to improve budgeting, the controller for Meliore, Inc., has developed a flexible budget for overhead costs. Meliore, Inc., makes two types of products, the standard model and the deluxe model. Meliore expects to produce 400,000 units of the standard model and 120,000 units of the deluxe model during the coming year. The standard model requires 0.05 direct labor hour per unit, and the deluxe model requires 0.08. The controller has developed the following cost formulas for each of the four overhead items:

Required:

1. Prepare an overhead budget for the expected activity level for the coming year.

2. Prepare an overhead budget that reflects production that is 10 percent higher than expected (for both products).

Prepare an overhead budget for production that is 20 percent lower than expected.

Question 1
REQUIRED: Given the following Adjusted Trial Balance, prepare a report form Classified Balance Sheet.

Hint: Prior to creating the Balance Sheet, calculate the profit/loss and the owner’s (revised) capital balance as of the end of the year. You may assume there were no investments.

Erickson Rentals Adjusted Trial Balance March 31, 2010

Debit Credit

**note: the current portion of the long term note payable is $1,900.

Profit/Loss Calculation – Circle your final answer. _____________________________________________________________________________

Assignment 1 – Winter 2019 FA1

_____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________

Capital/Equity Calculation : – Circle your final answer. _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ Report form Classified Balance Sheet :

Erickson Rentals Balance Sheet March 31, 2010

Assignment 1 – Winter 2019 FA1

The city of Morehead leased equipment. The life of the noncancellable lease is 10 years. Using an 8 percent interest rate, the present value of the lease payments is $905,861. The first payment of $125,000 is due when the lease begins, January 10, 2017. An additional payment is due on January 10th for each of the next 9 years. Prepare journal entries to record:

1. The long-term lease in the General Fund.

2. The first lease payment on January 10, 2017.

3. The second lease payment on January 10, 2018

Wizard’s Skateboard shop sells premium skateboards for use in skate parks. The shop uses a process-costing system to compute the unit costs of the skateboards that it produces and sells for $450. Customers place orders online for skateboards where they can customize the decks and griptape with a choice of patterns and colours. The parts are purchased and assembled, customized with the customer’s choice of grip tape for the deck, trucks and wheels, and packaged to be sent by courier directly to the customer. Wizard’s Skateboard shop has three distinct departments: Assembly, Customization, and Packaging/Shipping.

The production process works as follows: all major parts have been assembled and the skateboard is tested before it is transferred from Assembly to Customization, the Customization department adds some materials to meet customer’s preference, and finally, the Packaging/Shipping department places the skateboard in a cardboard box and makes arrangements for shipping to the customer. Overhead in each department is applied based on direct labour costs at a rate of 130% for assembly and 115% for customization.

During March, the following results are available for the first two departments:

Required:

Following the five steps outlined in the chapter, prepare a production report for the Assembly and Customization departments using the weighted average method.

FF&T Corporation is a confectionery wholesaler that frequently buys and sells securities to meet various investment objectives. The following selected transactions relate to FF&T’s investment activities during the last two months of 2021. At November 1, FF&T held $40 million of 20-year, 12% bonds of Convenience, Inc., purchased May 1, 2021, at face value. Management has the positive intent and ability to hold the bonds until maturity. FF&T’s fiscal year ends on December 31.

Charteris is a division of Capriola Corporation and operates as an investment center. Charteris currently has assets of $15 million, revenues of $12 million, and expenses of $9 million. The president of Charteris has an opportunity to acquire Grampan Corporation, which has revenues of $4 million, and expenses of $2.8 million. Acquisition price (value of assets) would be $7.5 million. Capriola has a target ROI for all divisions of 14%.

a) Compute Charteris' current ROI.

b) If Capriola evaluates divisions based on ROI, will be the president of Charteris be inclined to make the acquisition?Explain. Use the DuPont method to provide insight into your answer.

c) Would your answer change if Capriola also used residual income in evaluating divisions? Explain.

Budgeted Cash Collections, Budgeted Cash Payments

Historically, Ragman Company has had no significant bad debt experience with its customers. Cash sales have accounted for 20 percent of total sales, and payments for credit sales have been received as follows:

40 percent of credit sales in the month of the sale
35 percent of credit sales in the first subsequent month
20 percent of credit sales in the second subsequent month
5 percent of credit sales in the third subsequent month

The forecast for both cash and credit sales is as follows.

Required:

1. What is the forecasted cash inflow for Ragman Company for May?
$

2. Due to deteriorating economic conditions, Ragman Company has now decided that its cash forecast should include a bad debt adjustment of 2 percent of credit sales, beginning with sales for the month of April. Because of this policy change, what will happen to the total expected cash inflow related to sales made in April? (CMA adapted)

Cash will   by $.

Athos and Porthos are divisions of Dumas, Inc., operating as profit centers. Both are profitable. One of the products produced by Athos is A62, which normally sells for $180/unit. Cost is $125/unit (40% variable). Porthos is planning a new product, and is taking bids on one of the subassemblies. A62 would be appropriate for this subassembly with some modification.

a) Discuss the factors Athos should consider when submitting a bid.

b) If Athos does not submit the low bid, might Porthos still benefit from accepting their bid? Discuss briefly.

AudioMart is a retailer of radios, stereos, and televisions. The store carries two portable sound systems that have radios, tape players, and speakers. System A, of slightly higher quality than System B, costs $19 more. With rare exceptions, the store also sells a headset when a system is sold. The headset can be used with either system. Variable-costing income statements for the three products follow:

* This includes common fixed costs totaling $17,900, allocated to each product in proportion to its revenues.

The owner of the store is concerned about the profit performance of System B and is considering dropping it. If the product is dropped, sales of System A will increase by 31%, and sales of headsets will drop by 26%. Round all answers to the nearest whole number.

City Art Museum ("City") is considering hosting a travelling exhibit of paintings by a famous artist, sponsored by the Smithsonian Institution. The Smithsonian charges $300,000 for a one-month exhibit, which covers all costs of insurance and transportation. They will also receive 15% of gross ticket sales from the exhibit. City will incur costs of $75,000 to modify exhibit space for these paintings; the modifications would have no value afterward. Additional staff for ticket sales and security will cost $43,000. City will pay $55,000 to advertise the exhibit. It is expected that 14,000 visitors will purchase the exhibit ticket for $50, which would include access to the entire museum. Of these, it is estimated that 11,000 would otherwise not have attended the museum, while 3,000 would have purchased a regular admission ticket for $30 even without the special exhibit. It is estimated the increase in visitors will result in additional sales of $230,000 for the gift shop, and $80,000 for the coffee shop. Additional staffing for these units will cost $22,000. The gift shop normally has gross margin of 40%, and the coffee shop, 65%.

Determine the incremental profit or loss to City Art Museum of hosting the travelling exhibit.

6. During 2017, Miami Inc. had sales revenue $1,328,000, gross profit $728,000, operating expenses $398,000, cash dividends $90,000, other expenses and losses $40,000. Its corporate tax rate is 30%. What was Miami's income tax expense for the year?

Select one:

a. $ 60,000

b. $ 87,000

c. $ 99,000

d. $267,000

e. $218,400

8.On January 1, 2018, equity account balances are as follows:

                  Preferred Stock                                                                 $       500,000

                  Common Stock                                                                        1,000,000

                  Paid-In Capital in Excess of Par - Preferred                           200,000

                  Paid-In Capital in Excess of Par - Common                         500,000

                  Paid-In Capital From Treasury Stock                                      20,000

                  Retained Earnings                                                                  1,500,000

                  Treasury Stock (25,000 shares purchased 3/15/17)            762,500

            On January 15, 2018, 10,000 shares of treasury stock are sold at $15 per share. The entry to record this transaction includes a

Select one:

a. debit to Paid-In Capital From Treasury Stock of $135,000

b. debit to Paid-In Capital From Treasury Stock of $155,000

c. debit to Retained Earnings of $155,000

d. debit to Paid-In Capital From Treasury Stock of $150,000

e. debit to Retained Earnings of $135,000

9.Relative to a given bond issue, using either the straight-line method or the effective-interest method of amortization will result in

Select one:

a. the same amount of interest expense being recognized each year.

b. the same amount of interest expense being recognized over the life of the bonds.

c. the same carrying value each year during the life of the bonds.

d. more interest expense being recognized than if premium or discounts were not amortized.

10.Blanco, Inc. has a net income of $300,000 for 2017, and there are 200,000 weighted-average shares of common stock outstanding. Dividends declared and paid during the year amounted to $40,000 on preferred stock and $60,000 on common stock. Earnings per share for 2017 is

Select one:

a. $1.20.

b. $1.50.

c. $1.30.

d. $1.00.

e. $2.00.

Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $230 million of 10% bonds, dated January 1, on January 1, 2021. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 12%. The price paid for the bonds was $210 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2021, was $220 million.

Required:
1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate).
4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2021, balance sheet?
4-b. Prepare the entry necessary to achieve this reporting objective.
5. How would Fuzzy Monkey's 2021 statement of cash flows be affected by this investment? (If more than one approach is possible, indicate the one that is most likely.)