Question 1

Inherent risks can be classified according to their nature, such as “unusual pressure on management” or “account likely to require adjustments”; and also their level as either a “financial report level inherent risk” or an “assertion level inherent risk”.

Required: Below are listed six situations that can give rise to inherent risks. Classify each situation by its nature and level.

Note: In answering this question please write the letter that denotes the situation followed by its nature and level. For example, if you believe that the situation A is an example of “Nature of the Entity”, write: A: Nature of the entity; FR level

SITUATIONS
A. Senior management of your client, Black Pty Ltd, can earn substantial bonuses if they meet certain revenue targets.

B. This the fourth year that you are auditing Brown Pty Ltd. In the past two years you have had to ask Brown to adjust its provision for warranty.

C. You are auditing Blue Pty Ltd (Blue). During the year, Blue’s CFO entered into a number of hedging contracts in an attempt to smooth fluctuations in the costs of imported inventory.

D. Your client, Red Pty Ltd, a leading home builder, hired a new Credit Controller during the year. While this person is highly credentialed, she has not worked in the building industry before.

E. Your client, Green Pty Ltd (Green) sells mobile telephones. Recently, Green’s CFO undertook a comprehensive review of inventory.

Which method will give you a higher amount of depreciation expense in the later years of an asset's life, straight-line or declining balance? Explain

The Corporations Act 2001 (Cth) provides defences for director’s conduct that may otherwise breach sections of the Act. Identify these defences for directors and explain how these defences can be applied in relation to that particular breach.                                                   

Pretend you are an auditor (I know, I know, this is an amazing dream). Imagine that you are performing the 12/31/18 financial statement audit of Curly's Coffee and Vinyl Shop. During the substantive procedures, you discovered the situations listed below. If it is a 2018 error, then you will need to communicate these to the client and request that they be fixed within the 2018 financial records. In that case, write the adjusting journal entry that the client should book to correct. Include date, accounts debited and credited and amounts.

If no adjusting entry is needed, then write: “no adjusting entry necessary” and provide a brief explanation.

1. You tested their repairs and maintenance expense account and found an error. They purchased a fancy new espresso machine on 01/01/2018 (check #74 for $4,000). They mistakenly expensed it (as repairs and maintenance expense) instead of capitalizing. Write the journal entries needed to correct error and properly reflect all 2018 accounting entries that should have been booked related this capitalized asset, which has an expected 5-year useful life and no estimated salvage value.

On January 1, 2021, Red Flash Photography had the following balances: Cash, $23,000; Supplies, $9,100; Land, $71,000; Deferred Revenue, $6,100; Common Stock $61,000; and Retained Earnings, $36,000. During 2021, the company had the following transactions: 1. February 15 Issue additional shares of common stock, $31,000. 2. May 20 Provide services to customers for cash, $46,000, and on account, $41,000. 3. August 31 Pay salaries to employees for work in 2021, $34,000. 4. October 1 Paid for one year's rent in advance, $23,000. 5. November 17 Purchase supplies on account, $33,000. 6. December 30 Pay dividends, $3,100. The following information is available on December 31, 2021: Employees are owed an additional $5,100 in salaries. Three months of the rental space has expired. Supplies of $6,100 remain on hand. All of the services associated with the beginning deferred revenue have been performed.

I just need the closing entries for the revenue accounts, the expense accounts and the dividends accounts

As an employee, write an internal memo to your manager addressing the following: Suggest several ways (other than raising prices) a medical practice can maximize the
contribution margin per unit of this limiting resource. identify the factor that you believe is most likelyto limit potential output capacity

Research should be memo and  should include the following five sections:

(1) Facts, (2) Issue, (3) Authorities, (4) Conclusion, and (5) Analysis.

Scenario. Mary and John were married during the years at issue (i.e., years 2014, 2015, and 2016). They separated in 2016 and divorced in 2017 after nearly 20 years of marriage. At the time Mary filed her petition, she resided in Maryland. She holds a high school diploma and attended the University of Delaware for six months, taking noncredit courses in the data processing. While married, Mary and John owned the marital home, two rental properties and a farm. As having a large blended family, they owned a large van in addition to two pickup trucks and an Oldsmobile Cutlass, which John described as a "classic car". They took family vacations each year, including trips to Bermuda and Mexico. They enjoyed camping, and throughout the years they purchased several campers, which they used on family camping trips every few months. John owned VIP Builders, which was the primary source of the family's income. Established in the early 1990s, VIP Builders is a home improvement company focusing on residential remodeling. A carpenter by trade, John operated the business, but he did not have the bookkeeping background to maintain the company's records. He hired Mary to be the company's bookkeeper and office manager. Their relationship blossomed, and they eventually wed. Mary was VIP Builders' bookkeeper/office manager for approximately 20 years, including the years at issue. She developed and maintained the accounting program used by the business. Her duties included: (1) managing the company's financial records, bank accounts, and American Express credit card account; (2) managing the company's "end of the month check run", which reconciled all charge accounts that VIP Builders had from its vendors, roofing suppliers, lumber yards, plumbing supply houses, and other subcontractors; (3) reconciling the company's bank and credit card statements; (4) managing the accounts payable and accounts receivable; (5) tracking inventory; and (6) managing the company's payroll. To these ends, Mary had the authority to write and sign checks on behalf of VIP Builders, deposit money into the company's accounts, and prepare checks and receipts for the business. Mary was familiar with VIP Builders' clients and knew, or at least could have learned, the amounts they paid the company. Before becoming VIP Builders' bookkeeper, she had other experience in accounting. When Mary managed VIP Builders' finances, her duties included the end-of-year accounting for the company. She reviewed the company's books and provided information and documents to the company's certified public accountant (C.P.A.), Joe Taigi, who prepared Mary and John's joint tax returns. Mary also met and interacted with Mr. Taigi during the years involved. She admitted to "booking things wrong" for VIP Builders and was advised that she had done so by Mr. Taigi. 2 For 2014 Mary and John's joint returns underreported income attributable to VIP Builders; for 2015 the returns underreported income and overstated expenses attributable to VIP Builders. The IRS made no adjustments with respect to VIP Builders for 2016. In addition to working for VIP Builders, Mary operated a horse care and boarding business on the farm that she and John owned. She exclusively controlled the business, and under her stewardship, the business' income for each of the years involved was underreported. All adjustments made by the IRS for 2016 were due to underreported income with respect to the horse care and boarding business. Mary wrote checks drawn on VIP Builders' bank account to herself, and she used the VIP Builders' American Express credit card to pay horse care and boarding business and household expenses. Mary was given the joint income tax returns for 2014, 2015, and 2016 before they were filed, but she did not review them before signing them. Mary was not a victim of spousal abuse or domestic violence during the years involved. The IRS tries to collect the joint tax liabilities of years 2014-2016 from Mary. Instruction: Provide your advice to Mary who is appealing the case.

On December 31, 2018, Rhone-Metro Industries leased equipment to Western Soya Co. for a four-year period ending December 31, 2022, at which time possession of the leased asset will revert back to Rhone-Metro. The equipment cost Rhone-Metro $607,484 and has an expected useful life of six years. Its normal sales price is $607,484. The lessee-guaranteed residual value at December 31, 2022, is $25,000. Equal payments under the lease are $160,000 and are due on December 31 of each year. The first payment was made on December 31, 2018. Western Soya’s incremental borrowing rate is 8%. Western Soya knows the interest rate implicit in the lease payments is 6%. Both companies use straight-line depreciation. Use (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. Show how Rhone-Metro calculated the $160,000 annual lease payments.
2. How should this lease be classified (a) by Western Soya Co. (the lessee) and (b) by Rhone-Metro Industries (the lessor)?
3. Prepare the appropriate entries for both Western Soya Co. and Rhone-Metro on December 31, 2018.
4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term for the lessee and the lessor.
5. Prepare all appropriate entries for both Western Soya and Rhone-Metro on December 31, 2019 (the second lease payment and depreciation).
6. Prepare the appropriate entries for both Western Soya and Rhone-Metro on December 31, 2022 assuming the equipment is returned to Rhone-Metro and the actual residual value on that date is $1,500.

Assignment

Wanda comes to you because she is discouraged and needs to talk. Her parents have heard she is thinking of expanding her business and even possibly taking out a second mortgage on her home to fund the expansion. They have never been overly supportive of her business, but as long as it seemed like a “hobby,” they didn’t have much to say. Recently Wanda’s mother called and expressed strong reservations about Wanda taking such a large step. This made a big impression on Wanda. She tells you that she doesn’t want her business to cause a rift in the family. Perhaps she should take her parents’ advice and just forget expanding the business. Moreover, she doesn’t understand why her parents aren’t as excited about the prospects for the business as she is.

Your Task

You decide that you are going to take matters into your own hands and go directly to the source of the problem, Wanda’s mother! In this assignment you will write a letter to Wanda’s mother and explain to her the positive characteristics of entrepreneurs Wanda is exhibiting and how you know she will be successful. You can compare Wanda’s start-up of Salty Pawz to other more well-known entrepreneurs who took a risk and succeeded, or you can recount your own experiences with an entrepreneur you know personally. The key is that Wanda’s mother understands that (1) it is not unusual for people to see things differently than the entrepreneur and (2) Wanda possesses many of the characteristics shared by successful entrepreneurs.

Q1) The Buffet Company produces and sells Parrot-head t-shirts. Income statements for two activity levels are provided below:

Required:

1. Identify the mixed expenses.
2. Use the high-low method to separate the mixed costs into variable and fixed components.
3. Prepare a contribution margin income statement at the 50,000 unit level.

__________________________________________________________________________________________________________________________

Q2) The Mean Cleaning Machine (MCM) Company and the Acme Cleaning Service provide janitorial services to commercial and residential customers in a major metropolitan area. MCM pays its employees $10 per hour for commercial jobs and $12.50 per hour for residential jobs. Acme pays its workers salaries. Acme’s total labor costs run $200,000 per year. Both companies charge their commercial customers an average of $15 per hour and the residential customers $25 per hour.

Required:

1. Prepare a contribution margin income statement for each company assuming they provide 15,000 hours of service to commercial customers and 4,000 hours of service to residential customers during the period and incurred no other expenses than those mentioned above.
2. A new service has recently entered the market specializing in residential cleaning at substantial lower rates. Both MCM and Ace are contemplating getting out of the residential business. Prepare a contribution margin income statement for each company assuming they do exit the residential business.
3. Which company will fare better if the residential business is eliminated? Why?

Campbell Manufacturing Company uses two departments to make its products. Department I is a cutting department that is machine intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II, where they are assembled into finished goods. The assembly department is labor intensive and requires many workers to assemble parts into finished goods. The company’s manufacturing facility incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are $264,000 and utility costs are $192,000. The typical consumption patterns for the two departments are as follows:

The supervisor of each department receives a bonus based on how well the department controls costs. The company’s current policy requires using a single allocation base (machine hours or labor hours) to allocate the total overhead cost of $456,000.

Required

1. Assume that you are the supervisor of Department I. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected.

2. Assume that you are the supervisor of Department II. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected.

3. Assume that you are the plant manager and have the authority to change the company’s overhead allocation policy. Formulate an overhead allocation policy that would be fair to the supervisors of both Department I and Department II. Compute the overhead allocations for each department using your policy.

4. 	Department Allocated Cost I II Total

5. 	Department Allocated Cost I II Total

6. 	Costs Department I Department II Fringe benefits Utility Total

7. 	Costs Department I Department II Fringe benefits Utility Total

Explain why Ford would be violating U.S. GAAP if it recognized all related revenue at the time cash was received from customers, rather than recording any as deferred

On January 1, 2017, Sheridan Company purchased  9% bonds having a maturity value of $ 290,000, for $ 313,782.32. The bonds provide the bondholders with a  7% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest receivable January 1 of each year. Sheridan Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

a. Prepare the journal entry at the date of the bond purchase. (Enter answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

b. Prepare a bond amortization schedule. (Round answers to 2 decimal places, e.g. 2,525.25.)

c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017. (Round answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2018. (Round answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)