Suzy’s Cool Treatz is a snow cone stand near the local park. To plan for the future, the owner wants to determine her cost behavior patterns. She has the following information available about her operating costs and the number of snow cones served.

Suzy uses the high-low method to determine her operating cost equation. What are her estimated costs at 4628 snow cones? When calculating the variable cost per unit, round your answer to two decimal places before completing your calculations. Do not use dollar signs, commas or decimals in your answer. Input your answer to the nearest whole number.

Question 2

You are an auditor on the BLUE Limited (BLUE) audit engagement for the financial year ending 30 September 2019. BLUE is a large hotel company with more than 1000 hotels in Australia and Asia under a range of hotel brands. You are in the process of undertaking audit planning procedures for the BLUE audit. You have noted a number of significant risks outlined below.

BLUE’s revenue is made up of management fees earned from hotels managed by BLUE under long-term contracts with hotel owners, and from the rental of rooms and food and beverage sales from hotels owned and leased by the company directly. In hotels owned and leased directly by BLUE, the company’s practice is to confirm hotel bookings by taking credit card details and collecting payment for accommodation and incidentals at the end of a customer’s stay. You have noted an increasing incidence of corporate clients prepaying for their employees’ accommodation. These have been recorded as revenue when payment has been received.

It has also come to your attention that there have been a growing number of disputes with hotel owners in relation to the amount of management fees being charged. Management fees included a base fee, a percentage of hotel revenue, and an incentive fee based on the hotel’s profitability. Individual contracts negotiated with hotel owners include provisions for percentage increases of the base fee either annually or biannually to take effect at specific dates. Based on your initial review of the correspondence, it appears that BLUE has been applying percentage increases to the base fee charged to hotel owners prior to their effective date as contained in the contracts with individual hotel owners.

BLUE runs a hotel loyalty program which enables members of the program to earn points for every dollar spent on accommodation, food and beverages at BLUE branded hotels. These points may be redeemed at a later date for free accommodation or other benefits. BLUE records a loyalty program future redemption liability on the basis of the number of points expected to be redeemed prior to their expiry multiplied by redemption cost per point. An announcement was made on 30 May 2017 that points earned under the loyalty program would now expire in two years rather than five years from the time they are earned. BLUE’s management subsequently reduced the amount provided in the loyalty program future redemption liability by $80 million based on their estimate of the revised amount required to meet the liability given the impact of the change.

BLUE has embarked on a large-scale software development project in the current year to internally develop improved guest reservation and hotel management systems. An amount of $37 million for the year has been capitalised as software development during the year. Your initial review has revealed that this amount includes repairs and maintenance of a range of BLUE’s hardware incurred during a year.

Required

(a) Considering the information provided, determine the four key account balances and related assertions at risk. Briefly justify your answer. (4 X 5 Marks = 20 Marks)

b) Recommend one audit procedure in relation to each of the assertions identified above (4 X 2.5 Marks = 10 Marks)

Government is considering building a public park in a small town ìBelleî. The cost of building this park is 120. There are three people in this town, Arnold, Ben, and Carrol. Each personís valuation of the park is 20, 30, and 80 respectively. But, government does not know these valuations.

(a) The government decides whether to build this park by majority voting. If majority supports building the park, then cost will be equally shared. What will be the outcome of majority voting?

(b) Government suggests that the cost of building the park will be financed through the government revenue in other towns. But government will only take this project when the benefit is higher than the cost. Government want survey these three to know the benefit of the park. Do you think this is the right plan to get the benefit of the park? Explain why or why not.

(c) Government suggests another plan. Government will survey these three to get the valuation of the park. If the sum of benefit is greater than the cost, cost will proportionately shared among three according to the reported valuation. For example, the reported valuation is 50, 60, and 70, then each cost share will be 50/(50+60+70), 60/(50+60+70), and 70/(50+60+70). Do you think this is the right plan to get the true valuation? Explain why or why not.

Bob Ross Ltd builds large ships and uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2012 year-end.

4a1) How much revenue will Bob's Construction recognize in 2011?

4a2) How much G.P. will Bob's Construction recognizes in 2012?

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4b) Bob Ltd. entered a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2011, with a planned completion date of December 31, 2013. A summary of the costs, billings, and collections is provided below:

Bob uses the percentage of completion method. What amount would appear as accounts receivable on Bob's December 31, 2012 balance sheet?

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4c) With the same data as 4b, Bob's Construction Ltd. entered a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2011, with a planned completion date of December 31, 2013.  Bob uses the percentage of completion method. How much gross profit would Bob's Construction recognize in 2012?

Big Red Engineering Associates entered into a 3 year contract to construct an office building at a contract price of $1,700,000. With the construction data below prepare the necessary journal entries to record cost incurred, billings to customers, cash collections, and the end of year adjusting entry applicable to percentage of completion method:

                                                 Year 1                    Year 2                    Year 3

Construction cost incurred       250,000                 900,000                  210,000

Estimated cost to complete   1,000,000                  287,500                       0

Progress Billings                      190,000               1,200,000                  310,000

Collections from customer       150,000               1,100,000                  450,000

Q1) Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,600 per year. The rooms rent at an average price of $127 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10.6 per person per night and the cost of food which is $5.8 per person per night.

A) Determine the sales revenue Jane needs to break even.

B) Determine the number of rentals Jane needs to earn a target net income of $50,000.

C) Jane is considering changing the business strategy. She considers installing additional cleaning machines which will decrease laundry and cleaning service per person per night by $3. However, fixed depreciation cost will increase by $4,080. Determine the number of rentals Jane needs to break even if the changes are made.

D) Determine the number of rentals at which Jane would be indifferent between the current and proposed business models. (Hint: Consider net income figures.)

Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,700 per year. The rooms rent at an average price of $128 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10.7 per person per night and the cost of food which is $5.1 per person per night.

A) Determine the sales revenue Jane needs to break even.

B) Determine the number of rentals Jane needs to earn a target net income of $50,000.

C) Jane is considering changing the business strategy. She considers installing additional cleaning machines which will decrease laundry and cleaning service per person per night by $3. However, fixed depreciation cost will increase by $4,010. Determine the number of rentals Jane needs to break even if the changes are made.

D) Determine the number of rentals at which Jane would be indifferent between the current and proposed business models. (Hint: Consider net income figures.)

Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,730,000. The project was begun in 2020 and completed in 2021. Cost and other data are presented below:

Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.

Required:
Compute the amount of gross profit recognized during 2020 and 2021.

Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,730,000. The project was begun in 2020 and completed in 2021. Cost and other data are presented below:

Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.

Required:
Compute the amount of gross profit recognized during 2020 and 2021.

Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Amy was offered the opportunity to purchase a hotel near a seaside vacation area she had often visited. After obtaining a lawyer and a financial accountant to assist her, Amy did an analysis of the most recent financial statements of the hotel. Since the hotel had consistently shown a profit during the past few years, Amy thought that the price of the hotel was reasonable, so she decided to purchase the hotel. She resigned her position, obtained a loan, and purchased the hotel.

During the first year as a hotel manager, Amy received an offer from a tour operator who proposed to guarantee a considerable number of room reservations, including during the off-season. However, she turned down the offer because the tour operator asked for a 20% price reduction compared to the regular room rate. A few weeks later, she decided to shut down the restaurant, located in the main building of the hotel, in order to save expenses. With regard to general expenses, she was particularly concerned with the high room cleaning and service costs. On the sales side, although the reservations for the cheaper standard rooms were a bit sluggish, the more expensive large-size superior rooms had a very good occupancy rate of over 90%.

The following year, there was a severe economic downturn and also a very bad weather season that reduced the number of guests and also caused a resulting mold situation in the hotel building that required expensive repair work. Amy ran short of cash, became emotionally distraught, and eventually had to sell the hotel at a significant loss.

Question: Using Relevant Costs To Make Short-Term Decisions explain potential management errors that Amy had made and could have helped her to improve decision-making and the financial results of the business.