Question 1.

Company Z had the following transactions in its first year of operations:

(1) On January 15, purchased 5,000 units of inventory for $20 each

(2) On March 1, purchased 10,000 units of inventory for $22 each

(3) On March 30, sold 7,000 units of inventory for $48 each

(4) On June 20, purchased 9,000 units of inventory for $25 each

(5) On August 10, sold 12,000 units of inventory for $50 each

(6) On September 3, sold 1,000 units of inventory $49 each

Company Z records transactions using a perpetual system. Calculate the cost of goods sold and ending inventory using (1) average cost, (2) FIFO, and (3) LIFO.

Company Z asks you to advise them on which inventory method to use. What method would you choose if the company wants to take out a loan from a bank in the near future that requires the company to meet a large threshold for its current assets’ value? What method would you choose if the company has a near-term investment opportunity that requires more cash on hand? Explain your answers.

True or False

41. There are only two things a company can do with its profits, pay dividends and retain profits.

42.The investment cash flows for a project typically carry a positive sign.

43. A positive of NPV is its currency units.

44.A project uses the WACC of the country where the capital is raised regardless of where the project is built.

45.The CAPM approach is too difficult to be used often as a project's cost of equity.

47.Flotation costs are a measure of how much it costs to raise funds.

48.A board of directors oversees executives in a firm.

50. WACC is a measure of a company's marginal cost of new funds.

Four holes must be drilled in a casting which forms the housing for an electric motor. The holes may be located and drilled without the aid of a jig by a skilled machinist whose wage rate is $26 per hour. His production time will be 3.5 minutes per housing. A jig could be built at a cost of $600 permitting the holes to be drilled by a machinist at a lower skill level. In this case the lower wage rate would be $19 per hour and the production rate would be four minutes per housing. Which alternative would you recommend if 2,200 housings are to be produced?
b)The total production cost using no jig with a skilled machinist is?

Question:

Suppose you have organized another business under the name “PAPA’s Hotel & Restaurant” on December 1, 2019. In order to compete in the market, you have decided to avail of financing from Azizi Bank for further expansion. Bank requires a list of documents including financial statements for further process. The business transactions during the month of December are as follows:

Dec 01: You have invested cash of $2,500,000 in your business, PAPA’s Hotel & Restaurant.

Dec 01: Purchased hotel building for $550,000. Made a $180,000 cash down payment and issued a note payable for balance amount.

Dec 01: You have agreed with Unilever Corporation to provide meeting hall and charge fixed revenue of $5,000 per month. The entire six-month rent revenue of $30,000 was collected in advance and credited to Unearned Rent Revenue.

Dec 01: Purchased food items for the restaurant on credit $10,000

Dec 10: Received cash of $80,000 from customers as rent revenue from customers.

Dec 15: Paid $10,000 salary to employees for services during the first half of December.

Dec 18: Purchased restaurant supplies of $2,500 on account.

Dec 31: Paid cash $10,000 for food items purchased on Dec 01.

Dec 31: You withdrew $5,000 cash from the business for personal use.

As you are following the accrual basis of accounting so adjustments are needed as at December 31, 2019. The information regarding adjustments is as follows:

1. Salaries earned by employees but not paid amount to $10,000 for second half of Dec.
2. As of Dec. 31, you have earned $20,000 rent revenue but not received any amount yet.
3. On Dec 1, entire six-month rent revenue of $30,000 was collected in advance and credited to Unearned Rent Revenue. As at December 31, adjustment is needed.
4. A Toyota Corolla car had been rented on Dec 09, at daily rate of $80 to provide transportation facility. No rental payment has yet been made.
5. Depreciation on Hotel’s building is based on an estimated useful life of 15 years. The original cost of building was $550,000 and residual value of $50,000.

Instructions:

1. Prepare Journal Entries, Post to the ledger, Prepare Trial Balance, Prepare adjusting entries, and then Prepare adjusted Trial Balance
2. Prepare financial statements (balance sheet & income statement) as of December 31, 2019 based on above information as it is the compulsory requirement of Azizi bank.
3. Evaluate the financial position and profitability of your business?
4. If you have applied for the financing of $250,000, whether you are qualified against the collateral of hotel building as at December 31, 2019?

The management Hilton Hotels series has decided to build a hotel in Cairo by the Nile River. The management has finished all construction procedures and set up all the interior furniture that were bought locally from the local suppliers. The rest of the finishing items were decided to be imported from foreign suppliers.   The hotel management has instructed you on 01.04.2020 to be responsible for the transport of the imported items and set them up inside indicated areas in the Hotel before opining date on 01.05.2020.

The details of the cities of suppliers and the type of commodities to be transported EXW are as follow:

P.S. (All Dimensions with meter as measure unit)

• Riyadh – KSA Furniture 50 pieces        transit times: air / 2 Hours – Sea / 3 hours from

                                       2.00 L*1.00 W*1.00 H         Jeddah + 2 days from Riyadh to Jeddah                                                                           by inland

Transport – Full overland freight from Riyadh to Cairo / 3 days.

• New York – USA         Sanitary wares Transit Times: Air / 3 days – Sea / 18-21 days.

                                                      200 cartons. Dim 1.00 H* 0.5 W* 0.5 H

• Milan – Italy                Glass cups, glass        100 Box 0.75L*0.75W*0.75H

Wares and China

Wares.             Transit Times: Air / 2 days – Sea / 6-8 days

• Singapore                     Spot Lights                   Transit Times: Air / 3 days – Sea / 18 days

                                                       100 Cartons       Dim: 0.50L*0.50W*0.50H

• Paris – France              Liquors – Wines Transit Times: Air / 3 days - Sea / 11-13 days

                                                    10 Boxes, 100 liters 0.50L*0.50W*0.50H

• Düsseldorf – DE            Electric back up           6 batteries , Dim 2.25 L* 2.3 W* 2.00 H

Batteries (DGR) Transit Times: Air / 3 days – Sea / 11-13 days

***** Please decide and indicate:

• Shipments to be shipped by air freight.
• Shipments to be shipped by sea freight.
• Shipments to be shipped by overland freight.
• Possibility to combine 2 modes of transport (Multimodal) to saves both cost & time.
• Air transport procedures.
• Sea transport procedures..
• Overland transport procedures.
• Customs Clearance procedures.

**** Note that:

• Pick up from suppliers may take 2-3 days.
• Customs clearance in Cairo airport may take 3-4 days and in any Egyptian port it may take 5-6 days.
• Set up of all items inside the Hotel after arrival of all commodities may take 5-6 days.

Chapter 2 Mastery Problem

The T – Accounts are set up for you in the excel spreadsheet.

Hassan Rahim won a concession to rent bicycles in the local park during the summer. During the month of June, Hassan completed the following transactions for his bicycle rental business:

Chart of Accounts

ABC Ltd (“ABC”) entered into a contract on 1st January 20x6 to build a factory building for its customer on its customer’s land for $20 million. The completion is expected to be in two years’ time. ABC’s policy is to bill its clients based on 60% in the first year and the balance upon completion of the project. ABC has a 31st December financial year end. It has adopted FRS 115 Revenues from Contracts with Customers and adopts the input method to measure the entity’s progress towards the complete satisfaction of the performance obligations.

At the end of 20x6, ABC has incurred actual costs of $10 million on the construction project. The estimated costs that are required to complete the project was $6 million. Actual collections in 20x6 amounted to $10.5 million.

In 20x7, a modification to the contract was required. To comply with new safety regulations, the concrete flooring was to be reinforced with steel. An electronic gantry and carpark structures were also added to the existing open-air carpark area.

The contract was increased by $5 million for the reinforced concrete flooring and $1 million for the car-park structures. The additional expected costs for the reinforced flooring was $2 million and the car park structure was $800,000. The commencement of work was to start in 20x8 and the completion date is expected to be extended for an additional year in 20x8. Billings for the additional contract price will be done in 20x8.

At the end of 20x7, the actual costs incurred and paid was $8 million, fully attributable to the construction of the factory building. An estimated cost of $5 million is further required to complete the factory building and $800,000 for the car-park. $8 million were invoiced as per the original plans, and actual collections during the year amounted to $9.5 million.

At the end of 20x8, the contracts were completed. The actual costs incurred and paid during 20x8 were as estimated during the modification agreement. A final billing of $6 million was made and actual collections amounted to $4.5 million.

Required:

(a) Discuss revenue recognition under FRS 115 Revenues from contracts with customers in view of its application to construction contracts. Please include in your discussion the costs that goes into a construction contract and the issues involved.

(b) Discuss also the impact of modifications, common reasons for modifications and how modifications are treated. Explain how the modification of the contract to change the flooring and addition of the car park structure should be treated under FRS 115 Revenues from contracts with customers.

(c) Compute the revenues, expenses and profits to be recognised for each financial year ending 31st December 20x6, 20x7 and 20x8. Illustrate the accounting for this contract by preparing the necessary journal entries to record the relevant transactions for 20x6 and the final entry to record the completion of the project. Journal narratives are not required. (Answers may be rounded to the nearest thousand dollars).

For all problems below, use correct notation where appropriate.
Round all proportions to 3 d.p. and standard errors to 4 d.p.
1. (up to 5 EC pts) Do we dream in color? In the 1940s, before the age of television,
color movies, and video games, 29% of the American population reported dreaming in
color. A psychologist suspects that the present-day proportion might be higher, now
that we are surrounded with color imagery. In a random sample of 113 people, 92
reported dreaming in color (Schwitzgebel 2003).
a) State the parameter to be tested. Be specific and use the appropriate notation.
b) Conduct a hypothesis test to determine if the psychologist’s suspicion is
correct. Clearly show all 7 steps as shown in the lecture notes. Complete each
step by hand. Be sure to state the hypotheses in words and symbols.
c) In the context of this problem, what would it mean if we made a Type I error?
What is the probability of making this kind of error? (See 8.1,8.2 lecture notes.)