Horizon Corporation manufactures personal computers. The company began operations in 2016 and reported profits for the years 2016 through 2019. Due primarily to increased competition and price slashing in the industry, 2020’s income statement reported a loss of $20 million. Just before the end of the 2021 fiscal year, a memo from the company’s chief financial officer to Jim Fielding, the company controller, included the following comments:

If we don’t do something about the large number of unsold computers already manufactured, our auditors will require us to write them off. The resulting loss for 2021 will cause a violation of our debt covenants and force the company into bankruptcy. I suggest that you ship half of our inventory to J.A. Sales in Nevada. I know the company’s president and he will accept the merchandise and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost profits to an acceptable level. The J.A. Sales will simply return the merchandise in 2022 after the financial statements have been issued.

During 2020, Mr. Hopkins realized a $20,000 long-term capital loss on a sale of ABC Inc. stock. Mr. Hopkins also owns 2,100 shares of XYZ Inc. stock with a basis of $70 per share and a current market value of $90 per share. Mr. Hopkins purchased this stock six months ago. Mr. Hopkins plans to hold his XYZ stock until 2024, at which time he expects to sell the stock for $135 per share. Mr. Hopkins is considering selling just enough of his XYZ shares to fully utilize his capital loss in 2020, and immediately repurchasing the XYZ shares the following day at the same price ($90) so as to maintain his investment in XYZ. He will then sell his XYZ stock, including the original shares acquired for $70 and the repurchased shares acquired for $90, in 2024 as originally planned.

Alternatively, Mr. Hopkins is considering simply holding his XYZ stock until selling it in 2024. Mr. Hopkins’ ordinary income tax rate is 25% and his long-term capital gains tax rate is 15%. He uses a discount rate of 5% in his NPV calculations.

Using the above information, which alternative (i.e., the sale/repurchase strategy or simply holding the stock until 2024) maximizes Mr. Hopkins’ post-tax cash flows from his XYZ stock?

The Crafty Ltd is an online retailer of a broad range of art and craft products. You are an audit senior at the firm Star Wars & Co and are planning the financial report audit for the year ended 30 June 2020. The Crafty is a new client to your firm and this is the first year end since you were appointed. The following information was obtained from a meeting with the CEO, Katrina Maglanque.

The company has managed to ride a wave of renewed interest by younger people in arts and crafts and the revenue for 2020 is approximately $3.2 million. This continues a trend that has seen revenue increase by between 20% and 30% consistently for the six years since the company was started by Katrina and her tennis partner Jade Garrard who is the COO. Profits in 2020 are $0.2 million and have not increased significantly in four years despite the increased turnover. In 2016 there are plans to broaden the range of products sold to include bedding, curtains and household furnishings.

Rapid expansion has put pressure on the company’s various systems, not least of which is the online sales order system. The Crafty do not have their own in-house IT function relying on Katrina’s sister Kristine who is responsible for accounting, IT, HR, payroll and general office management.

You are aware that in previous years errors had been detected at the audit stage, partly due to IT system errors and partly due to Kristine’s inexperience as an accountant. Katrina and Kristine are confident that any errors in the financial report will be immaterial and not worth investigating given how busy they are with the growing business.

As part of the growth of the business the company is looking to raise additional bank borrowings to fund more warehouse space and invest in improvements to the IT systems. Katrina has indicated that she needs the audit report signed before 15 September which is when she will be meeting the bank to discuss the details of the loan. Based on the above information, identify and explain five (5) issues that give rise to risks for the financial report external audit you are about to commence.

Based on the above information, identify and explain five (5) issues that give rise to risks for the financial report external audit you are about to commence.    

On 1/1/2016, California Corporation purchased 75% of the outstanding voting stock of San Diego Corporation for $2,400,000 paid in cash. On the date of the acquisition, San Diego’s shareholders’ equity consisted of the following:

Common stock, $10 par                 $1,000,000

APIC                                                   600,000

Retained Earnings                               800,000

Total SE                                         $2,400,000

The excess fair value of the net assets acquired was assigned 10% to undervalued Inventory (sold in 2016), 40% to undervalued PPE assets with a remaining useful life of 8 years, and 50% to Goodwill.

Comparative trial balances of California Corporation and San Diego Corporation at December 31, 2020, are as follows:

Required:

Determine the amounts that would appear in the consolidated financial statements of California Corporation and its subsidiary for each of the following items:

1. Goodwill at December 31, 2020. (2 points)
2. Income to Non-controlling interest for 2020. (3 points)
3. Consolidated retained earnings at December 31, 2019. (2 points)
4. Consolidated retained earnings at December 31, 2020. (2 points)
5. Controlling share of consolidated Net Income for 2020. (3 points)
6. Non-controlling interest at December 31, 2020. (3 points)

On 1/1/2016, XYZ Corporation purchased 75% of the outstanding voting stock of Sally Corporation for $2,400,000 paid in cash.  On the date of the acquisition, Sally’s shareholders’ equity consisted of the following:

Common stock, $10 par                 $1,000,000

APIC                                                   600,000

Retained Earnings                               800,000

Total SE                                         $2,400,000

The excess fair value of the net assets acquired was assigned 10% to undervalued Inventory (sold in 2016), 40% to undervalued PPE assets with a remaining useful life of 8 years, and 50% to Goodwill.

Comparative trial balances of XYZ Corporation and Sally Corporation at December 31, 2020, are as follows:

Required:

Determine the amounts that would appear in the consolidated financial statements of XYZ Corporation and its subsidiary for each of the following items:

1. Goodwill at December 31, 2020. (2 points)
2. Income to Non-controlling interest for 2020. (3 points)
3. Consolidated retained earnings at December 31, 2019. (2 points)
4. Consolidated retained earnings at December 31, 2020. (2 points)
5. Controlling share of consolidated Net Income for 2020. (3 points)
6. Non-controlling interest at December 31, 2020. (3 points)

The comparative balance sheets for 2021 and 2020 and the income statement for 2021 are given below for Arduous Company. Additional information from Arduous’s accounting records is provided also.

   
Additional information from the accounting records:

1. Investment revenue includes Arduous Company’s $6 million share of the net income of Demur Company, an equity method investee.
2. Treasury bills were sold during 2021 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
3. Equipment originally costing $70 million that was one-half depreciated was rendered unusable by a flood. Most major components of the equipment were unharmed and were sold for $17 million.
4. Temporary differences between pretax accounting income and taxable income caused the deferred tax liability to increase by $3 million.
5. The preferred stock of Tory Corporation was purchased for $25 million as a long-term investment.
6. Land costing $46 million was acquired by issuing $23 million cash and a 15%, four-year, $23 million note payable to the seller.
7. The right to use a building was acquired with a 15-year lease agreement; present value of lease payments, $82 million. Annual lease payments of $7 million are paid at the beginning of each year starting January 1, 2021.
8. $60 million of bonds were retired at maturity.
9. In February, Arduous issued dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at that time.
10. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $9 million.

a.  Determine the amounts of the components of pension expense that should be recognized by the company in 2020.

b.  Prepare the journal entry to record pension expense and the employer's contribution to the pension plan in 2020.

c.  Indicate the pension-related amounts that would be reported on the income statement and the balance sheet for Ferreri Company for the year 2020.

March 1 purchase 100 units $50 each

March 5 purchase 400 units $55 each

March 9 sales 420 $85 each

March 18 purchase 120 units $60

March 25 purchase 200 units $62

March 29 sales 160 units $95

1. The CEO has asked you to help her decide whether to use LIFO or FIFO for inventory costing. Compute the gross profit earned by the company for both LIFO and FIFO.
2. The CEO’s bonus is calculated using net income before income taxes. If the CEO wishes to maximize her bonus, which of the following methods would you recommend?
3. Alternatively, the CEO desires the method that minimizes income taxes paid by the company in the current year. If income taxes are based on a percentage of net income, which method would you recommend to the CEO?

Perpetual