SA1 - Interview an Accountant or Accounting Firm OR a Banker

Option 1 – Interview an Accountant or Accounting Firm

Contact an accountant and conduct an interview on forms of businesses, taxes, licenses needed, and so forth.

1)    Which legal structure do you recommend? Why?

2)    Can this legal structure be changed once it has been established?

3)    Should the business be formed in or out of state? Why?

4)    What are the tax implications of the legal structure recommended?

5)    Will I need an employer identification number (EIN)?

6)    Should I open a business bank account, or will my personal account be sufficient? Why?

7)    Do you recommend using accounting software? Why?

8) What are the strengths and weaknesses of this business form?

OR,

Option 2 – Interview a Banker

Contact a bank manager and conduct an interview on loan procedures and qualifications.

1)    What is the current environment like for bank loans for small businesses?

2)    What are the current rates the bank charges for business loans?

3)    What criteria are considered in the determination of the rate of the loan and the amount that can be borrowed?

4)    Are you lending money to new/small businesses?

5)    What is the difference between a line of credit and a loan?

6)    Do you sell your loans?

7)    What financial information is required by the lender?

8)    How do I obtain a loan application?

9) What types of questions might be asked in addition to those in the loan application?

10) What types of security might be requested to secure the loan?

11) What types of businesses normally get loans?

12) What are the characteristics of successful borrowers?

Splish Corp. has 150,240 shares of common stock outstanding. In 2020, the company reports income from continuing operations before income tax of $1,210,400. Additional transactions not considered in the $1,210,400 are as follows.

Analyze the above information and prepare an income statement for the year 2020, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 19% on all items, unless otherwise indicated.) (Round earnings per share to 2 decimal places, e.g. 1.47.)

1. Catherine’s the new CEO of an exercise equipment company and she wants to know if her time as CEO has affected the return rates of treadmills. Before she became CEO, 8% of treadmills were returned. What’s the null and alternative hypotheses of any tests she runs?

2. Imagine you were testing if a new battery lasts longer than the industry standard. You perform the appropriate hypothesis test with an unbiased sample and found statistical signifance at 99.9% confidence. It would be a mistake to claim that you “proved” this new batter lasts longer. Why?

It is January 1st 2020, on the day before, December 31st 2019, Alamo Co. reported a net income
of 4,009,000 dollars. To this date the company is unlevered and its real EBITDA is constant.
The company acquired the year before (on January 1st 2019) a new plant for 36,000,000
dollars, that the fiscal law allowed to depreciate straight line either in 3 (Plan 1) or 6 years
(Plan 2). All other assets are fully depreciated. Today, the company announces a
recapitalization in which it will issue risky debt and retire equity for an amount of 65,000,000
dollars. The company then plans to keep a constant debt level. Before the announcement, the
unlevered equity return is 7.65%. Assume that the inflation rate is 2.5%, that the debt beta is
0, that the expected market return is 8.00%, that the risk free rate is 4.50% and that the tax
rate is 30%. Finally assume that the depreciation tax shield is as risky as the company’s debt.
a) What is the depreciation plan chosen by the firm? Why?
b) What is the return experienced by the shareholders immediately after the
recapitalization announcement (but before the recapitalization is carried out)?
c) What is the beta of levered equity?

Raul Martinas, a professor of languages at Eastern University, owns a small office building adjacent to the university campus. He acquired the property 10 years ago at a total cost of $669,500—that is, $90,500 for the land and $579,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, and so Martinas is unsure whether he should keep it or sell it. His alternatives are as follows:

1. Keep the property. Martinas’s accountant has kept careful records of the income realized from the property over the past 10 years. These records indicate the following annual revenues and expenses: Martinas makes a $14,475 mortgage payment each year on the property. The mortgage will be paid off in eight more years. He has been depreciating the building by the straight-line method, assuming a salvage value of $86,850 for the building, which he still thinks is an appropriate figure. He feels sure that the building can be rented for another 15 years. He also feels sure that 15 years from now the land will be worth three times what he paid for it.

2. Sell the property. A realty company has offered to purchase the property by paying $222,000 immediately and $28,750 per year for the next 15 years. Control of the property would go to the realty company immediately. To sell the property, Martinas would need to pay the mortgage off, which could be done by making a lump-sum payment of $117,500.

Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.

Required:

Assume that Martinas requires a 12% rate of return. Compute net present value in favor of (or against) keeping the property using the total-cost approach. (Round discount factor(s) to 3 decimal places and other intermediate calculations to the nearest dollar amount.)

Would you recommend that he keep or sell the property?

multiple choice

• Keep the property

• Sell the property

Question 2: Porter, a public limited company, is the parent of a listed group of companies which have a year end of 30 April 2020. Porter’s functional currency is the pound (£) and presents its individual and consolidated financial statements in £. The statements of financial position for two entities as at 30 April 2020 are presented below:

Additional information

1. Porter acquired 75% of Belobe on 1 May 2019 for £9,150,000 when the retained reserves of Belobe were 3,155,000 Crowns. The functional currency of Belobe is Crowns.

2. The group policy is to value non-controlling interest at the proportionate share of the fair value of the net assets at acquisition.

3. Belobe made a profit of 3,575,000 Crowns for the year ended 30 April 2020.

4. The exchange rates between the £ and Crowns are as follows:

1 May 2019 £1: 0.69 Crowns

30 April 2020 £1: 0.62 Crowns

Average rate for the year ended 30 April 2020: £1: 0.64 Crowns

YOU ARE REQUIRED TO:

(a) Prepare the consolidated statement of financial position for the Porter group as at 30 April 2020.

(b) Prepare a reconciliation of the consolidated retained reserves figure showing the exchange gains and losses.

(c) Explain your calculation of goodwill and the treatment of exchange differences on goodwill for the year ended 30 April 2020. Your answer should refer to the relevant International Financial Reporting Standards (IAS/IFRS).(maximum word count 200 words) TOTAL 50 MARKS

Q1 Using the company's overall cost of capital to evaluate a project's cash flows is problematic in that the company is a collection of projects, with the possibility that each project has a different level of risk than the other projects currently working for the company.

Select one:

True

False

Q2) The three principal ways in which venture capital companies exit venture-backed companies are

Select one:

a. selling to a strategic buyer, buying out the founder, and offering shares to the public.

b. selling to a strategic buyer, selling to a financial buyer, and buying out the founder.

c. selling to a strategic buyer, selling to a financial buyer, and offering shares to the public.

d. None of the options.

Q3) A company is planning to issue 2.5 million ordinary shares and the underwriting spread is 8%. Following due diligence, the offer price has been set to $20 per share. Suppose that the offer has not been as successful as expected and only 95% of the shares have been sold. In such situation, considering stand-by arrangement, what will be the proceeds available to the underwriter?

Select one:

a. $1 million

b. $1.5 million

c. $3.8 million

d. $2 million

Q4) The use of debt financing

Select one:

a. increases agency costs.

b. decreases agency costs.

c. may both increase and decrease the agency costs.

d. has no effect on agency costs.

Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows: Total cash paid $4,500,000 Assets acquired: Land $800,000 Building $700,000 Machinery $800,000 Patents $700,000 The building is depreciated using the double-declining balance method. Other information is: Salvage value $70,000 Estimated useful life in years 20 The machinery is depreciated using the units-of-production method. Other information is: Salvage value, percentage of cost 10% Estimated total production output in units 100,000 Actual production in units was as follows: 2019: 20,000 2020: 20,000 2021: 30,000 The patents are amortized on a straight-line basis. They have no salvage value. Estimated useful life of patents in years 40 On December 31, 2020, the value of the patents was estimated to be $100,000 Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31. The machinery was traded on December 2, 2021 for new machinery. Other information is: Fair value of old machinery $400,000 Trade-in allowance $600,000 List price for new machinery $840,000 Estimated useful life of new machinery in years 10 Estimated salvage value of new machinery $8400 The new machinery if depreciated using the stright-line method and ½ year rule. On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows: Amount of addition, paid in cash $400,000 Number of years of useful life from 2023 (original machinery and addition): 20 Salvage value, percentage of addition 10% Required: Prepare journal entries to record: 1 The purchase of the assets of Coffee. 2 Depreciation and amortization expense on the purchased assets for 2019. 3 The decline (if any) in value of the patents at December 31, 2020. 4 The trade-in of the old machinery and purchase of the new machinery. 5 Depreciation on the new machinery for 2021. 6 Cost of the addition to the machinery on August 14, 2023. 7 Depreciation on the new machinery for 2023.

Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows:

Total cash paid $2,990,000

Assets acquired:

Land $600,000

Building $600,000

Machinery $500,000

Patents $600,000

The building is depreciated using the double-declining balance method. Other information is:

Salvage value $60,000

Estimated useful life in years 30

The machinery is depreciated using the units-of-production method. Other information is:

Salvage value, percentage of cost 10%

Estimated total production output in units 400,000

Actual production in units was as follows: 2019: 40,000

2020: 80,000

2021: 120,000

The patents are amortized on a straight-line basis. They have no salvage value.

Estimated useful life of patents in years 20

On December 31, 2020, the value of the patents was estimated to be $900,000

Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31.

The machinery was traded on December 2, 2021 for new machinery. Other information is:

Fair value of old machinery $240,000

Trade-in allowance $336,000

List price for new machinery $504,000

Estimated useful life of new machinery in years 20

Estimated salvage value of new machinery $15,120

The new machinery if depreciated using the stright-line method and ½ year rule.

On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows:

Amount of addition, paid in cash $100,000

Number of years of useful life from 2023 (original machinery and addition): 20

Salvage value, percentage of addition 10%

Required: Prepare journal entries to record:

1 The purchase of the assets of Coffee.

2 Depreciation and amortization expense on the purchased assets for 2019.

3 The decline (if any) in value of the patents at December 31, 2020.

4 The trade-in of the old machinery and purchase of the new machinery.

5 Depreciation on the new machinery for 2021.

6 Cost of the addition to the machinery on August 14, 2023.

7 Depreciation on the new machinery for 2023.