Mike Jackson and Terrence Jensen are the owners of J&J Air, and they recently decided to expand the company. Recently hired financial analyst, Gus Christie, has been instructed to locate an underwriter who can help the firm sell $35 million in new 10-year bonds. The bonds will be used to finance construction as part of the firm's expansion. Valerie Harper is an underwriter with the investment banking firm of Warren & Zevon. After Gus contacted her, Valerie briefed him regarding various bond features J&J should consider, along with an appropriate coupon rate for the anticipated bond issue.

Gus is aware of the bond features, although he is uncertain regarding the costs and benefits of some features. Accordingly, he remains unsure about how each of these features might influence the bond issue's coupon rate. Assume you are Valerie's assistant, and she has asked you to draft a memo to Gus that clearly describes the effect of each of the following bond features on the coupon rate of the new bond issue. She also instructed you to describe the advantages and disadvantages of each feature.

1. The security of the bond; i.e., whether the bond has collateral.
2. The seniority of the bond.
3. The presence of a sinking fund.
4. A call provision with specified call dates and call prices.
5. A deferred call accompanying the call provision.
6. A make-whole call provision.
7. Any positive covenants. Also, discuss several possible positive covenants J&J Air might consider.
8. Any negative covenants. Also, discuss several possible negative covenants J&J Air might consider.
9. A conversion feature (note that S&S Air is not a publicly traded company).
10. A floating rate coupon.

The following statement was made at a recent company board meeting: “We (the company) did receive a good price for our shares issued at the initial public offering (IPO). Thank heavens we, as directors, do not need to worry about the share price in the future as is the shares are traded on the secondary market.” Do you agree with this statement? Explain.

You should answer all of the questions listed below as they relate to the financial statements of any U.S. public company of your choice in its latest annual report. Please use the Securities and Exchange Commission web site as your primary source for financial statements. All publicly traded U S companies have their annual reports called the 10-K available through the Securities and Exchange Commission web site. http://www.sec.gov/

COMPANY: Delta Airlines Inc. (DAL)

Instructions for use of the site are as follows: About half way down the home page is a box titled Search EDGAR, free access to over 21 million filings. Enter the company name [(Delta Airlines Inc. (DAL)] or ticker symbol. That brings up a page called EDGAR Search Results. In the line "filter results" enter "10-K" in filing type and hit search. That will bring up recent company annual reports. Note: You have a choice of "Documents" or "Interactive Data." Both contain all the information. "Interactive Data" uses Excel and provides the best access to information for questions 1, 2, and 3. "Documents" provides information that is easy to read for questions 4 through 8. After you click on Documents, click on the red letters and numbers to the right of the "10-K" heading.

Also, you can find the financial statements of any U.S. public company by visiting Morningstar, Yahoo Finance or MSN Money, and using the stock market symbol for your chosen company (which can be looked up on Morningstar, Yahoo Finance or MSN Money). Please be aware that sometimes these services omit some numbers in order to fit their preferred formats. Many companies have links to the Annual Report as filed with the SEC. It can be found on the Investor relations page of the company web site.

1) What 3 items of important information does the income statement reveal about the financial

performance of the company over the last three years?

2) What 3 items of important information does the balance sheet reveal about the financial position of

the company over the last two years?

3) Can you identify the major sources of funding used by the company from the information presented in the company's annual report? Please look at the Statement of Cash Flows, formerly called the Source and Uses of Funds Statement.

4) Who is responsible for:

-the issuance, and

-the content

of the company financial statements? (Note: this information may be difficult to find. Look for statements by management and the independent auditing firm.)

5) What assurance, if any, is there that the financial statements are in compliance with GAAP, and are free of material misstatements?

6) Of what use, if any, are the notes to the financial statements? Give an example of something learned from the footnotes of your company.

7) What can you learn from the Business Section of the 10-K? Give two facts learn from reading this section.

8) What can you learn from the Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A)? Give two facts learned from reading this section.

PROBLEM: ASC 606: Revenue from Contacts with Customers, Correction of Accounting Errors, Professional Research, and Accounting Theory (Conceptual Framework)

Ian Mathews is a creator of board games. Ian will be selling his most recent game, Radical Rainbows, through his newly formed company, UPR, Inc. UPR was formed in June, 2018. Ian contributed $1,000 to UPR in exchange for 100% of UPR’s voting common stock. Ian has had unprecedented success with the first two games in his most recent game trilogy: unicorns, ponies and rainbows. Ian was looking to finance UPR’s initial production run of the third game, Radical Rainbows at a rate of 7.5% or less.   The best deal offered by several banks had an APR of 8%. That was more than Ian was willing to pay and he felt there were other sources of financing that were less expensive.

As he had done for the first two games in the series: Unstable Unicorns and Perplexed Ponies, Ian turned to Kickstarter to finance the cost of the first production run of Radical Rainbows. Normally, UPR will be selling Radical Rainbows for $50 per game. UPR offered to sell Radical Rainbows to its Kickstarter backers for $45 per game.   The Kickstarter campaign was completed in two days, and on June 1, 2018 UPR received $225,000 in exchange for a promise to deliver 5000 games to its Kickstarter backers on December 1, 2019.  

At a manufacturing cost of $30 per game, UPR will be able to produce 7500 units with the $225,000 raised in the Kickstarter campaign. The 7500 games would be ready for shipment on December 1, 2019.

On June 1, 2018, UPR’s bookkeeper made the following entry to record the receipt of cash:

On December 1, 2019, UPR was able to deliver the 5000 board games to its Kickstarter backers. UPR also sold and delivered the additional 2500 games to other customers for the normal retail price of $50 per game. UPR’s bookkeeper made the following entries to record these transactions:

UPR used the $126,000 in cash available to UPR in December, 2019 to manufacture another 4200 board games. Those games were in finished goods inventory at December 31, 2019 and were sold in January, 2020 for $50 per game

UPR’s Financial Statements at December 31, 2019 and 2018 as prepared by UPR’s bookkeeper showed the following:

*You can assume that the Cash, Inventory, Common Stock and Cost of Goods Sold amounts as shown in both the journal entries and financial statements are correct.

Your analysis of this problem will involve using ASC 606 - Revenue from Contracts with Customers. UPR adopted ASC 606 when Ian formed the company in 2018. UPR has applied ASC 606 incorrectly.

You can assume that a contract is in place and that only one performance obligation exists: the delivery of the board game to the customer. Thus, determining the Transaction Price is the issue that needs to be addressed. The principles for the determining transaction prices can be found in ASC Subtopic 606-10-32-2 through 606-10-32-27. You may also want to refer to the illustrations (examples) contained in ASC 606. A list of the illustrations can be found at ASC Subtopic 606-10-55-93.

QUESTIONS TO BE ANSWERED

You must answer the following questions:

What are the additional entries or correct entries required on the following dates? If the entries made by the bookkeeper are correct, indicate “Bookkeeper made correct entry”. Otherwise use the Journal Entry template to record your answer and then paste into your answer.:

June 1, 2018

December 31, 2018 Adjusting Journal Entry

December 1, 2019

Use the attached Excel Template, show the corrected comparative Balance Sheet and Income Statement at December 31, 2019 and December 31, 2018.   Paste the template into your answer.

Using references to ASC 606 explain how your arrived at your answers in 1. And 2. Above.

From the point of view of a potential investor or lender to UPR, do the corrected financial statements or the original financial statements prepared by UPR’s bookkeeper better reflect the economics of UPR during its initial two years in business? Why?             

1. determine when the seller should recognize revenue.

2.  Explain your answer using GAAP revenue recognition guidelines.

3. Explain how each transaction would appear on the income statement and balance sheet for 2017.

Case 3-Your company sells a product bundle of software that includes a 3 year service contract for $100,000, Your company installed the software on July 1, 2018, and the client paid $50,000 cash. Thebalance is due on December 31, 2018. Identify the performance obligations and the revenue in 2018, assuming: (a) the performance obligations are interdependent (b) the performance obligations are not interdependent ( the service contract is sold separately for $25,000 and the software for $100,000.)

Forecast Sales Volume and Sales Budget

For 20Y8, Raphael Frame Company prepared the sales budget that follows.

At the end of December 20Y8, the following unit sales data were reported for the year:

For the year ending December 31, 20Y9, unit sales are expected to follow the patterns established during the year ending December 31, 20Y8. The unit selling price for the 8" × 10" frame is expected to increase to $28 and the unit selling price for the 12" × 16" frame is expected to increase to $30, effective January 1, 20Y9.

Required:

1. Compute the increase or decrease of actual unit sales for the year ended December 31, 20Y8, over budget. Use the minus sign to indicate a decrease in amount and percent. Round percents to the nearest whole percent.

2. Assuming that the increase or decrease in actual sales to budget indicated in part (1) is to continue in 20Y9, compute the unit sales volume to be used for preparing the sales budget for the year ending December 31, 20Y9. Use the minus sign to indicate a decrease in percent. Round budgeted units to the nearest whole unit.

3.  Prepare a sales budget for the year ending December 31, 20Y9.

Five years ago, a company was considering the purchase of 74 new diesel trucks that were 15.13% more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks).

Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low; under assumption #2, diesel prices will rise considerably. The 74 new trucks will cost the firm $5 million. Depreciation will be 25.35% in year 1, 38.81% in year 2, and 36.55% in year 3. The firm is in a 39% income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts:

Forecast for assumption #1 (low fuel prices):

Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

Note: The educational purpose of this problem targets the students’ ability to read + follow instructions.

Further Information (solution steps):

• Step (1): Calculate the annual expected price of diesel per gallon under each assumption, based on the probabilities outlined in the inputs section.

• Step (2): Using the annual expected fuel prices calculated in step (1), determine the increase in annual savings created by the proposed efficiency for each assumption.

• Step (3): Find the increased cash flow after taxes (CFAT) for both forecasts, based on the annual increase in fuel savings determined in step (2) as the increase in earnings before depreciation and taxes (EBDT), and the starting point from which profit is calculated for each assumption. As part of this step, you must establish annual depreciation (remember: depreciation is a noncash charge).

• Step (4): Considering the increased annual CFAT produced in step (3), calculate the NPV of the truck purchases for each assumption, based on the discount rate (cost of capital) indicated in the inputs section

• Step (5): In view of the outcomes produced in step (4), estimate the combined NPV weighed by the probability of each assumption.

• Step (6): Finally, calculate the percentage difference hypothesizing that an increase took place starting from the NPV for assumption #1 to the combined NPV worked out in step (5).

Five years ago, a company was considering the purchase of 74 new diesel trucks that were 15.13% more fuel-efficient than the ones the firm is now using. The company uses an average of 10 million gallons of diesel fuel per year at a price of $1.25 per gallon. If the company manages to save on fuel costs, it will save $1.875 million per year (1.5 million gallons at $1.25 per gallon). On this basis, fuel efficiency would save more money as the price of diesel fuel rises (at $1.35 per gallon, the firm would save $2.025 million in total if he buys the new trucks).

Consider two possible forecasts, each of which has an equal chance of being realized. Under assumption #1, diesel prices will stay relatively low; under assumption #2, diesel prices will rise considerably. The 74 new trucks will cost the firm $5 million. Depreciation will be 25.35% in year 1, 38.81% in year 2, and 36.55% in year 3. The firm is in a 39% income tax bracket and uses a 10% cost of capital for cash flow valuation purposes. Interest on debt is ignored. In addition, consider the following forecasts:

Forecast for assumption #1 (low fuel prices):

Required: Calculate the percentage change on the basis that an increase would take place from the NPV under assumption #1 to the probability-weighted (expected) NPV.

Answer% Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).

FIELD: Exchange Rates and International Finance
The sales manager of a US company trades iPhones in three different markets, Europe (Eurozone), UK and the USA, has just received a total amount of $1million from the selling of 1,000 iPhones (each iPhone costs $1,000). He has a week available until the payment of firm’s suppliers and employees’ salaries. The current exchange rates between the currencies of the three markets (USD $, euro € and GBP £), are: ?¹_€⁄$=0.9110, ?²_€/£=1.1712 and ?³$ ⁄£=1.2910.

a) If no transaction costs exist, could the manager take advantage of an arbitrage opportunity? Explain. [Mark 1.5]
b) When will there not be any room for profits? That is, there is no arbitrage opportunity. [Mark 0.5]
c) Suppose now that there is a cost each time currency is being traded, i.e., either bought or sold. Moreover, this transaction cost is equal to 1% of the value of currency that is traded. What will the manager’s decision be in this case? [Mark 1.0]

Note: Round your answers to the third decimal point.

Potter Company began operating in 2007. During 2007, it provided $308,000 in services to customers on account and collected 260,000 in cash from its accounts receivable. At the end of the year, it adjusted its accounts based on the estimate that 1% of the revenue on account would not be collected.

Prepare the journal entries to record all transactions related to accounts receivable.

Account titles: Debit: Credit:

What was the net realizable value of Potter's accounts receivable at the end of 2007?

Is this correct?

account titles debit credit

A/R 308,000

service revenue 308,000

cash 260,000

A/R 260,000

allowance for doubtful acc. 3,080

A/R 3,080

Net realizable value:

308,000 x 0.01= 3,080

308,000-3,080-260,000=44,920