The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys equity securities as noncurrent investments. None of Ornamental’s investments are large enough to exert significant influence on the investee. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020.

Mar. 31 Acquired Distribution Transformers Corporation common stock for $480,000.

Sep. 1 Acquired $1,020,000 of American Instruments' common stock.

Sep. 30 Received a $19,200 dividend on the Distribution Transformers common stock.

Oct. 2 Sold the Distribution Transformers common stock for $513,000.

Nov. 1 Purchased $1,480,000 of M&D Corporation common stock.

Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are:

American Instruments common stock $ 962,000
M&D Corporation common stock $ 1,548,000

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year-end.
2. Indicate any amounts that Ornamental Insulation would report in its 2021 income statement, 2021 statement of comprehensive income, and 12/31/2021 balance sheet as a result of these investments. Include totals for net income, comprehensive income, and retained earnings as a result of these investments.

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys equity securities as noncurrent investments. None of Ornamental’s investments are large enough to exert significant influence on the investee. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020.

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year-end.
2. Indicate any amounts that Ornamental Insulation would report in its 2021 income statement, 2021 statement of comprehensive income, and 12/31/2021 balance sheet as a result of these investments. Include totals for net income, comprehensive income, and retained earnings as a result of these investments.

If you have a CEO or a person who is considered to be an insider sell a large block of stock and he gets reported through the security and exchange commission, is that a sign that the company as well as the stop is headed for challenging times?

True or False questions

Michael Baker and Michael Gluk were the CEO and CFO of ArthroCare Corporation, a public company. Due to fraud committed by two senior vice presidents of ArthroCare, John Raffle and David Applegate, ArthroCare misstated its earnings in various SEC filings from 2006 to 2008. Pursuant to the clawback provisions of §§ 302 and 304 of Sarbanes-Oxley Act and acting on behalf of ArthroCare, the SEC sought recovery from Baker and Gluk in the amount of cash bonuses, incentives, and equity-based compensation that Baker and Gluk earned during the affected periods. The SEC argued that Baker and Gluk were liable because they were the CEO and CFO at the time and thus signed the filings that required restatements. Baker and Gluk argued that they did not commit any conscious wrongdoing, did not themselves commit any violation of securities law, and should not be required to disgorge their compensation.

4]The GPAs of all students enrolled at a large university have an approximately normal distribution with a mean of 3.02 and a standard deviation of .29. Find the probability that the mean GPA of a random sample of 20 students selected from this university is 2.93 to 3.11

The chief executive officer (CEO) of Faoilean Co has just returned from a discussion at a leading university on the 'application of options to investment decisions and corporate value'. She wants to understand how some of the ideas which were discussed can be applied to decisions made at Faoilean Co. She is still a little unclear about some of the discussion on options and their application, and wants further clarification on the following:

(i) Faoilean Co is involved in the exploration and extraction of oil and gas. Recently there have been indications that there could be significant deposits of oil and gas just off the shores of Ireland. The Government of Ireland has invited companies to submit bids for the rights to commence the initial exploration of the area to assess the likelihood and amount of oil and gas deposits, with further extraction rights to follow. Faoilean Co is considering putting in a bid for the rights. The speaker leading the discussion suggested that using options as an investment assessment tool would be particularly useful to Faoilean Co in this respect.

(ii) The speaker further suggested that options were useful in determining the value of equity and default risk, and suggested that this was why companies facing severe financial distress could still have a positive equity value.

(iii) Towards the end of the discussion, the speaker suggested that changes in the values of options can be measured in terms of a number of risk factors known as the 'greeks', such as the 'vega'. The CEO is unclear why option values are affected by so many different risk factors.

Required With regard to

(ii) above, discuss how options could be useful in determining the value of equity and default risk, and why companies facing severe financial distress still have positive equity values.

17

Which of the following is NOT a reason it is hard for the board of directors to effectively monitor all the activity of the CEO and top management?

The board of directors may be not be experts in the business of the corporation.

Members of the board of directors can be large shareholders.

The board of directors are part time.

Board of directors depends upon management for most of their information about the company and its competitive situation.

22

Some people have suggested that managers should have a professional code of ethics like the one for physicians. Your textbook even included an example of a managerial code of ethics (the MBA oath). Which of the following is NOT a reason it is harder to set up a managerial code of ethics than the one for physicians?

Managers serve stakeholders with a more diverse set of ethical standards.

Managers serve many more stakeholders than physicians.

Being a physician is a less complex job than being a manager.

The acceptable rules of business can change across countries.

23

A local Phoenix fashion designer has been successful selling expensive jewelry inspired by the styles of Arizona After a long vacation in Japan the designer noticed no one was selling similar jewelry in Japan. The designer has already signed a lease on a small store in Tokyo and arranged for friend to move to Japan and run the store. It will open in six months. The designer approaches you to ask for your help in this effort What is the first question you should ask?

Who will be your competitors in Japan?

What kinds of jewelry do the Japanese like?

Have you made a business plan?

None of these

Have you considered using a joint venture with local Japanese firm?

Windy Kitchen is a manufacturer of baked beans. Kim Gordon is the CEO of Windy Kitchen and a strong believer in continuous quality improvement. Recently, Kim asked her management accountant, Tom Hardee, to gather further information about quality costs for her company. Below is a list of quality-related costs manually prepared by Tom for the years 20X1 and 20X2.

20X1 20X2

Customer Returns $3,000 $8,000

Handling Customer Complaints $6,000 $5,000

Inspection of WIP $20,000 $10,000 Machines Repair $16,000 $17,500

Product Recalls $2,000 $10,000

Quality Training $10,000 $8,000

Raw Materials Inspection $20,000 $15,000

Rework $15,000 $14,000 Scrap Processing $30,000 $40,000

Technical Training $50,000 $30,000 Total $172,000 $157,500

Sales revenue for Windy Kitchen was $500,000 in 20X1 and $550,000 in 20X2.

(a) Prepare a combined cost of quality report for Windy Kitchen for both 20X1 and 20X2. Include proportions of the major quality cost categories as a percentage of sales.

(b) When Kim, the CEO, receives the cost of quality report from you, she is amazed and says, “Why haven’t I been able to access this information from our accounting systems before?” Explain to Kim why she may not have been able to easily extract this information from the company’s accounting system?

(c) Kim is very happy that the total cost of quality has decreased from $172,000 to $157,500. She believes that the company is moving in the right direction. Analyse and assess Windy Kitchen’s quality improvement progress with respect to the cost of quality information you have calculated in part (a). Do you agree with Kim that the company is “moving in the right direction” on quality costs?

Leverage Benefits: You have finished your MBA and taken job at a small manufacturing company that specializes in restoring old fj-40 Land Cruisers and the Series II and III Land rovers (the classic safari vehicles you see in movies). With baby boomers retiring and fulfilling pent up dreams the business cannot keep up with demand for these classic rugged 4-wheel drive vehicles. The owners would like to expand but tell you they only have about half cash to pay for the expansion, which would cost about $600,000. You ask them why they don’t just borrow the other half. They say it is too expensive, especially compared to the cost of retained earnings. Current loans from the bank would cost 7% to 8%. The company is every profitable and the expansion would have a positive NPV at discounts up to 18% or 20%. The company’s tax rate is 30%.

A. Do you agree with the owners that debt is expensive compared to retained earnings?

B. Make a brief argument for why the owners should borrow and pursue this opportunity.