Smart Company prepared its annual financial statements dated December 31, 2020. The company applies the FIFO inventory costing method; however, the company neglected to apply the LC&NRV valuation to the ending inventory. The preliminary 2020 statement of earnings follows:

Assume that you have been asked to restate the 2020 financial statements to incorporate the LC&NRV inventory valuation rule. You have developed the following data relating to the ending inventory at December 31, 2020:

1. Restate the statement of earnings to reflect the valuation of the ending inventory on December 31, 2020, at the LC&NRV. Apply the LC&NRV rule on an item-by-item basis.(FINISHED BELOW ANSWER QUESTION 2)

2. Compare and explain the LC&NRV effect on each amount that was changed in part 1. (Negative answers should be indicated by a minus sign.)

Select three corporations and research their present financial position (on target, below target, etc.) and plans for the future. For example: You would give some figures on GM and then go into their present/future plans. Then state direction of the company: In a recent interview, General Motors Chairwoman and CEO Mary Barra, discussed the self-driving Chevrolet Bolt EV which was manufactured in Detroit and makes GM the first automaker to mass produce self-driving vehicles. Looking for facts and figures (not an annual report, but dollars and percentages, etc.) on how the company is doing now and their prediction for the future. There should be at least a good size paragraph PER company.

Allied Tech Company, Inc. is a leading manufacturer of robotics, and the company owns several cutting-edge patents on artificial intelligence. Mr. Jenkins, the CEO of Allied Tech said he believed the long-term growth (aka, terminal growth) rate of his company is 28%. The rationale behind his statement is his belief in the long-term growth prospects for artificial intelligence and robotics. Is the 28% long-term growth rate reasonable given his firm’s potential prospects? Why or why not? If you believe there is not enough information to answer the question, please explain why you think there is not enough information.

Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 million pay- able in six months. Airbus is concerned about the euro proceeds from international sales and would like to control exchange risk. The current spot exchange rate is $1.05/€ and the six-month forward exchange rate is $1.10/€. Airbus can buy a six-month put option on U.S. dollars with a strike price of €0.95/$ for a premium of €0.02 per U.S. dollar. Currently, six- month interest rate is 2.5 percent in the euro zone and 3.0 percent in the United States.

1. Should a firm hedge? Why or why not?

Tax Computation Problem

John and Mary Jane Diaz are married, filing jointly. Their address is 204 Shoe Lane, Blacksburg, VA 24061. John is age 35, and Mary Jane is age 30. They are expecting their first child in early 2021. John’s salary in 2020 was $105,000, from which $20,800 of Federal income tax and $4,700 of state income tax were withheld. Mary Jane made $52,000 and had $3,000 of Federal income tax and $3,100 of state income tax withheld. The appropriate amounts of FICA tax and Medicare tax were withheld for John and for Mary Jane. John’s Social Security number is 111-11-1111, and Mary Jane’s Social Security number is 123-45-6789.

Both John and Mary Jane are covered by their employer’s medical insurance policies with 80% of the premiums being paid by their employers. The total premiums were $10,000 for John and $6,200 for Mary Jane. Mary Jane received medical benefits of $7,300 under the plan. John was not ill during 2020. Mary Jane paid noncovered medical expenses of $1,300.

John makes child support payments of $15,000 for his son, Rod, who lives with Jill, John’s former spouse, except for two months in the summer when he visits John and Mary Jane. At the time of the divorce, John worked for a Fortune 500 company and received a salary of $225,000. As a result of corporate downsizing, he lost his job.

Mary Jane’s father lived with them until his death in November. His only sources of income were salary of $2,800, unemployment compensation benefits of $3,500, and Social Security benefits of $4,100. Of this amount, he deposited $6,000 in a savings account. The remainder of his support of $9,500, which included funeral expenses of $4,500, was provided by John and Mary Jane.

Other income received by the Diazes was as follows:

John has always wanted to operate his own business. In October 2020, he incurred expenses of $15,000 in investigating the establishment of a retail computer franchise. With the birth of their child expected next year, however, he decides to forgo self-employment for at least a couple of years.

John and Mary Jane made charitable contributions of $8,700 during the year and paid an additional $1,800 in state income taxes in 2020 upon filing their 2019 state income tax return. Their deductible home mortgage interest was $8,200, and their property taxes came to $4,800. They paid sales taxes of $2,000, for which they have receipts. They paid a ticket of $150 that Mary Jane received for running a red light (detected by a red light camera).

Part 1—Tax Computation

Calculate John and Mary Jane’s tax (or refund) due for 2020.

Part 2—Tax Planning

Assume that the Diazes come to you for advice in December 2020. John has learned that he will receive a $40,000 bonus. He wants to know if he should take it in December 2020 or in January 2021. Mary Jane will quit work on December 31 to stay home with the baby. Their itemized deductions will decrease by $3,100 because Mary Jane will not have state income taxes withheld. Mary Jane will not receive the employee award in 2021. She expects the medical benefits received to be $9,000. The Diazes expect all of their other income items to remain the same in 2021. Write a letter to John and Mary Jane that contains your advice, and prepare a memo for the tax files.

Q1 a. Draw a diagram with money demand and money supply curves. Explain why the money demand curve is downward sloping. Find the equilibrium interest rate. b. Shift one of these curves to show if there is a stock market crash in the U.S. and find the new equilibrium interest rate. c. Draw a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of this U.S. stock market crash on the dollar/euro exchange rate.

Q2 Why might the law of one price fail to hold? List three examples.

Q3 Show the relationship between the public saving and the net export based on the absorption approach. What are the effects of the following events on the U.S. GDP and its components? What are the effects of the following events on the U.S. current account and financial account? (1) Apple Company sold $10,000 computers to a German company. (2) The U.S. Government spent 0.5 million dollars on purchasing printing machines made in Japan. (3) The U.S. Government spent 1 million dollars on social security.

Q4 What is interest rate parity? Assume that the euro interest rate is constant at 2 percent, and that the expected exchange rate is 1.05 dollars per euro. Find the expected dollar return on euro deposits for the following cases: (1) The current exchange rate is 1 dollar per euro (2) The current exchange rate is 0.9 dollar per euro (3) The current exchange rate is 1.1 dollar per euro Based on the interest rate parity, what will happen if the dollar interest rate is 1 percent if the current exchange rate is 1 dollar per euro?

Q5 a. What is the exchange rate overshooting model? b. If the Fed announces that they will lower the interest rate by 0.5% next Wednesday, plot the time paths showing its effects on: (a). The dollar interest rate. (b). The U.S. price level. (c). The dollar/euro exchange rate.

Rawl Corporation sold a building to a bank at the beginning of 2017 at a gain of $88,500 and immediately leased the building back for a period of four years. The lease is accounted for as an operating lease. The book value of building (net) is $518,000.

Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes.

Required:

1. Prepare journal entries for this sale and leaseback for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.

- Record the entry for the sale of the building as per U.S. GAAP.

- Record the entry for gain recognition as per U.S. GAAP.

- Record the entry for the sale of the building as per IFRS.

- Record the entry for gain recognition as per IFRS.

2. Prepare the entry(ies) that Rawl would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

- Record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS

- Record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS.

- Record the entry for reversing part of deferred gain already recognized in Profit and Loss account as per U.S. GAAP.

Rawl Corporation sold a building to a bank at the beginning of 2017 at a gain of $80,100 and immediately leased the building back for a period of four years. The lease is accounted for as an operating lease. The book value of building (net) is $510,000. Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes. Required: Prepare journal entries for this sale and leaseback for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS. Prepare the entry(ies) that Rawl would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

A)

1. Record the entry for the sale of the building as per U.S. GAAP.

2. Record the entry for gain recognition as per U.S. GAAP.

3. Record the entry for the sale of the building as per IFRS.

4. Record the entry for gain recognition as per IFRS.

B)

1. Record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS

2. Record the entry for deferring gain on sale of building which was previously recognized in Profit and loss account due to conversion from U.S. GAAP to IFRS.

3. Record the entry for reversing part of deferred gain already recognized in Profit and Loss account as per U.S. GAAP.

During 2019 Canada Computer Company sold computers for $100,000 which includes a 2-year warranty. Warranties sold separately for $70,000 that requires the company to perform periodic services and to replace defective parts. In 2020, Canada Computer Company incurred actual warranty costs relative to 2019 computer sales of $5,000 for parts and $12,000 for labor.                                                                                            

Instructions

(a) Using the revenue warranty approach, prepare the entries to reflect the above transactions for 2019 and 2020. assuming Canada co. earn any unearned warranties equally over warranty life.

(b) The transactions of part (a) create what balance under current liabilities in the Dec 31, 2019 balance sheet?

As a long-term investment, Fair Company purchased 20% of Midlin Company’s 300,000 shares for $360,000 at the beginning of the reporting year of both companies. During the year, Midlin earned net income of $135,000 and distributed cash dividends of $0.25 per share. At year-end, the fair value of the shares is $375,000.

1. Assume no significant influence was acquired. Record the transactions from the purchase through the end of the year, including any adjustment for the investment’s fair value, if appropriate. 2. Assume significant influence was acquired. Record the transactions from the purchase through the end of the year, including any adjustment for the investment’s fair value, if appropriate.