Hello. Please answer all my all questions.

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.95 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below:

The total cost of operating the company for the year is $351,000 which includes the following costs:

Resource consumption is distributed across the activities as follows:

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

1. Prepare the first-stage allocation of costs to the activity cost pools.
2. Compute the activity rates for the activity cost pools.
3. The company recently completed a 400 square foot carpet-cleaning job at the Flying N Ranch—a 51-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.
4. The revenue from the Flying N Ranch was $95.80 (400 square feet @ $23.95 per hundred square feet). Calculate the customer margin earned on this job.

7. You have a 3-year maturity, 5% coupon bond traded at par. If the interest rate were to increase by 125 basis points, your predicted new price for the bond based on duration only is _________ (round to the nearest dollar).

   1. $955

   2. $966

   3. $1,000

   4. $1,042

   5. None of the above

1. Under the perpetual method, the balance in the Inventory account: a. increases when customers return merchandise and the company returns merchandise to vendors. b. decreases when customers return merchandise and the company receives vendor purchase allowances. c. decreases when merchandise is sold and merchandise is purchased. d. increases when customers return merchandise and decreases when the company returns merchandise to vendors.

2. In its first year, FiCo, which uses the perpetual method and records purchases at net, buys two lots of sweaters, 1/10, n/30: one lot on March 10 for $4,000, paying the invoice on March 16; a second lot on June 25 for $2,000, paying the invoice on July 9. If no sweaters are sold from March through July, what is the balance in FiCo’s Inventory account on July 31? a. $6,000 b. $5,980 c. $5,960 d. $5,940

3. If your company records inventory using the perpetual net method, then: a. when a discount is not taken, the Inventory account is not affected. b. when a discount is taken, the Inventory account is affected. c. it is assumed the buyer will not take the discount. d. none of the above.

4. Your firm, which uses the perpetual method, purchases $10,000 of inventory, 2/10, n/30 You debit Inventory for $9,800 and credit Accounts Payable for $9,800. If the merchandise is paid for within the discount period, you will: a. debit to Accounts Payable for $9,800. b. debit to Purchase Discounts Lost for $200. c. credit to Purchase Discounts Lost for $200. d. credit to Inventory for $200.

5. Your company, which uses the perpetual method, sells inventory on account for $15,000. If the cost of the inventory is $9,000, you will: a. credit Inventory for $9,000. b. debit COGS for $9,000. c. credit Sales Revenue for $15,000. d. all of the above.

6. On August 6, your firm, which uses the perpetual method, orders $450 of inventory FOB shipping point. Freight is $50. On August 24, the merchandise arrives and you remit $500. For this transaction, you will: a. debit Inventory for $500 on August 24. b. debit Inventory for $450 on August 24. c. debit Purchases for $450 on August 6. d. debit Purchases for $500 on August 6.

Question 1: When dropping a product line, the avoidable costs are which of the following:

1.The variable costs plus the direct fixed costs of the line

2.Only the variable costs of the line

3.Only the direct fixed costs of the line

4.The variable costs plus direct fixed costs plus common fixed costs of the line

Question 2: Which of the following will be considered relevant in an incremental analysis decision:

1.Unavoidable fixed cost

2.Opportunity cost

3.Sunk cost

4.Only variable cost can be considered relevant

A company manufactures computer monitors for a cost of $150. After selling thousands of monitors to customers, 100 screens were returned by customers. The company can refurbish (process) the monitors with a cost of $50 per monitor and sell it to customers for $140 per monitor. If the monitors are not refurbished, the company can sell them “as-is” to the Giant Screen Liquidators Company for $80 per monitor.

Required:

Should the company refurbish/process the returned monitors or just sell them “as-is”?

Question 3: In the previous example, when considering the company’s decision whether to refurbish the monitors or not, the cost of producing the monitors is:

1.Relevant

2.Necessarily fixed

3.Necessarily variable

4.Irrelevant

Question 4:

In the decision on the profit maximizing price the fixed costs:

1.Are Relevant Costs

2.Are Irrelevant costs

3.Do not affect net profit

4.Increase with the selling price

Question 5: Assume now the Chinese retail chain from the previous example also requests that the company will change the box in which the contacts are packaged to one that fits the Chinese market. The company estimates that designing the new box will cost $150,000 (a one-time cost) and it will also increase variable costs by $7 per box. Should the company still take the special order?

1.Yes

2.No

Please answer all questions above and briefly explain how you got to that answer. Thank you in advance.

[The following information applies to the questions displayed below.]

On March 4, 2009, the SEC reached an agreement with Krispy Kreme Doughnuts, Inc., and issued a cease-and-desist order to settle charges that the company fraudulently inflated or otherwise misrepresented its earnings for the fourth quarter of its FY2003 and each quarter of FY2004. By its improper accounting, Krispy Kreme avoided lowering its earnings guidance and improperly reported earnings per share (EPS) for that time period; these amounts exceeded its previously announced EPS guidance by 1 cent.

The primary transactions described in this case are “round-trip” transactions. In each case, Krispy Kreme paid money to a franchisee with the understanding that the franchisee would pay the money back to Krispy Kreme in a prearranged manner that would allow the company to record additional pretax income in an amount roughly equal to the funds originally paid to the franchisee.

There were three round-trip transactions cited in the SEC consent agreement. The first occurred in June 2003, which was during the second quarter of FY2004. In connection with the reacquisition of a franchise in Texas, Krispy Kreme increased the price that it paid for the franchise by $800,000 (i.e., from $65,000,000 to $65,800,000) in return for the franchisee purchasing from Krispy Kreme certain doughnut-making equipment. On the day of the closing, Krispy Kreme debited the franchise’s bank account for $744,000, which was the aggregate list price of the equipment. The additional revenue boosted Krispy Kreme’s quarterly net income by approximately $365,000 after taxes.

The second transaction occurred at the end of October 2003, four days from the closing of Krispy Kreme’s third quarter of FY2004, in connection with the reacquisition of a franchise in Michigan. Krispy Kreme agreed to increase the price that it paid for the franchise by $535,463, and it recorded the transaction on its books and records as if it had been reimbursed for two amounts that had been in dispute with the Michigan franchisee. This overstated Krispy Kreme’s net income in the third quarter by approximately $310,000 after taxes.

The third transaction occurred in January 2004, in the fourth quarter of FY2004. It involved the reacquisition of the remaining interests in a franchise in California. Krispy Kreme owned a majority interest in the California franchise and, beginning in or about October 2003, initiated negotiations with the remaining interest holders for acquisition of their interests. During the negotiations, Krispy Kreme demanded payment of a “management fee” in consideration of Krispy Kreme’s handling of the management duties since October 2003. Krispy Kreme proposed that the former franchise manager receive a distribution from his capital account, which he could then pay back to Krispy Kreme as a management fee. No adjustment would be made to the purchase price for his interest in the California franchise to reflect this distribution. As a result, the former franchise manager would receive the full value for his franchise interest, including his capital account, plus an additional amount, provided that he paid back that amount as the management fee. Krispy Kreme, acting through the California franchise, made a distribution to the former franchise manager in the amount of $597,415, which was immediately transferred back to Krispy Kreme as payment of the management fee. The company booked this fee, thereby overstating net income in the fourth quarter by approximately $361,000.

Additional accounting irregularities were unearthed in testimony by a former sales manager at a Krispy Kreme outlet in Ohio, who said a regional manager ordered that retail store customers be sent double orders on the last Friday and Saturday of FY2004, explaining “that Krispy Kreme wanted to boost the sales for the fiscal year in order to meet Wall Street projections.” The manager explained that the doughnuts would be returned for credit the following week—once FY2005 was under way. Apparently, it was common practice for Krispy Kreme to accelerate shipments at year-end to inflate revenues by stuffing the channels with extra product, a practice known as “channel stuffing.”

Some could argue that Krispy Kreme's auditors—PwC— should have noticed a pattern of large shipments at the end of the year with corresponding credits the following fiscal year during the course of their audit. Typical audit procedures would be to confirm with Krispy Kreme’s customers their purchases. In addition, monthly variations analysis should have led someone to question the spike in doughnut shipments at the end of the fiscal year. However, PwC did not report such irregularities or modify its audit report.

In May 2005, Krispy Kreme disclosed disappointing earnings for the first quarter of FY2005 and lowered its future earnings guidance. Subsequently, as a result of the transactions already described, as well as the discovery of other accounting errors, on January 4, 2005, Krispy Kreme announced that it would restate its financial statements for 2003 and 2004. The restatement reduced net income for those years by $2,420,000 and $8,524,000, respectively.

In August 2005, a special committee of the company’s board issued a report to the SEC following an internal investigation of the fraud at Krispy Kreme. The report states that every Krispy Kreme employee or franchisee who was interviewed “repeatedly and firmly” denied deliberately scheming to distort the company’s earnings or being given orders to do so; yet, in carefully nuanced language, the Krispy Kreme investigators hinted at the possibility of a willful cooking of the books. “The number, nature, and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings,” the report said. “Further, CEO Scott Livengood and COO John Tate failed to establish proper financial controls, and the company’s earnings may have been manipulated to please Wall Street.” The committee also criticized the company’s board of directors, which it said was “overly deferential in its relationship with Livengood and failed to adequately oversee management decisions.”

Krispy Kreme materially misstated its earnings in its financial statements filed with the SEC between the fourth quarter of FY2003 and the fourth quarter of FY2004. In each of these quarters, Krispy Kreme falsely reported that it had achieved earnings equal to its EPS guidance plus 1 cent in the fourth quarter of FY2003 through the third quarter of FY2004 or, in the case of the fourth quarter of FY2004, earnings that met its EPS guidance.

On March 4, 2009, the SEC reached agreement with three former top Krispy Kreme officials, including one-time chair, CEO, and president Scott Livengood. Livengood, former COO John Tate, and CFO Randy Casstevens all agreed to pay more than $783,000 for violating accounting laws and fraud in connection with their management of the company.

Livengood was found in violation of fraud, reporting provisions, and false certification regulations. Tate was found in violation of fraud, reporting provisions, record keeping, and internal controls rules. Casstevens was found in violation of fraud, reporting provisions, record keeping, internal controls, and false certification rules. Livengood’s settlement required him to pay about $542,000, which included $467,000 of what the SEC considered as the “disgorgement of ill-gotten gains and prejudgment interest” and $75,000 in civil penalties. Tate’s settlement required him to return $96,549 and pay $50,000 in civil penalties, while Casstevens had to return $68,964 and pay $25,000 in civil penalties. Krispy Kreme itself was not required to pay a civil penalty because of its cooperation with the SEC in the case.

SEC Charges against PricewaterhouseCoopers ¹

In a lawsuit brought on behalf of the Eastside Investors group against Krispy Kreme Doughnuts, Inc., members of management, and PricewaterhouseCoopers, a variety of the fraud charges leveled against the company were extended to the alleged deficient audit by PwC. These charges were settled and reflect the following findings.

PwC provided independent audit services and rendered audit opinions on Krispy Kreme’s FY2003 and FY2004 financial statements. The firm also provided significant consulting, tax, and due diligence services. Of the total fees received during this period, 66 percent (FY2003) and 61 percent (FY2004) were for nonaudit services. The lawsuit alleged that PwC was highly motivated not to allow any auditing disagreements with Krispy Kreme management to interfere with its nonaudit services.

PwC was charged with a variety of failures in conducting its audit of Krispy Kreme. These include: (1) failure to obtain relevant evidential matter whether it appears to corroborate or contradict the assertions in the financial statements; (2) failure to act on violations of GAAP rules with respect to accounting for franchise rights and the company’s relationship with its franchisees; and (3) ignoring numerous red flags that indicated risks that should have been factored into the audit and in questioning of management. These include:

• Unusually rapid growth, especially compared to other companies in the industry;
• Excessive concern by management to maintain or increase earnings and share prices;
• Domination of management by a single person or small group without compensating controls such as effective oversight by the board of directors or audit committee;
• Unduly aggressive financial targets and expectations for operating personnel set by management; and
• Significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by another firm.

The legal action against PwC referenced Rule 10b-5 of the Securities Exchange Act of 1934 in charging the firm with making untrue statements of material fact and failing to state material facts necessary to make Krispy Kreme’s financial statements not misleading. The company wound up restating its statements for the FY2003 through FY2004 period.

___________________

^* Unless otherwise indicated, the facts of this case are taken from Securities and Exchange Commission, Accounting and Auditing Enforcement Release No. 2941, In the Matter of Krispy Kreme Doughnuts, Inc., March 4, 2009, Available at:https://www.sec.gov/litigation/admin/2009/34-59499.pdf.

¹ Material in this section was taken from United States District Court Middle District North Carolina, No. 1:04-CV-00416, In re Eastside Investors v. Krispy Kreme Doughnuts, Inc., Randy S. Casstevens, Scott A. Livengood, Michael C. Phalen, John Tate, and PricewaterhouseCoopers, LLP, 2005, Available at: http://securities.stanford.edu/filings-documents/1030/KKD04-01/2005215_r01c_04416.pdf.

q-1:How was mismanagement at Krispy Kreme reflective of leadership failure?

1. A candystore allows customers to select 3 different candies to be shipped. If there are a total of 10 varieties available, how many possible selections can be made?

2.The average cost of labor for car repairs for a chain of garages is $48.25. The standard deviation is $4.20. Assume normal distribution. If 20 stores are selected at random what is the probability that the mean of the sample labor cost will be between $46 and $48?

There are 3 servers in the checkout area. The interarrival time of customers is 4 minutes. The processing time is 10 minutes. The coefficient of variation for the arrival process is 1 and the standard deviation of the processing times is 20 minutes. What is the average number of customers that are waiting?

Campbell v. Carr

603 S.E.2d 625, Web 2004 S.C. App. Lexis 276 (2004)

Court of Appeals of South Carolina

“This inadequate consideration combined with Carr’s weakness of mind, due to her schizophrenia and depression, makes it inequitable to order specific performance.”

—Anderson, Judge

Facts

Martha M. Carr suffered from schizophrenia and depression. Schizophrenia is a psychotic disorder that is characterized by disturbances in perception, inferential thinking, delusions, hallucinations, and grossly disorganized behavior. Depression is characterized by altered moods and diminished ability to think or concentrate. Carr was taking prescription drugs for her mental diseases. Carr, a resident of New York, inherited from her mother a 108-acre tract of unimproved land in South Carolina. Carr contacted Raymond C. and Betty Campbell (Campbell), who had leased the property for 30 years, about selling the property to them. Carr asked Campbell how much the property was worth, and Campbell told Carr $54,000. Carr and Campbell entered into a written contract for $54,000. Campbell paid Carr earnest money. Carr subsequently missed the closing day for the sale of the property, returned the earnest money, and refused to sell the property to Campbell. Campbell sued Carr to obtain a court judgment ordering Carr to specifically perform the contract. At trial, evidence and expert witness testimony placed the value of the property at $162,000. Testimony showed that Campbell knew the value of the property exceeded $54,000. The court agreed with Campbell and ordered Carr to specifically perform the contract. Carr appealed.

Issue

Does Carr, because of her mental diseases of schizophrenia and depression, lack the mental capacity to enter into the contract with Campbell?

Language of the Court

This inadequate consideration combined with Carr’s weakness of mind, due to her schizophrenia and depression, makes it inequitable to order specific performance.

Decision

The court of appeals held that Carr’s mental diseases of schizophrenia and depression affected her ability to make an informed decision regarding the sale of the property. The court held that Carr did not have to sell her property to Campbell.

Ethics Questions

Should Carr have been relieved of her contracts? Did the Campbells act unethically in this case?

Selected transactions for the Sleezer Company are listed below.

List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and stockholders' equity.