Mars Dump is a multinational company that is caught by the Emissions Trading Scheme (ETS).

Details of ETS are as follows:

It is a cap and trade scheme in which permits are traded in an active market. Its annual compliance period is from 1 July of the current period to 30 June of the following year.

Each participating company receives an allocation of free permits each year based on their reporting carbon emissions from the previous period. In the case of Mars Dump Ltd, permits to emit 36 000 tonnes of carbon dioxide equivalents have been issued on the first day of the current period (i.e. 1 July 2019) when the market price of a permit was $25 per tonne of carbon dioxide equivalents.

During the 2019/2020 financial year, Mars Dump emitted 37 000 tonnes of carbon dioxide equivalents, which exceeded its permitted emissions of 36 000 tones. This occurred despite the managers of Mars Dump estimating that it had emitted 19 000 tonnes of carbon dioxide equivalents by 31 March 2020 and was therefore on target to emit 36 000 tonnes by 30 June 2020. The market price of a permit is $27 on 31 March 2020. As a result of exceeding allowed emission levels, on 30 June 2020, Mars Dump purchased 1 000 permits at a market price of $33 per tonne. Mars Dump uses the cost model in accordance with AASB 138, and amortises any deferred income arising from the permits using the proportion of actual emissions to estimated total emissions.

Required

1. How can stakeholder theory be used to explain companies voluntarily undertaking corporate social responsibility reporting? Discuss.                                                                            
2. “There is no mandatory reporting of corporate social responsibility in Australia.” What is your understanding of this phrase? Explain.                                                          
3. Account for above events in the books of Mars Dump Ltd for the period 1 July 2019 to 30 June 2020 in accordance with the requirements of Interpretation 3 and AASB138.                                                                                                                                                                     

Corporate Social Responsibility (CSR)

Mars Dump is a multinational company that is caught by the Emissions Trading Scheme (ETS).

Details of ETS are as follows:

It is a cap and trade scheme in which permits are traded in an active market. Its annual compliance period is from 1 July of the current period to 30 June of the following year.

Each participating company receives an allocation of free permits each year based on their reporting carbon emissions from the previous period. In the case of Mars Dump Ltd, permits to emit 36 000 tonnes of carbon dioxide equivalents have been issued on the first day of the current period (i.e. 1 July 2019) when the market price of a permit was $25 per tonne of carbon dioxide equivalents.

During the 2019/2020 financial year, Mars Dump emitted 37 000 tonnes of carbon dioxide equivalents, which exceeded its permitted emissions of 36 000 tones. This occurred despite the managers of Mars Dump estimating that it had emitted 19 000 tonnes of carbon dioxide equivalents by 31 March 2020 and was therefore on target to emit 36 000 tonnes by 30 June 2020. The market price of a permit is $27 on 31 March 2020. As a result of exceeding allowed emission levels, on 30 June 2020, Mars Dump purchased 1 000 permits at a market price of $33 per tonne. Mars Dump uses the cost model in accordance with AASB 138, and amortises any deferred income arising from the permits using the proportion of actual emissions to estimated total emissions.

Required

1. How can stakeholder theory be used to explain companies voluntarily undertaking corporate social responsibility reporting? Discuss.                                                                            
2. “There is no mandatory reporting of corporate social responsibility in Australia.” What is your understanding of this phrase? Explain.                                                          

Account for above events in the books of Mars Dump Ltd for the period 1 July 2019 to 30 June 2020 in accordance with the requirements of Interpretation 3 and AASB138.

Hassellhouf Company’s trial balance at December 31, 2020, is as follows. All 2020 transactions have been recorded except for the items described following the trial balance.

Unrecorded transactions:

a)Prepare journal entries for the transactions listed above

b)Prepare an updated December 31, 2020, trial balance.

c)Prepare a 2020 income statement.

d)Prepare a 2020 an owner’s equity statement.

e)Prepare a December 31, 2020, classified balance sheet. (List Current Assets in order of liquidity. List Property, Plant and Equipment in the order of Land, Buildings and Equipment.)

How Aldi's grocery stores adapt its operation in the US and how the company adjusts its operation to suit the US environment?

1. The current interest rate in the US is 8% per year, while it is 10% in the UK. Currently, in the spot market, US $1 can be exchanged for GBP 0.875. Calculate the amount of 120-days forward exchange rate between US $ and GBP? Do you think the GBP exchange rate is classified as a premium or discount?

2. Lanyala Corp is considering two alternatives to find funds: (1) issuing straight bonds, and (2) issuing bonds-with-warrant. Both types of bonds have a maturity of 5 years. Currently the government bond interest rate is 6% and Lanyala Corp wants to provide a premium of 4% above the interest rate on government bonds for straight bonds, and only 1% premium for bonds-with-warrant. Suppose each bond is sold at a face value of $ 100 million, and a corporate tax of 25% is known. Based on the data above, calculate what is the warrant value for the second alternative?

3. Dell Corp. is considering acquiring a startup company Asus Corp. Based on last year's financial statements, Asus Corp reported obtaining a free cash flow (FCF) of $ 400 million, and is expected to experience a constant growth of 5% every year. The acquisition will be funded with 60% equity, and the remainder with debt with a fixed interest of 12% per year. There is a market return of 15%, a government bond interest rate of 6%, and an Asus Corp beta amount of 0.8. Corporate tax is 25%. Calculate what is the fair value of Asus Corp as the target company to be acquired by Dell Corp.

4. A construction company is considering building a machine worth $ 200 million with an economic age of 4 years with two funding alternatives: (1) 100% debt with 14% interest annually for 4 years; (2) leasing. The following data are known:
- The economic life of the asset is 4 years, and will be depreciated using the straight-line depreciation method
- Maintenance costs per year: $ 30 million
- 25% corporate tax
- Annual lease rent of $ 60 million
- Net residual value of $ 25 million
Calculate which alternative is more efficient?

Q 4.1

In the 2020 fiscal year, Company A recognized $10 of bad-debt expense (as well as the same amount of bad-debt allowance) for its Accounts receivable. There was no bad-debt written-off in the same year. The corporate tax rate is 30%.

Required: Assuming all else equal, discuss the effect of the recognition of the $10 bad-debt expense on the following two tax-related accounts:

• Current tax liability
• Deferred tax asset (or deferred tax liability)

You need to relate your discussions to the current tax worksheet as well as deferred tax worksheet.

Q.4.2

In the 2020 fiscal year, Company B reported an accounting profit of $1,000. In the same year, the accounting depreciation expense for plant was $150, while the tax deduction for plant depreciation was $200. There was no other difference between accounting and tax in the year. In the 2019 fiscal year, the company recorded a tax loss ($300) and recognized a deferred tax asset in respect of this tax loss. In the 2020 fiscal year, the company reduced the taxable profit by recouping the tax losses carried forward. The company does not set off deferred tax liabilities and assets. The corporate tax rate is 30%.

1. Required: Provide the journal entries for the current tax adjustment. Workings (or narrations) are not required.

2. Now assume that Company B’s accounting profit in the 2020 fiscal year includes $55 of government grant which is exempt from tax. Also, assume that tax losses carried forward must be offset against any exempt income before being used to reduce taxable profit.

Required: Under these additional assumptions, provide the journal entries for the current tax adjustment. Workings (or explanations) are not required.

Explain the components of the Fraud Triangle.

Donald R. Cressey, a noted criminologist, is mostly credited with coming up with the concept of a Fraud Triangle. Albrecht points out that, while researching his doctoral thesis in the 1950s, Cressey developed a hypothesis of why people commit fraud. He found that trusted persons become trust violators when they conceive of themselves as having a financial problem that is nonsharable, are aware that this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their contacts in that situation verbalizations which enable them to adjust their conceptions of themselves as users of the entrusted funds or property.⁶ (Links to an external site.)

Edwin Sutherland, another criminologist, argued that persons who engage in criminal behavior have accumulated enough feelings and rationalizations in favor of law violation that outweigh their pro-social definitions. Criminal behavior is learned and will occur when perceived rewards for criminal behavior exceed the rewards for lawful behavior or perceived opportunity. So, while not directly introducing the Fraud Triangle, Sutherland did introduce the concepts of rationalizations and opportunities. It is interesting to think about how Sutherland’s thesis relies on a utilitarian analysis of harms and benefits of criminal behavior.⁷ (Links to an external site.)

The Fraud Triangle in auditing is discussed in AU-C Section 240. The deception that encompasses fraudulent financial reporting is depicted in Exhibit 5.2 (Links to an external site.).⁸ (Links to an external site.)

Three conditions generally are present when fraud occurs. First, management or other employees have an incentive or are under pressure, which provides the motivation for the fraud. Second, circumstances exist that provide an opportunity for a fraud to be perpetrated. Examples include the absence of, or ineffective, internal controls and management’s override of internal controls. Third, those involved are able to rationalize committing a fraudulent act.

As noted in the auditing standard, some individuals possess an attitude, character, or set of ethical values that allow them to commit a dishonest act knowingly and intentionally. For the most part, this is the exception rather than the rule. However, even honest individuals can commit fraud in an environment that imposes sufficient pressure on them. The greater the incentive or pressure, the more likely that an individual will be able to rationalize the acceptability of committing fraud.⁹ (Links to an external site.)

It is important for students to understand the link between elements of the Fraud Triangle and our earlier discussions about cognitive development. The disconnect between one’s values and actions may be attributable to motivations and incentives to act unethically, perhaps because of a perceived gain or as a result of pressures imposed by others who might try to convince us it is a one-time request or standard practice, or to be loyal to one’s supervisor or the organization. These also become rationalizations for unethical actions invoked by the perpetrator of the fraud.

Incentives/Pressures to Commit Fraud

The incentive to commit fraud typically is a self-serving one. Egoism drives the fraud in the sense that the perpetrator perceives some benefit by committing the fraud, such as a higher bonus or promotion. The fraud may be caused by internal budget pressures or financial analysts’ earnings expectations that are not being met. Personal pressures also might lead to fraud if, for example, a member of top management is deep in personal debt or has a gambling or drug problem. In a “60 Minutes” interview with Dennis Kozlowski, the former CEO of Tyco, Kozlowski said his motivation to steal from the company was to keep up with “the masters of the universe.” This meant keeping up with other CEOs of large and successful companies that had pay packages in the hundreds of millions. Kozlowski was generous with his lieutenants because he thought they would be loyal to the boss. In 2005, a jury found that Kozlowski and ex-CFO Marc Swartz stole about $137 million from Tyco in unauthorized compensation and made $410 million from the sale of inflated stock.

Opportunity to Commit Fraud

The second side of the Fraud Triangle connects the pressure or incentive to commit fraud with the opportunity to carry out the act. Employees who have access to assets such as cash and inventory should be monitored closely through an effective system of internal controls that helps safeguard assets. For example, the company should segregate cash processing responsibilities, including the opening of mail that contains remittance advices, along with checks for the payment of services; the recording of the Page 278receipts as cash and a reduction of receivables; the depositing of the money in the bank; and the reconciling of the balance in cash on the books with the bank statement balance. Obviously, when the fraud is perpetrated by the CEO and CFO, as was the case with Tyco, access is a given. Then, it is just a matter of circumventing the controls or overriding them or, in the case of Kozlowski, enlisting the aid of others in the organization to hide what was going on.

Rationalization for the Fraud

Fraud perpetrators typically try to explain away their actions as acceptable. For corporate executives, rationalizations to commit fraud might include thoughts such as “We need to protect our shareholders and keep the stock price high,” “All companies use aggressive accounting practices,” “It’s for the good of the company,” or “The problem is temporary and will be offset by future positive results.” In the Tyco case, Kozlowski stated in his “60 Minutes” interview that he wasn’t doing anything different from what was done by his predecessor. He took the low road of ethical behavior and rationalized his actions by essentially claiming that everyone (at least at Tyco) did what he did by misappropriating company resources for personal purposes. The fact is he established the culture that condoned such behavior.

Other rationalizations might include “My boss doesn’t pay me enough” or “I’ll pay the money back before anyone notices it’s gone.” The underlying motivation for the fraud in these instances may be dissatisfaction with the company and/or personal financial need. AU-C Section 240 (AU-C 240) provides an extensive list of risk factors that can contribute to the likelihood that fraudulent financial reporting will occur. These are presented in Exhibit 5.3 (Links to an external site.).

1. For discussion purposes: how can the fraud triangle help you identify and prevent fraud?

2. What are the 10-Q and 10-K used to report?

Consider: This Quote on the Nucleus: Neils Bohr (a Danish physicist who made foundational contributions to understanding atomic structure and quantum theory, for which he received the Nobel Prize in Physics in 1922) said to Wolfgang Pauli (an Austrian-born Swiss and American theoretical physicist and one of the pioneers of quantum physics) after his presentation of Heisenberg’s and Pauli’s nonlinear field theory of elementary particles at Columbia University in 1958:

"We are all agreed that your theory is crazy. The question that divides us is whether it is crazy enough to have a chance of being correct."

You are asked to think of this quote in a scientific context.

University presidents around the country have convinced the Congress to support an educational program that will allow students to attend any college in the US they want for only $15,000 in annual tuition and living expenses. This program would generate $40,000 in extra after-tax earnings. The rest of society – i.e., taxpayers, pays costs of $24,000 in scholarship costs per student but receives only $10,000 in discounted added tax revenues.

1. Would this program pass the Hicks-Kaldor economic efficiency test?

2. Is this the right test to use?

3. Regardless of the answers to (a) and (b), is this a program that you would support? Why yes or no?