Question 4

Consider each of the following independent and material situations, identified below (i-vi). In each case:

• the balance date is 30 June 2020;
• the field work was completed on 12 August 2020;
• the Directors’ Declaration and the Audit report were signed on 20 August 2020;
• the completed financial report accompanied by the signed Audit report were mailed to the shareholders on 26 August 2020.

1. On 26 September 2020, you discovered that a debtor at 30 June 2020 had gone bankrupt on 2 September 2020. The debt had appeared collectible at 30 June 2020 and 20 August 2020.

2. On 12 August 2020, you discovered that a debtor at 30 June 2020 had gone bankrupt on 5 August 2020. The cause of the bankruptcy was an unexpected loss of a major lawsuit by the debtor on 15 July 2020.

3. On 14 August 2020, you discovered that a debtor had gone bankrupt on 5 August 2020. The sale took place on 2 July 2020. The cause of the bankruptcy was a major uninsured fire at one of the debtor’s premises on 30 June 2020.

4. On 19 August 2020, the company settled a legal action out of court that had originated in 2016 and was listed as a continent liability at 30 June 2020.

5. A draft investigative report commissioned by a government enquiry was leaked to the media on 10 August 2020. The report has questioned the continued need for a segment of your client’s business. Accordingly, there is a significant uncertainty regarding the future necessity for one of the services offered by your client and its industry colleagues. There have been significant media attention and speculation on this issue.

6. Your client, BHP Mining, owns a mineral exploration licence in Western Australia. At 30 June this licence was valued by an independent expert at $20,000,000. This valuation is reflected in the financial report. On 17 August BHP Mining received notice that a claim was being lodged under the Native Titles Act for land which included that subject to the exploration licence. If the claim is successful, the exploration licence will be worthless.

Required:

1. For each of the situations described above (i-vi), select the appropriate action from the list below, and justify your response.

1. Adjust the 30 June 2020 financial report.
2. Disclose the information in the notes to the 30 June 2020 financial report.
3. Request that the client recall the 30 June 2020 financial report for revision.
4. No action is required.                                                                                                  (6*2= 12 marks)

If no action is taken by management for each of the events described above (i-v), determine the most appropriate audit opinion to be issued.            

Question 6: The following company provides a single product and have provided their summary forecast data shown below relating to its product for 2020.    

a. Calculate the contribution margin per unit.                         

b. Calculate the contribution margin ratio.

c. Calculate the break-even in units and sales dollars for 2020.

d.Calculate the profit earned in 2020.

Carla Vista Company, which uses the retail LIFO method to determine inventory cost, has provided the following information for 2020:

Assuming stable prices (no change in the price index during 2020), what is the cost of Carla Vista's inventory at December 31, 2020? (Hint: Round intermediate calculation to 2 decimal places, e.g. 0.63 and final answer to 0 decimal places.)

Question 6: The following company provides a single product and have provided their summary forecast data shown below relating to its product for 2020.     

a. Calculate the contribution margin per unit.                                         

b. Calculate the contribution margin ratio.

c. Calculate the break-even in units and sales dollars for 2020.

d.Calculate the profit earned in 2020.

Comfort Company manufactures pillows. The 2020 operating budget is based on production of 1,000 pillows with 0.50 machine-hour allowed per pillow. Budgeted variable overhead per hour was $10. Actual production for 2020 was 750 pillows using 400 machine-hours. Actual variable costs were $9 per machine-hour.

Required: Calculate the variable overhead spending and efficiency variances.

Cheyenne Company reports pretax financial income of $70,000 for 2020. The following items cause taxable income to be different than pretax financial income.

Cheyenne’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020.

Compute taxable income and income taxes payable for 2020.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Compute the effective income tax rate for 2020. (Round answer to 1 decimal places, e.g. 25.5%.)

On January 1, 2020, Coronado Company purchased at face value, a $1300, 9% bond that pays interest on January 1. Coronado Company has a calendar year end.
The entry for the receipt of interest on January 1, 2021 is

Outstanding stock of the Sheridan Corporation included 20800 shares of $5 par common stock and 5100 shares of 6%, $10 par noncumulative preferred stock. In 2019, Sheridan declared and paid dividends of $1900. In 2020, Sheridan declared and paid dividends of $6400. How much of the 2020 dividend was distributed to preferred shareholders?

Marigold, Inc. has 3100 shares of 4%, $50 par value, cumulative preferred stock and 62000 shares of $1 par value common stock outstanding at December 31, 2019. The board of directors declared and paid a $2700 dividend in 2019. In 2020, $18100 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2020?

Chenard, Jennings, and Blair share profits and losses is 2:3:5, respectively. The balance sheet is:

CHENARD, JENNINGS, AND BLAIR PARTNERSHIP
Balance Sheet
December 31, 2020
Assets      Liabilities and Owners' Equity
Cash   $ 37700      Liabilities   $141000
Noncash assets   283000      Chenard, Capital   59500
          Jennings, Capital   89400
           Blair, Capital   30800
Total  
$320700
    Total  
$320700

If the partnership is liquidated by selling the noncash assets for $384000, and creditors are paid in full, what is the total amount of cash that Chenard will receive in the distribution of cash to partners?

5.            Black Corporation had a 1/1/20 balance in the Allowance for Doubtful Accounts of $21,000. The balance in Accounts Receivable was $420,000 at 1/1 and $504,000 at 12/31. At 12/31/20, Black estimates that 5% of accounts receivable will prove to be uncollectible. What should Black report as its Allowance for Doubtful Accounts at 12/31/20?

6.            David Company uses the gross method to record sales made on credit. On June 10, 2020, it sold goods worth $250,000 with terms 2/10, n/30 to Charles Inc. On June 19, 2020, David received payment for 1/2 of the amount due from Charles Inc. David’s fiscal year end is on June 30, 2020. What amount will be reported in the financial statements for the accounts receivable due from Charles Inc.?

7.            Becky had net sales (all on account) in 2020 of $8,000,000. At December 31, 2020, before adjusting entries, the balances in accounts receivable was a $1,000,000 debit. Becky estimates that 3% of its accounts receivable will prove to be uncollectible. What is the net amount expected to be collected of the receivables reported on the financial statements at December 31, 2020? (Net A/R)

8.            Wellington Corp. has outstanding accounts receivable totaling $1.27 million as of December 31. If the company estimates that 2% of its accounts receivable will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?

Sully Company’s January 1, 2020 balance sheet is as follows:

Assets Liabilities & Equity

Cash, receivables $ 3,000,000 Current liabilities $ 2,000,000

Inventories 4,000,000 Long-term liabilities 6,500,000

Equity method investments 1,000,000 Capital stock 2,000,000

Land, buildings & equipment 5,500,000 Retained earnings 3,500,000

Accumulated other comprehensive loss (400,000)

_________ Treasury stock (100,000)

Total assets $13,500,000 Total liabilities & equity $13,500,000

On January 1, 2020, Pronto Corporation acquired Sully’s assets and liabilities for $50 million in cash. Sully’s cash and receivables, and current liabilities were reported at values approximating fair value. However, its inventories were overvalued by $2,000,000, and its equity method investments were undervalued by $3,000,000. Its land, buildings & equipment were overvalued by $2,500,000, and its long-term liabilities were undervalued by $500,000. The accountants identified the following possible intangible assets attributed to Sully but not currently recorded on its balance sheet:

Fair Value

Skilled workforce $7,000,000

Favorable leases 5,000,000

Developed technology 2,000,000

Prospective customer contracts 1,500,000

Synergies on future projects 3,000,000

Required

Prepare Prance’s journal entry to record the acquisition.