QUESTION 1

Advance Energy Bhd (AEB) acquired a piece of land and a building on 1 January 2017 at the cost of RM6,000,000 and RM8,000,000 respectively. AEB decided that the acquisition of land is for long term capital appreciation. As for the building, it was planned to be rented out to its wholly subsidiary, Imperial Bhd. The fair value of land and building on 31 December 2017 was RM9,000,000 and RM6,000,000 respectively. On 31 August 2018, due to insufficient working space, AEB decided to terminate the rental agreement with its subsidiary and used the building for administrative use. The building was expected to have a remaining useful life of 10 years. The fair value of the building on 31 August 2018 was RM14,000,000. Unfortunately, due to liquidity issues, AEB sold both land and building on 30 April 2019 for RM15,500,000 and RM12,500,000 respectively. AEB adopted a fair value model for investment property and revaluation model for owner-occupied property. AEB depreciates its non-current assets using the straight-line method and closes its account on 31 December each year.

REQUIRED: (Round all numbers to the nearest RM)

(a) Prepare the journal entries for Advance Energy Bhd for its transaction in the year 2017 and 2018.

(b) Prepare the journal entries for Advance Energy Bhd when it sold both properties in the year 2019.

(c) In accordance with MFRS 140 Investment Property, discuss how Advance Energy Bhd consider the accounting treatment for the building that be rented out to Imperial Bhd.

(d) After the initial recognition, MFRS 140 Investment Property requires an entity to choose either the cost model or fair value model as its accounting policy. Briefly explain TWO (2) differences between these two models.

1. To maintain a strong credit rating, Freedom will borrow $1.2 million today to finance the Ingleburn facility’s expansion. The ten-year principal-and-interest loan has annual interest repayments of $147,949 (assuming a 4% p.a. rate). Freedom’s accountant confirms that interest is classified as a business expense and is tax deductible.

2. There is an anticipated expense of $180,000 to install the equipment associated with the Ingleburn expansion, and a $50,000 cost to upgrade the electricity supply required to commence operations. According to the ATO both of these items are classified as a business expense. The manager of the Ingleburn facility would prefer to classify these expenses as assets and therefore depreciate them over the ten-year project life to give the appearance of higher profitability for the 2018 financial year. The manager is budgeting to achieve a net profit for 2018 of $1.22 million and increasing it by $150,000 for 2019.

3. You assume that the Ingleburn building can be sold for $1.9 million in the year 2028, and at any point in time the equipment will have a resale value of $650,000. In ten years’ time Freedom assumes that it will have cash holdings of $12 million. You note the ATO regulation that all non-current assets be depreciated to zero.

a) Identify the cash flows at the start

b) Identify the cash flows over the life

c) Identify the cash flows at the end

Your firm recently divested some non-core assets and now has a significant amount of excess cash. Branda Sim, the CEO, is considering investing in either Singapore Technologies Engineering Limited (“STE”) shares or 10-year Singapore Government Securities (“SGS”) or a combination of both. She knows that you are studying a Finance course, and she is seeking your advice.

Based on your research, the following market data was obtained:

Information relating to STE

As at December 2018, beta is 0.72.

Information relating to SGS

The coupon rate is 2.75% per year and will mature in December 2023.

Other market data

• Market risk premium = 5.5%

• Inflation rate = 1.2%

(a) Calculate the annual returns for both STE and SGS for the 5 years 2014 to 2018.   

At December 31, 2017, Flounder Corporation reported the following plant assets.

During 2018, the following selected cash transactions occurred.

Journalize the transactions. Flounder uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 40-year useful life and no salvage value; the equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (Record entries in the order displayed in the problem statement. 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.)

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List of Accounts

Record adjusting entries for depreciation for 2018. (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.)

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List of Accounts

Prepare the plant assets section of Flounder’s balance sheet at December 31, 2018. (Hint: You may wish to set up T accounts, post beginning balances, and then post 2018 transactions.) (List Plant Assets in order of Land, Building and Equipment.)

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At December 31, 2017, Flounder Corporation reported the following plant assets.

During 2018, the following selected cash transactions occurred.

Journalize the transactions. Flounder uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 40-year useful life and no salvage value; the equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (Record entries in the order displayed in the problem statement. 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.)

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List of Accounts

Record adjusting entries for depreciation for 2018. (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.)

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List of Accounts

Prepare the plant assets section of Flounder’s balance sheet at December 31, 2018. (Hint: You may wish to set up T accounts, post beginning balances, and then post 2018 transactions.) (List Plant Assets in order of Land, Building and Equipment.)

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List of Accounts

Condensed data from the comparative statement of financial position of Greencastle Inc. follow:

Part 1

Using horizontal analysis, calculate the percentage of a base-year amount, using 2016 as the base year. (Round answers to 1 decimal place, e.g. 15.2%.)

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Part 2

Using horizontal analysis, calculate the percentage change for each year. (Round percentage to 1 decimal place, e.g. 15.2%. Enter negative amounts using either a negative sign preceding the number e.g. -45.1 or parentheses e.g. (45.1)%.)

1) The gravity model describes an empirical relationship between value of trade, size of the economies, and distance between the economies.

a. Write out the generic form of the gravity model and briefly discuss how you would use this model to verify whether its implications are supported by data or not. (10 pts)

b. Suppose the gravity model generally holds for the U.S. and its trading partners. However, a restrictive trade policy limits the trade value without changing the sizes of the economies and the distance. For example, the USMCA mandates at least 75% of an automobile’s value must come from domestic origin. How is this policy reflected in the gravity model? How would you justify such policy using the gravity model?

As your final assignment, you are charged with describing the empirical connection between unemployment and real GDP growth, i.e. Okun’s Law. Please use FRED to acquire all the data asked for below. Furthermore, only study the time period from 1970-today, at an annual frequency.

a. In one (well labeled) figure, plot the change in the unemployment rate (“Civilian Unemployment Rate”) versus time and real GDP growth versus time. In a professional looking table, report the following summary statistics: mean, variance, and number of data points for both time-series. Furthermore, please report, the covariance of the change in unemployment with real GDP growth.

b. Using Okun’s law (as discussed in class) and the observed change in unemployment, compute predicted real GDP growth. In one (well labeled) figure, plot predicted real GDP growth versus time and actual real GDP growth versus time. How well does Okun’s Law perform? In your report provide a brief discussion of what you see. Please provide special attention to time periods in which there is disagreement.

c. Advanced. Please compute the ratio of the covariance of the change in unemployment and real GDP growth relative to the variance of the change in unemployment. In your report, discuss the following: Is this value larger or smaller than 2? How does it relate (or not) to the performance of Okun’s law that you found in part b?

E6.2 Using the data set Growth described in Empirical Exercise E4.1, but excluding the data for Malta, carry out the following exercises. a. Construct a table that shows the sample mean, standard deviation, and minimum and maximum values for the series Growth, TradeShare, YearsSchool, Oil, Rev_Coups, Assassinations, and RGDP60. Include the appropriate units for all entries. b. Run a regression of Growth on Trade Share, YearsSchool, Rev_Coups, Assassinations, and RGDP60. What is the value of the coefficient on Rev_Coups? Interpret the value of c. Use the regression to predict the average annual growth rate for a country that has d. Repeat (c) but now assume that the country's value for Trade Share is one standard e. Why is Oil omitted from the regression? What would happen if it were included? this coefficient. Is it large or small in a real-world sense? average values for all regressors deviation above the mea.

Select from the literature a couple of leading papers on empirical efficient market hypothesis testing (at least one from the US stock market, and at least one from a foreign stock market - possibly from an emerging economy) and discus them thoroughly, while addressing the issue of market maturity and regulations affecting information efficiency and technical efficient of the stock market in question. You discussion should include the following parts:

- importance of the study,
- implications of the paper,
- contribution of the paper to the EMH testing,
- methodology and data used in the research,
- interpretations of findings,
- limitations and recommendation for further research.