You are the new accountant for ABC, Co. ABC, Co. is a plumbing supply and installation company.

Your boss is the President, Mr. Bigg.

As the accountant, it is your job to explain to Mr. Bigg the following accounting terms.

1. What is a chart of accounts?

2. What are adjusting journal entries?

3. What is an income statement?

Based on your course work of accounting and information systems course (ACC 4310) at your University, what would you recommend to Mr. Bigg to improve his business in regards to the following situations?

1. Accounts Receivables are billed and due at 30 days from invoice, however, most customers tend to pay up to 45 days. The company needs to improve cash flows.

2. Several customers have bounced checks and this causes issues, especially the $25.00 fee charged from the bank?

3. The company needs capital for expansion, to purchase materials, and new equipment. Why would you suggest to Mr. Bigg.

On January 1, 2017, the ledger of Sheridan Company contained these liability accounts. Accounts Payable $44,300 Sales Taxes Payable 7,500 Unearned Service Revenue 20,800 During January, the following selected transactions occurred. Jan. 1 Borrowed $18,000 in cash from Apex Bank on a 4-month, 5%, $18,000 note. 5 Sold merchandise for cash totaling $6,254, which includes 6% sales taxes. 12 Performed services for customers who had made advance payments of $12,500. (Credit Service Revenue.) 14 Paid state treasurer’s department for sales taxes collected in December 2016, $7,500. 20 Sold 680 units of a new product on credit at $53 per unit, plus 6% sales tax. During January, the company’s employees earned wages of $70,300. Withholdings related to these wages were $5,378 for Social Security (FICA), $5,021 for federal income tax, and $1,506 for state income tax. The company owed no money related to these earnings for federal or state unemployment tax. Assume that wages earned during January will be paid during February. No entry had been recorded for wages or payroll tax expense as of January 31.

On January 1, 2022, the ledger of Crane Company contained these liability accounts. Accounts Payable $44,900 Sales Taxes Payable 9,000 Unearned Service Revenue 21,400 During January, the following selected transactions occurred. Jan. 1 Borrowed $18,000 in cash from Apex Bank on a 4-month, 5%, $18,000 note. 5 Sold merchandise for cash totaling $5,406, which includes 6% sales taxes. 12 Performed services for customers who had made advance payments of $13,600. (Credit Service Revenue.) 14 Paid state treasurer’s department for sales taxes collected in December 2021, $9,000. 20 Sold 740 units of a new product on credit at $49 per unit, plus 5% sales tax. During January, the company’s employees earned wages of $54,000. Withholdings related to these wages were $4,131 for Social Security (FICA), $5,379 for federal income tax, and $1,614 for state income tax. The company owed no money related to these earnings for federal or state unemployment tax. Assume that wages earned during January will be paid during February. No entry had been recorded for wages or payroll tax expense as of January 31.

Suppose you use a call spread strategy on 4/15/2020, by buying a Facebook call option with the strike price of $180 at $7 and selling a Facebook call option with the strike price of $195 at $2. Both call options mature on 5/15/2020.

1. What is your total payoff and profit if Facebook share is traded at $170 on 5/15/2020?
2. What is your total payoff and profit if Facebook share is traded at $185 on 5/15/2020?
3. What is your total payoff and profit if Facebook share is traded at $200 on 5/15/2020?

Suppose you use a call spread strategy on 4/15/2020, by buying a Facebook call option with the strike price of $180 at $7 and selling a Facebook call option with the strike price of $195 at $2. Both call options mature on 5/15/2020.

(a) What is your total payoff and profit if Facebook share is traded at $170 on 5/15/2020?

(b) What is your total payoff and profit if Facebook share is traded at $185 on 5/15/2020?

(c) What is your total payoff and profit if Facebook share is traded at $200 on 5/15/2020?

Q4 Hotel California has 160 rooms. The hotel has an ample low-fare demand at the room rate of $200 per night, but the demand from the high-fare class which pays $450 per night on average, is uncertain. Table below shows the number of high-fare rooms that were booked during the past 30 days. How many rooms should Hotel California protect for high-fare customers to maximize its expected revenue? (6 points)

IN THE DECADE between 2005 and 2015, LEGO—the famous Danish toy company—grew fivefold from some $1 billion in revenues to $5 billion (see Exhibit MC12.1). Rediscovering, leveraging, and extending its core competence allowed a successful revival for a company that was floundering in the early 2000s. How did LEGO construct a successful turnaround? To answer this question, we first need to understand a bit of the history of this Danish wonder company.

The LEGO company was founded in 1932 by Ole Kirk Kristiansen. The name is a contraction of the Danish words Leg godt, which means “play well.” Only later did LEGO executives realize that le go in Latin also means “I assemble.” Throughout its history, LEGO has had numerous formidable competitors, but it has outperformed all of them. Tinkertoys were more complex, Lincoln Logs were limited in what could be constructed, traditional blocks had nothing to hold them together and were too large to show much detail. LEGO bricks were the right balance of simplicity, versatility, and durability.

LEGO competes for the attention of children and their parents who buy the product. Moreover, there is also a sizable group of adult LEGO fans. In the wake of the personal computer revolution in the 1990s, however, the popularity of LEGO began to wane because of attractive alternatives for children such as gaming consoles and computer games. By 1998, LEGO was in trouble. The Danish toymaker hired a highly touted turnaround expert to change its fortune. Unfortunately, he had no background in the toy industry. To make matters worse, the new executive decided that LEGO’s hometown of Billund, Denmark, (with 6,000 people) was too provincial. He continued to live in Paris and either commute or run the company remotely.

Things at LEGO went from bad too worse. It started hyperinnovating and diversified into too many areas, too quickly, and too far away from its core. Among a whole slew of other innovation failures, the company created a Saturday morning cartoon called “Galidor,” which flopped. During this time period, it also decided to become a lifestyle company and to offer LEGO-branded clothing and accessories.

LEGO’s Turnaround

By 2003, LEGO was on the verge of bankruptcy. To avoid this fate, the closely held private company, owned by the Kristiansen family since its inception, needed to do something drastic and quickly. Almost out of desperation, it hired Jørgen Vig Knudstorp as CEO. His résumé was quite unusual to say the least: He was only 35 years old (in comparison, the average age for a Fortune 500 CEO is 55 years), held a doctorate in economics, and was a former academic. Knudstorp had transitioned to McKinsey, one of the world’s premier strategy consulting firms.

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Knudstorp decreed that LEGO must “go back to the brick” and focus on core products. As a result of the strategic refocusing, LEGO divested a number of assets including its theme parks. It also drastically culled its product portfolio by almost 50 percent, from some 13,000 pieces to 7,000. At the same time as Knudstorp focused LEGO again on its fundamental strengths, he was also careful to balance exploitation—applying current knowledge to enhance firm performance in the short term—with exploration—searching for new knowledge that may enhance a firm’s future performance. This allowed LEGO to improve the performance of traditional product lines, while at the same time to innovate, but this time in a much more disciplined manner.

In particular, LEGO increased sales of its well-known existing products by strengthening the interoperability of various LEGO pieces with other sets to encourage user innovation and creativity. To drive innovation, LEGO has brought its adult fans into the new product development process to leverage crowd-sourcing—obtaining ideas from a large fan base using online forums and other Internet-based technologies. To drive future growth, LEGO under Knudstorp has been much more careful with its product extensions. In the past LEGO had licensed its brand freely to other brands, including Star Wars, Indiana Jones, Harry Potter, the Lord of the Rings, Batman, the Simpsons, and Iron Man. The problem was that the benefits from these licensing agreements accrued mainly to the existing brands, because LEGO did not own the more critical intellectual property. Knudstorp focused on owning and leveraging the core intellectual property. As a case in point, The LEGO Movie in 2014 was a particular high for the company, grossing $500 million on a $60 million budget in the first year alone. Unlike in previous movie tie-ins, LEGO owned the intellectual property, which meant that LEGO did not need to split profits with existing brands.

Challenges

Although LEGO has grown fivefold since Knudstorp took over, it faces a number of challenges. LEGO needs to strengthen its triple-bottom-line performance (along economic, social, and ecological dimensions) and address globalization challenges.

LEGO must address ecological concerns in the face of growing consumer criticism: Its signature bricks are made from petroleum-based plastic. The company is searching for an environmentally friendly material to replace its bricks that date back to 1963. To overcome its relatively large carbon footprint, the company is spending millions on a 15-year R&D project in hope of finding an eco-friendly alternative. The goal is to invent and then be able to manufacture bricks cost-effectively from a new bio-friendly material that will be virtually indistinguishable from the current blocks. It is a difficult problem to solve because LEGObricks are precisely engineered to Page 459four-thousandths of a millimeter, hold a large range of colors well, and even have a particular sound when two pieces are snapped together.

To continue to grow, LEGO must become stronger in emerging growth markets such as China. LEGO is a comparatively new entry into China because of the fear that knockoff bricks have sufficiently damaged its brand. Knockoffs, which are rampant in China, are of inferior quality and even have injured some consumers. Yet, with growth in Western markets plateauing and a larger number of Chinese entering the middle class, this market opportunity is critical to LEGO’s future success. Moreover, Chinese government officials endorse LEGO as a “mind toy,” which helps children to develop creativity. The hope is that creative children will grow up to drive innovation in firms, something many critics say Chinese companies lack. In addition, Chinese parents and grandparents are eager to spend money on things that are perceived to help their offspring to excel academically. In general, parents around the globe are more than happy to spend money on games that get their children away from mobile devices, computers, and game consoles.

To take advantage of the growth opportunity in China and other Asian countries such as India and Indonesia, LEGO opened offices in Shanghai and Singapore as well as a factory in Jiaxing, China. To address the globalization challenge more generally, LEGO also needs to internationalize its management. At this point, it is a local, small-town company that happened to be successful globally, especially in the West. LEGO hopes to become a global company that happens to have its headquarters in the 6,000-people town of Billund, Denmark.

DISCUSSION QUESTIONS

1.  Why did LEGO face bankruptcy in the early 2000s? In your reasoning, focus on both external and internal factors.

2.  What is LEGO’s core competence? Explain.

3.  Apply the core competence–market matrix to show how LEGO leveraged its core competence into existing and new markets under Jørgen Vig Knudstorp, who was appointed CEO in late 2004.

4.  In terms of revenue growth, LEGO experienced a competitive advantage over both Hasbro and Mattel since 2007 because it grew much faster. What explains LEGO’s competitive advantage?

5.  What must LEGO do to sustain its competitive advantage in the future? One avenue to tackle this question is to think about diversification, both along products but also geography. Another avenue is partnerships such as strategic alliances or even acquisitions. What lessons from LEGO’s past should guide its future diversification?

Fill out the summary of T-Accounts for

1. Revenue and Expenses (Temporary Income Statement Accounts)

       -Includes: Sales and Service Revenue, Costs of Goods sold, Wages Expense, Insurance Expense, Rent Expense, Depreciation Expense.

2. Assets (Permanent Balance Sheet Accounts)

      -Includes: Cash, Inventory, accounts receivable, prepaid insurance, equipment, accumulated depreciation, prepaid rent.

3. Liabilities and Equities (Permanent Balance Sheet Accounts)

      -Includes: Accounts payable, unearned revenue, wages payable, common stock, retained earnings

4. What are the total Assets?

5. What are the total Liabilities & Shareholder's Equity?

    Note: Total assets and Liabilities + Shareholders equity should balance.

1. Jan. 1: Log issued $40,000 of common stock.
2. Jan. 1: Log paid $18,000 cash to purchase an equipment. The equipment has an estimated useful life of 5 years and an estimated salvage value of $3,000.
3. Jan. 1: Log paid $7,000 cash for two years of insurance coverage starting on Jan. 1, 2020.
4. March 1:Log rented a building and paid $2,400 for one year’s rent (starting 3/1).
5. April 1: Log purchased $5,700 of inventory on account.
6. June 1:Log sold $23,000 of software on account. The cost is $3,500.
7. Sept. 1: Log collected $7,000 cash from its customers for the previous sales on account.
8. Oct 31: Log paid $5,000 cash for employee wages earned during the first ten months (Jan 1 to October 31, $500 per month).
9. Nov 1: Log paid $3,300 cash to suppliers for inventory purchases made on account.
10. Dec 1: Log started an on-line service where customers pay an annual subscription fee when they sign up for a 12-month service plan. On Dec. 1, Log received $3,600 of cash from customers for one year of subscription fees (for online services from Dec 1, 2020 to Nov 30, 2021).

Additional Info:

-Xenon uses Straight Line Depreciation

-Two months of employee wages was accrued on Dec. 31, 2020. Xenon plans to pay employees Jan. 1 2021

1. Jan. 1: Xenon issued $40,000 of common stock.
2. Jan. 1: Xenon paid $18,000 cash to purchase an equipment. The equipment has an estimated useful life of 5 years and an estimated salvage value of $3,000.
3. Jan. 1: Xenon paid $7,000 cash for two years of insurance coverage starting on Jan. 1, 2020.
4. March 1:Xenon rented a building and paid $2,400 for one year’s rent (starting 3/1).
5. April 1: Xenon purchased $5,700 of inventory on account.
6. June 1: Xenon sold $23,000 of software on account. The cost is $3,500.
7. Sept. 1: Xenon collected $7,000 cash from its customers for the previous sales on account.
8. Oct 31: Xenon paid $5,000 cash for employee wages earned during the first ten months (Jan 1 to October 31, $500 per month).
9. Nov 1: Xenon paid $3,300 cash to suppliers for inventory purchases made on account.
10. Dec 1: Xenon started an on-line service where customers pay an annual subscription fee when they sign up for a 12-month service plan. On Dec. 1, Xenon received $3,600 of cash from customers for one year of subscription fees (for online services from Dec 1, 2020 to Nov 30, 2021).

Additional Info:

-Xenon uses Straight Line Depreciation

-Two months of employee wages was accrued on Dec. 31, 2020. Xenon plans to pay employees Jan. 1 2021

Questions

Fill out the summary of T-Accounts for

1. Revenue and Expenses (Temporary Income Statement Accounts)

       -Includes: Sales and Service Revenue, Costs of Goods sold, Wages Expense, Insurance Expense, Rent Expense, Depreciation Expense.

2. Assets (Permanent Balance Sheet Accounts)

      -Includes: Cash, Inventory, accounts receivable, prepaid insurance, equipment, accumulated depreciation, prepaid rent.

3. Liabilities and Equities (Permanent Balance Sheet Accounts)

      -Includes: Accounts payable, unearned revenue, wages payable, common stock, retained earnings

4. What are the total Assets?

5. What are the total Liabilities & Shareholder's Equity?

    Note: Total assets and Liabilities + Shareholders equity should balance.

40. What is a typical Day of Arrival (DOA) and pattern for Special Corp customers?

1. Sunday through Wednesday
2. Monday through Thursday
3. Sunday through Thursday
4. Tuesday through Friday

41. What is the typical BMF that management companies get?

a. 3%

b. 5%

c. 2%

d. within 30 days they start getting 3%

42. On the STR report, if the development funnel/ pipeline is strong showing a lot of rooms are being developed what might it indicate?

a. Your brand is has strong preference

b. Owners Priority is being made occasional across the portfolio

c. Owners Priority is being made more quickly than other hotel’s mgt. companies’ brands

d. a and c

42.   When driving sales, revenue management in a group hotel should shrink the hotel by adding great groups, as far out as reasonably possible, know based on history what the cross over goal should be, as long as the groups have what?

a. The right number of customers

b. The right average rate

c. The largest total spend possible

d. The use the banquet and outlet space occasionally

43. If a hotel has a lot of great group room nights on the books in years out, it also allows revenue management to do what important strategy?

a. Open discounts

b. Close out discounts

c. Close out all corporate, association, and other group.

d. focus on driving transient higher rates