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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?

Please respond to the following discussion post:

The strategy that Avon president Andrea Jung began to pursue to turn grow the company’s wealth was to follow the same guidelines in international markets that the American companies used, which was to give country managers considerable autonomy. This policy allowed them to use the Avon brand name in a direct-sales format that was the company’s hallmark (Hill, 2015, p. 404). Once Jung realized that this business model was not working for Avon she transformed the company by hiring seasoned managers from well-known global consumer products companies such as Proctor & Gamble and Unilever to regain control over communications, performance visibility, and accountability of the company (Hill, 2015, p. 405).This move was the beginning of a positive growth performance of the company, and by 2007, this strategy was starting to yield dividends. Jung began using stars to promote the Avon products which resulted in higher product sales, and an increase in its sales force.

Avon soon took another tumble in market shares in the year 2010 and 2011 because of an increase of competition from rival companies like Proctor & Gamble. Problems arising from technology issues and bribes from government officials in China caused Avon to be charged with violating the Foreign Corrupt Practices Act. After feeling the pressure from investors Jung relinquished her role as CEO in 2011. Sometimes CEO’s take risks that start out on a good path but after a while find that changes need to be made sooner than later in order to offset market changes that will affect company growth. Jung’s aggressive strategy proved to be a failure in the end and ultimately resulted in her ouster as CEO.

Application Exercise:
In a bottling company, all female employees with 2 to 4 years of experience have a mean salary of $27300 with a with a variance of $30913600.00. A random sample of 29 male employees also having 2 to 4 years of experience had a mean salary of $28800. The company accountant believes that male employees make more money than female employees. What can be concluded with α = 0.10?

a) What is the appropriate test statistic?
---Select--- na z-test one-sample t-test independent-samples t-test related-samples t-test

b)
Population:
---Select--- the CEO male employees bottling company salary female employees
Sample:
---Select--- the CEO male employees bottling company salary female employees

c) Obtain/compute the appropriate values to make a decision about H₀.
(Hint: Make sure to write down the null and alternative hypotheses to help solve the problem.)
critical value =  ; test statistic =  
Decision:  ---Select--- Reject H0 Fail to reject H0

d) If appropriate, compute the CI. If not appropriate, input "na" for both spaces below.
[  ,  ]

e) Compute the corresponding effect size(s) and indicate magnitude(s).
If not appropriate, input and select "na" below.
d =  ;   ---Select--- na trivial effect small effect medium effect large effect
r² =  ;   ---Select--- na trivial effect small effect medium effect large effect

f) Make an interpretation based on the results.

The salary of male employees is significantly higher than female employees.

The salary of male employees is significantly lower than female employees.     

The salary of male employees did not differ from female employees.

Company BVEX, headquartered in Toronto, Canada, operates seven double-trailer trucks for commercial long-distance hauling of cattle in Ontario, Quebec, Manitoba, New York, Vermont, Massachusetts, New Jersey, and Maine. Each truck averages one completed load per week, picking up the cattle from various farms across the aforementioned states and provinces. The cattle are driven to a large farm near Milton, Ontario.
BVEX maintains an office in each of the 8 states and provinces it operates in. Staffing in each of these offices includes a manager, a secretary, and a veterinarian.
BVEX’s CEO is seriously considering dropping New Jersey as a source of business. Last year, only 25 truckloads of cattle were handled in that state. BVEX’s CEO wants to determine if it is profitable to retain an office and do business in New Jersey’s farms.
To analyze the New Jersey market, BVEX’s CEO gathers data on last year's cattle shipments and revenues. Each of the 25 trucks that were loaded in New Jersey last year carried between 26 and 50 cows. The income generated per cow differed significantly (ranging from 50 to 80 dollars) based on the weight of the cows to be shipped. (See the table below for details.) BVEX’s CEO decided that if she were to simulate 25 truckloads out of New Jersey, she could determine if it would be profitable to continue to operate there next year. She estimates that each shipment to the Milton farm costs $900, including the driver, gasoline, and truck expenses; other cargo and loading and unloading costs average $120 per shipment. In addition, it costs $41,000 per year to operate the New Jersey office, including salaries and indirect overhead costs from the home office in Toronto.

Here is the crucial question that the BVEX’s CEO wants to address: Will the shipments of cattle out of New Jersey next year generate enough revenues to cover BVEX costs there?

This is the main question above. Can I please get the excel solution?

Moon Star Company obtained two notes receivable during the year of 2019. The details of the notes are as follows:

October 3, 2019          Sold goods for $24,000 on account to a customer (Sun Company) and received 8% note. The note was due on October 18, 2019.

December 5, 2019      Received 13% note for $15,000 to replace account receivable from a customer (Strong Company). The note was due on January 5, 2020.

1. Compute maturity value of the note receivable received on October 3 (Show supporting calculations.)
2. Journalize the collection of the note which was due on October 18, 2019.
3. Journalize the adjusting entry at December 31, 2019 to record accrued interest.
4. Compute total interest revenue earned on the note receivable received on December 5, 2019 (Show supporting calculations.)
5. Journalize the collection of the note which was due on January 5, 2020.

An incomplete cost of goods manufactured schedule is presented below for Cepeda Manufacturing Company for the year ended December 2020:

Complete the cost of goods manufactured schedule for Cepeda Manufacturing Company.

An incomplete cost of goods manufactured schedule is presented below for Cepeda Manufacturing Company for the year ended December 2020:

Complete the cost of goods manufactured schedule for Cepeda Manufacturing Company.

As a team, you are required to create the 4 basic financial statements for ZZZ Widget Company. Go through details described below, and create an Excel spreadsheet that shows an income statement, balance sheet, statement of owners equity, and statement of retained earnings.

Grading is based on accuracy as well as the style of the Excel sheet. I expect for you to use formulas and references as needed.

ZZZ Widget Company was formed Dec 1, 2020 with a $200,000 owner investment.

Took a 50,000 loan on 6/31 (12% annual interest rate)

Distributed $10,000 in dividends in December.

Purchased $100,000 of inventory in August (cash).

In September, sold half of inventory for $200,000 cash.

Purchased $50,000 building in January, 2020. Lifetime of 10 years.

Paid $50,000 R&D in May

The company pays 21% in corporate taxes.

Your client is a wealthy investor and property owner. Your client provides you with information (as detailed below) about various transactions that took place between 1 July 2019 and 30 June 2020.

1) Warehouse: On 30 April 1985 your client acquired a large parcel of vacant land at Rocklea, a suburb in Brisbane with a significant number of commercial buildings. The purchase price was $180,000 and your client incurred $2,000 in legal fees and $18,000 in transfer duty when purchasing the land. In April 2000 your client signed a contract for the construction of a large warehouse on the land. The final construction cost was $1,000,000. The warehouse is used to house your client’s extensive motor vehicle collection. Your client signs the contract to sell the warehouse for $2,200,000 on 1 June 2020. Your client receives the proceeds on 1 July 2020. At the time of sale, an independent valuation revealed the land component of the sale price was $1,200,000. Your client paid $80,000 to insure the warehouse building against flood and fire damage.

2) Boat: Your client owned a luxury motor cruiser that was moored at the Manly Yacht Club. Your client used the boat to go fishing over weekends and to cruise the waters of Moreton Bay. Your client purchased the vessel in late 2006 for $140,000 and sells the vessel on 1 June 2020 to a local boat broker for $90,000. During the period of ownership your client paid a total of $25,000 in weekly mooring fees to the Manly Yacht club and also incurred $20,000 in repairs on the vessel.

3) Dining Table: Your client acquires a large, hand crafted, English oak dining table for $8,000 in April 2001. The table is very old, having been constructed sometime during 1910 and was used by your client and his family in their formal dining room. Your client auctions the table on 2 April 2020 and it sells for a record price of $50,000. Your client pays $2,000 in auction fees. During your client’s period of ownership they paid $3,000 to insure the table against loss or damage.

4) Your client also has a capital loss carried forward from the 2017–2018 income year of $10,000.

You are required to: Calculate which amount(s), if any, must be returned as assessable income for the 2019–2020 income year. Show all your calculations and provide reasons for your answer, referencing relevant sections of the Income Tax Assessment Acts

LePage Manufacturing Ltd. agrees to lease equipment to Labonté Ltée. on July 15, 2020. LePage follows ASPE and Labonté is a public company following IFRS 16. The following information relates to the lease agreement.

1. The lease term is seven years, with no renewal option, and the equipment has an estimated economic life of nine years.

2. The equipment’s cost is $420,000 and the asset’s fair value on July 15, 2020, is $560,000.

3. At the end of the lease term, a payment to LePage, the lessor, in the amount of $80,000 is expected to be payable by Labonté, the lessee, under a residual value guarantee. Labonté depreciates all of its equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments beginning on July 15, 2020.

5. LePage usually sells its equipment to customers who buy the product outright, but Labonté was unable to get acceptable financing for a cash purchase. LePage’s credit investigation on Labonté revealed that the company’s financial situation was deteriorating. Because Labonté had been a good customer many years ago, LePage agreed to enter into this lease agreement, but used a higher-than-usual 15% interest rate in setting the lease payments. Labonté is aware of this rate.

6. LePage is uncertain about what additional costs it might have to incur in connection with this lease during the lease term, although Labonté has agreed to pay all executory costs directly to third parties.

7. LePage incurred legal costs of $2,500 in early July 2020 in finalizing the lease agreement.

Instructions:

a. Discuss the nature of this lease for both the lessee and the lessor.

b. Using (1) time value of money tables, (2) a financial calculator, or (3) Excel functions, calculate the amount of the annual rental payment that is required to obtain a return of 15% for LePage.

c. Prepare the journal entries that Labonté would make in 2020 and 2021 related to the lease arrangement, assuming that the company has a December 31 fiscal year end and that it does not use reversing entries. Round amounts to the nearest dollar.

d. From the information you have calculated and recorded, identify all balances related to this lease that would be reported on Labonté’s December 31, 2020 statement of financial position and statement of income, and where each amount would be reported.

e. Prepare the journal entries that LePage would make in 2020 and 2021 related to the lease arrangement, assuming that the company has a December 31 fiscal year end and does not use reversing entries. Round amounts to the nearest dollar.

f. From the information you have calculated and recorded, identify all balances related to this lease that would be reported on LePage’s December 31, 2020 statement of financial position and statement of income, and where each amount would be reported.

g. Comment briefly on the December 31, 2020 reported results in parts (d) and (f) above.