Question 3:
Depreciation is considered as accounting policy and operational expense for the accounting period.
The value to be included in the financial statement is calculated based on the decision of the Board.
(a) You are required to:
(i) Explain the difference between capital expenditure and revenue expenditure, and how
each type of expenditure will affect the financial statements of a business.
(ii) Explain why it is important to distinguish between capital expenditure and revenue
expenditure, and briefly explain the accounting treatment of each type of expenditure.

(iii) Under what circumstances will you consider the reducing balance method as the most
appropriate method in calculating depreciation?
(b) Does depreciation decrease cash in a business? Explain your answer.

Case Background

A sole proprietor (the owner) has established a service business specializing in recruitment for businesses needing specialized Tool Industry staff. The trail balance at the end of the first three months of operations is provided below. Part of the service is to train people before they are placed with companies. The owner has asked, you, the accountant for HR, to prepare the answers to the questions below considering the notes provided.

Trial Balance

Notes

1. The owner issued a cheque for $2,000 for insurance for the next three month after discovering there was no insurance in place. The cheque has not been recorded as a reduction of cash to-date. There is no insurance expense for the first three months.

2. The equipment must be depreciated for three months. The equipment has a service life of 5 years and monthly depreciation is estimated to be $833 a month.

3. Recorded revenue of $5,000 is unearned and was an advance from a client. This revenue will be earned in the next three months.

4. Salaries of $15,000 were paid in the first three months. However, $1,000 of salaries should be accrued as employees earned these salaries but will not be paid until the 4th month.

5. The owner provided services of $2,500, which were not invoiced or billed to clients in the 3rd month but were earned in accordance with the Revenue Principle.

6. Interest expense (Debit) needs to be recorded at the end of three months. The amount is $750 and should be recorded as a liability in Interest Payable (Credit) on the balance sheet. None of the $50,000 note has been paid to lenders yet. This note will be paid back at the end of 5 years.

7. Supplies of $1,500 must be expensed to Cost of Goods Sold (i.e., moved out of inventory) and a new accrual of Accounts Payable should be established for $2,000 for supplies ordered at the end of the 3rd month, and not booked to-date.

Questions

1. Prepare a post closing trial balance indicating the balance of revenue, expenses and capital accounts. Show the amounts in permanent and temporary accounts after the post closing entries.

Ferntree Experiences has two operating divisions, Winery and Restaurant. The two divisions have a marketing agreement to provide incentives to customers. The Winery division offers coupons good for meals at the restaurant and the restaurant division offers coupons good for wine tasting and purchases. Annual profits are $12 million. The two divisions meet the requirements for segment disclosures.

Before the transactions are considered, revenues and costs (in thousands of dollars) for the two divisions are as follows.

After adjusting appropriately for the effect of the marketing agreement, the revenues and costs are as follows.

The value of the coupons issued by the Restaurant Division was double the value of the coupons issued by the Winery Division.

What was the value of the coupons issued by the Winery Division? What was the value of the coupons issued by the Restaurant Division?

Lily Company began business on January 1, 2017. The company’s year-end is December 31. The following events occurred during the first year of operations: Apr. 1 Paid cash in the amount of $24,000 for a one-year rental contract on a building. July 1 Received $60,000 in cash from customers for services to be provided evenly during the next twelve months. Oct. 1 Acquired a building by borrowing $300,000 at 6% interest, principal and interest payable at maturity in ten years. Annual depreciation expense is $12,000.

1. Prepare the necessary adjusting journal entries at December 31 (10 points total). (Hint: Four adjusting entries are necessary.)

2. Bonus: For each of the adjusting entries, indicate which of the following type of entry was recorded: accrued expense, accrued revenue, deferred expense, or deferred revenue (2 points total).

(Central Limit Theorem) An insurance company serves 10 large customers. The insurance claim placed by each customer in a year is uniformly distributed between 0 and 100. Assume that the insurance claims from different customers are independent. Use the central limit theorem to approximately compute the probability that the total insurance claim placed by all customers in a year exceeds 625. Let Φ(x) denote the cumulative distribution function of a standard normal distribution, i.e. a normal distribution with mean 0 and variance 1. Express your answer in terms of Φ, and then use software of your choice to evaluate it. (Hint: Compute the mean and standard deviation of the total insurance claim placed in a year. By the central limit theorem, the total insurance claim is approximately normally distributed. Why?)

Customers arrive at a cafe every 2 minutes on average according to a Poisson process. There are 2 employees working at the bar providing customer service, i.e., one handling customer orders and another handling payments. It takes an average of 1 minute to complete each order (exponentially distributed). Based on the above:

f. What are the service time probability density and cumulative distribution functions?

g. What percentage of customer orders will be prepared in exactly 2 minutes?

h. What are the chances it will take between 3 and 4 minutes to prepare a customer’s order?

i. What is the average service rate for completing orders?

j. What is the average number of customers waiting to order?

k. What is the average number of customers at the cafe?

l. On average, how long does it take to serve a customer?

The manager of the I-85 Carpet outlet needs to be able to forecast accurately the demand of Soft Shag carpet (its biggest seller). If the manager does not order enough carpet from the carpet mill, customers will buy their carpets from one of the outlets many competitors. The manager has collected the following demand data for the past eight months.

1. Compute a three-month moving average forecast for months 6 through 9.

2. Compute a weighted three-month moving average forecast for months 6 through 9. Assign weights of 0.55, 0.33 and 0.12 to the months in sequence, starting with the most recent month.   

3. Compute an exponential smoothed forecast using α=0.4 for months 6 through 9 (the forecasting of the fifth month is 7160 ; F(5)= 7160)                                                     

d. Indicate the most accurate method between a, b and c, and explain why?

in b & c it says to assign like you have to follow equation, so they won't give in the schedule.

A movie box office gross is used to predict DVD Revenue. For a sample of 20 movies, an analysis of variance showed that b1 = 0.3224 and Sb1 = 0.0645.

1. At the 0.05 level of significance, is there evidence of a linear relationship between box office gross and DVD Revenue?

2. Construct a 95% confidence interval estimate of the population slope, B1.

Answer the following:

tSTAT=

Critical value(s) is(are)?

The 95% confidence interval is?

Solve for price elasticity of demand (E_d) and price elasticity of supply (E_s) between each pair of prices ($8 and $7, and $7 and $6) and determine the total revenue that could be earned at each price. Show your work!