Case #1 – Sun Microsystems – Questions (pp. 92-95)

Sun Microsystems (trends, ratios stock performance) (LO3) Sun Microsystems is a leading supplier of computer-related products, including servers, workstations, storage devices, and network switches.*

In the letter to stockholders as part of the 2001 annual report, President and CEO Scott G. McNealy offered the following remarks:

Fiscal 2001 was clearly a mixed bag for Sun, the industry, and the economy as a whole. Still, we finished with revenue growth of 16 percent—and that’s significant. We believe it’s a good indication that Sun continued to pull away from the pack and gain market share. For that, we owe a debt of gratitude to our employees worldwide, who aggressively brought costs down— even as they continued to bring exciting new products to market.

The statement would not appear to be telling you enough. For example, McNealy says the year was a mixed bag with revenue growth of 16 percent. But what about earnings? You can delve further by examining the income statement in Exhibit 4. Also, for additional analysis of other factors, consolidated balance sheet(s) are presented in Exhibit 5 on page 94.

1. Referring to Exhibit 4, compute the annual percentage change in net income per common share-diluted (second numerical line from the bottom) for 1998–1999, 1999–2000, and 2000–2001.
2. Also in Exhibit 4, compute net income/net revenue (sales) for each of the four years. Begin with 1998.
3. What is the major reason for the change in the answer for Question 2 between 2000 and 2001? To answer this question for each of the two years, take the ratio of the major income statement accounts to net revenues (sales).

Cost of sales

Research and development

Selling, general and administrative expense

Provision for income tax

4. Compute return on stockholders’ equity for 2000 and 2001 using data from Exhibits 1 and 2.

Comprehensive Problem 2 (Continued)

Exhibit 4

5. Analyze your results to Question 4 more completely by computing ratios 1, 2a, 2b, and 3b (all from this chapter) for 2000 and 2001. Actually, the answer to ratio 1 can be found as part of the answer to question 2, but it is helpful to look at it again.

What do you think was the main contributing factor to the change in return on stockholders’ equity between 2000 and 2001? Think in terms of the Du Pont system of analysis.

6. The average stock prices for each of the four years shown in Exhibit 4 were as follows:

1998                11¼

1999                16¾

2000                28½

2001                9½

1. Compute the price/earnings (P/E) ratio for each year. That is, take the stock price shown above and divide by net income per common stock-dilution from Exhibit 4.
2. Why do you think the P/E has changed from its 2000 level to its 2001 level?

A brief review of P/E ratios can be found under the topic of Price-Earnings Ratio Applied to Earnings per Share in Chapter 2.

SMITH FAMILY'S 2018 TAX SCENARIO Joseph L. Smith (age 45, Social Security number 145-26-9210) and Rita M. Smith (age 43, Social Security number 142-46-5108) are husband and wife. They live at 1650 Belmont Avenue, Chicago, IL 60615. David is a self-employed CPA and Rita is a third grade teacher. They have two children: Blake (age 5, Social Security number 310-51-2108) and Amelia (age 3, Social Security number 314-62-8924). In 2018, Joseph earned $182,000 and Rita earned $46,000. The Smith family has medical coverage through the school system for which Rita works. As an employee, Rita had $9,500 of federal tax withheld, $2,300 of IL state tax withheld, and the required Social Security and Medicare taxes. Joseph has an office with business expenses for 2018 as follows: Item Amount Office Rent $24,000 Office Supplies $8,000 Internet Charges $1,2000 Phone System Charges $4,800 Advertising Expenses $1,800 Postage Charges $1,500 Audit/Tax Software Charges $20,000 Business Gifts $400 The advertising expenses included local newspaper advertisements, digital marketing, and direct marketing flyers. The business gifts were $40 gift certificates given to his 10 largest clients in appreciation for their business. Joseph purchased a 2017 Honda Civic in 2017. In 2018, he drove 24,000 business miles and 6,000 personal miles, and uses the standard mileage method for tax purposes. In 2018, Joseph made estimated quarterly federal tax payments of $18,000/quarter and estimated quarterly IL state tax payments of $3,000. All the payments were made within calendar 2018. Joseph also contributed $8,000 to his SEP account. Rita bought various supplies for her classroom, but did not closely track expenditures and thus only wants to take the allowed educator expenses deduction. Her teacher's license was also renewed in 2018 for $125. Blake and Amelia are both in day care at the Riley Day Care Center at 1325 Lake Street, Chicago, IL 60612 (EIN 36-2875647). They are only in day care for 9 months of the year (weekly charge of $240.00/week), because Rita does not work during the summer. In addition to the wages and expenses as detailed, the Smiths have the following documented income and expenses: Item Amount Interest income from CDs $1,800 Interest Income from Series EE $4,000 Government Bonds Mortgage Interest on Principal Residence $15,000 Property taxes on Residence $8,000 PMI Insurance Payments $3,000 Cash Charitable Contributions $2,500 Non-Cash Contributions (Used Clothing to Salvation Army) $350 The Smiths itemized deductions in 2017. The federal tax refund was $3,500 and the IL state tax refund was $600. In addition, the Smiths own rental property (a "two flat" in Chicago) which they have rented out for the entire year. Total rental income was $30,000. Rental property related expenses were as follows: Item Amount Mortgage Interest on Rental Property $13,000 Property Tax $9,000 Repairs on Rental Units $2,6000 Depreciation on Rental Units (using SL Depreciation) $3,500 Utilities $3,000 Landscaping $500

RCK Ltd issues a prospectus inviting the public to subscribe for 90 million ordinary shares of $2.00 each. The terms of the issue are that $1.00 is to be paid on application and the remaining $1.00 within one month of allotment.

Applications are received for 108 million shares during July 2018. The directors allot 90 million shares on 15 August 2018. All applicants receive shares on a pro rata basis. The amounts payable on allotment are due by 20 September 2018. By 20 September 2018 the holders of 18 million shares have failed to pay the amounts due on allotment. The directors forfeit the shares on 30 September 2018.

The shares are resold on 15 October 2018 as fully paid. An amount of $2.00 per share is received. The balance of forfeited shares is refunded on 20 October 2018.

DB Pty Ltd carries on a business with an annual turnover of $11million per annum. Towards the end of the income year ended 30 June 2018, the company incurred the following outgoings, all of which exclude GST:

1. Prepaid insurance expenses of $12,000 on 1 May 2018 for the period 1 May 2018 to 30 April 2019.
2. Prepaid employee bonuses totalling $120,000 on 1 June 2018 representing bonuses that would otherwise have been due for payment on 1 July 2018.
3. Prepaid advertising of $900 on 1 June 2018 for an online advertising campaign that will run for the next 10 months.

Required

Advise DB Pty Ltd how much, if any, of each of the payments would be tax deductible in the year ended 30 June 2018.

Duluth Ranch, Inc. purchased a machine on January 1, 2018. The cost of the machine was $36,500. Its estimated residual value was $11,500 at the end of an estimated 5-year life. The company expects to produce a total of 10,000 units. The company produced 1,350 units in 2018 and 1,800 units in 2019.


Required:

1. Calculate depreciation expense for 2018 and 2019 using the straight-line method.
2. Calculate the depreciation expense for 2018 and 2019 using the units-of-production method.
3. Calculate depreciation expense for 2018 through 2022 using the double-declining balance method.

Complete this question by entering your answers in the tabs below.

• Required A
• Required B
• Required C

Calculate depreciation expense for 2018 and 2019 using the straight-line method.

Champ Corporation has taxable income for 2018 of $20,000. For 2018, Champ had tax exempt interest of $6,000 and received $25,000 of proceeds from a term life insurance policy, paid to the corporation as a beneficiary by reason of the death of a corporate officer. The premium on the policy was $1000 for 2018. The corporation paid charitable contirbutions in 2018 of $7000 in excess of the amount allowed as an income tax deduction. Ignoring federal income taxes, what are Champ Corporations earnings and profits for 2018?

Question #20

The following information pertains to Hopson Co.'s pension plan:

• Actuarial estimate of projected benefit obligation at 1/1/18       $82,000
• Assumed discount rate (Interest rate)    10%
• Service costs for 2018   $23,000
• Pension benefits paid during 2018         $15,000

If no change in actuarial estimates occurred during 2018, Hopson's projected benefit obligation at December 31, 2018 was

Hopson's projected benefit obligation at December 31, 2018 was $

In 2017, NB Inc.'s federal taxable income was $242,000. Compute the required installment payments of 2018 tax in each of the following cases:

NB’s 2018 taxable income is $593,000.

NB’s 2018 taxable income is $950,000.

NB’s 2018 taxable income is $1,400,000.

What are the total installment payments for each?

Explain how the practice of medicine is becoming increasingly complex. What does it mean for the amount of information people working in clinical settings are expected to know? How can technology be used to educate and update employees on the changing requirements for healthcare professionals?

Back up your writing with terms and concepts from class readings. Remember, these same terms and concepts can be used in your Critical Thinking assignments and in the Portfolio Project, so use the discussion area as a place to practice applying terms and concepts to the situations being addressed.

You work in a chartered accounting firm and your partner, Sally Smith, has asked you to do some research and write a report to update her about the potential liability that auditors face as a result of the global financial crisis. The issue arose when a neighbour mentioned to Sally at the weekend that a global accounting firm has had a class action lodged against it over the collapse of Lehman Brothers. In your report talk about ASA701 Key Audit Matters and how this has changed the way auditors report