You are auditing Lifetime Tours Ltd for the year ended 30 June 2018. The financial report will be approved and signed by the directors on 30 July 2018, with the auditor’s report signed on the same date. The audited financial report will be issued on 12 August 2018.

After 30 June 2018 the following information came to light:

1. On 1 July 2018, the government issued a travel warning to a number of African countries. Forty-five per cent of Lifetime Tours’ business comes from running adventure tours in the countries mentioned in the warning.

2. On 15 July 2018, one of Lifetime Tours’ clients, Jungle Adventures, went into liquidation. Jungle Adventures purchased travel packages in bulk. A letter from the liquidator dated 30 July 2018 indicated that creditors were likely to receive ‘$0.10 in the dollar’. At 30 June 2018, Jungle Adventures owed Lifetime Tours $1 245 285 and Lifetime Tours had provided for 10 per cent of the amount owed as a doubtful debt.

3. On 9 August 2018, a bus transporting a Lifetime Tours tour group in New Zealand crashed. Some passengers on board, including the Lifetime Tours guide, and the driver had minor injuries. Lifetime Tours is concerned about the negative publicity relating to the crash.

1. REQUIRED

For each situation above, assess the type of subsequent event and how each would impact Lifetime Tours’ financial report for the year ended 30 June 2018, if at all

1. Horizontal Analysis
   1. Compute the difference in each line item from 2018 to 2019.
   2. Using 2018 as a base year, determine the change and percentage change in each line item from 2018 to 2019.
   3. Did sales to customers increase or decrease from 2018 to 2019?
   4. Did net income increase for decrease from 2018 to 2019?
   5. What line item(s) is (are) driving the differences between sales to customers and net income from 2018 to 2019?
2. Vertical Analysis
   1. Compute each line item as a percentage of sales for 2018 and 2019.
   2. Which line items makes up the largest proportion of sales in 2018 and 2019? (Keep in mind that some of the items like gross profit and earnings before provision for taxes on income are subtotals.)
   3. Comment of any changes in the income and expenses as a percent of sales from 2018 and 2019.

Question 2

KOL Limited purchased a machine on 1 January 2018 at $500,000. It has an expected useful life of 5 years and an estimated salvage value of $50,000. It is also expected that the machine can run for 30,000 hours. For the year ended 31 December 2018, KOL has used the machine for 4,000 hours.

KOL has another equipment with the following data on 31 December 2018.

Cost $260,000

Carrying amount $200,000

Fair value less costs to sell $180,000

Value-in-use $175,000

KOL has a shop in which it carries out retail business. In the year ended 31 December 2018, it had a sale of $79,644 and net income of $5,584. The carrying amount of the shop on 31 December 2018 was $125,717.

Required:

a. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using straight-line method.

b. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using activity-based method.

c. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using double declining-balance method.

d. For the machine, calculate the depreciation expense for the year ended 31 December 2018 using sum-of-the-years’-digits method.

e. Discuss when a company should perform an impairment review for a long-lived tangible asset, and when it is impaired.

f. Determine the impairment loss for the equipment on 31 December 2018

g. Compute the asset turnover for the shop.

h. Compute the profit margin on sales for the shop.

i. Compute the return on assets for the shop.

On January 1, 2018, the following information was drawn from the accounting records of Carter Company: cash of $800; land of $3,500; notes payable of $600; and common stock of $1,000.

Required

a. Determine the amount of retained earnings as of January 1, 2018.

b. After looking at the amount of retained earnings, the chief executive officer (CEO) wants to pay a $1,000 cash dividend to the stockholders. Can the company pay this dividend?

c. As of January 1, 2018, what percentage of the assets were acquired from creditors?

d. As of January 1, 2018, what percentage of the assets were acquired from investors?

e. As of January 1, 2018, what percentage of the assets were acquired from retained earnings?

f. Create an accounting equation using percentages instead of dollar amounts on the right side of the equation.

g. During 2018, Carter Company earned cash revenue of $1,800, paid cash expenses of $1,200, and paid a cash dividend of $500. (Hint: It is helpful to record these events under an accounting equation before preparing the statements.)

g-1. Prepare an income statement dated December 31, 2018.

g-2. Prepare a statement of changes in stockholders’ equity dated December 31, 2018.

g-3. Prepare a balance sheet dated December 31, 2018.

g-4. Prepare a statement of cash flows dated December 31, 2018.

j. What is the balance in the Revenue account on January 1, 2019?

Complete and submit the assignment in an EXCEL file.

Full credit is earned only if the formulas for the calculations is evident in the spreadsheet

She Shed. Corp was organized in 2017. These business events occurred during the year, affecting intangible assets.

1.    Purchased a license for $20,000 on July 1, 2017. The license gives She Shed exclusive rights to sell its sheds in the tri-state region and will expire on July 1, 2025.

2.    Purchased a patent on January 2, 2018, for $40,000. It is estimated to have a 5-year life.

3.    Costs incurred to develop an exclusive Internet connection process as of June 1, 2018, were $45,000. The process has an indefinite life.

4.    On April 1, 2018, She Shed. purchased a small circuit board manufacturer for $350,000. Goodwill recorded in the transaction was $90,000.

5.    On July 1, 2018, legal fees for successful defense of the patent purchased on January 2, 2018, were $11,400.

6.    Research and development costs incurred as of September 1, 2018, were $75,000.

(a) Prepare the journal entries to record all the entries related to the patent during 2018.

(b) At December 31, 2018, an impairment test is performed on the license purchased in 2017. It is estimated that the net cash flows to be received from the license will be $13,000, and its fair value is $7,000.

Compute the amount of impairment, if any, to be recorded on December 31, 2018.

(c) What is the amount to be reported for intangible assets on the balance sheet at December 31, 2017 and December 31, 2018?

Corporation Income Statements (excerpt)

(dollars in millions) 2019 2018 Sales to customers $71,890 $70,074 Cost of products sold 21,685 21,536 Gross profit 50,205 48,538 Selling, marketing and administrative expenses 19,945 21,203 Research and development expense 9,095 9,046 In-process research and development 29 224 Interest income -368 -128 Interest expense, net of portion capitalized 726 552 Other (income)expense, net 484 -2,064 Restructuring 491 509 Earnings before provision for taxes on income 19,803 19,196 Provision for taxes on income 3,263 3,787 Net earnings $16,540 $15,409 Horizontal Analysis Compute the difference in each line item from 2018 to 2019. Using 2018 as a base year, determine the change and percentage change in each line item from 2018 to 2019. Did sales to customers increase or decrease from 2018 to 2019? Did net income increase for decrease from 2018 to 2019? What line item(s) is (are) driving the differences between sales to customers and net income from 2018 to 2019? Vertical Analysis Compute each line item as a percentage of sales for 2018 and 2019. Which line items makes up the largest proportion of sales in 2018 and 2019? (Keep in mind that some of the items like gross profit and earnings before provision for taxes on income are subtotals.) Comment of any changes in the income and expenses as a percent of sales from 2018 and 2019.