Question 1

Lady Gaga Inc. is a company that manufactures and sells flashy women’s apparel. Recently, the company’s budget committee completed preliminary work on its master budget. Based on management's sales forecast, required production for the next three months is budged to be as follows:

Every unit sold is produced using 50 centimeters (0.5 meters) of fabric, which is purchased in one meter-length rolls at an average price of $50 per meter. Management wants to maintain an ending inventory of fabric equal to 80% of next month’s expected production requirements (of fabric). These standards remain unchanged from the previous year.

Required: Prepare a direct materials budget for the three months ending July 31, excluding quarterly totals.

Question 2

Sherry's Shoes, Inc. has estimated the following sales in units for each of the next three quarters:

Management at Sherry's Shoes, Inc. wished to maintain an inventory of finished goods at the end of each quarter equal to 25% of the next quarter's expected sales. The finished goods on hand at the beginning of the budget period conformed to management's standard.

Required:

Prepare a production budget for the first two quarters of 2020, with total column.

On December 31, 2019, Akron, Inc., purchased 5 percent of Zip Company's common shares on the open market in exchange for $17,100. On December 31, 2020, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $95,000.

During the next two years, the following information is available for Zip Company:

At December 31, 2020, Zip reports a net book value of $280,000. Akron attributed any excess of its 30 percent share of Zip's fair over book value to its share of Zip's franchise agreements. The franchise agreements had a remaining life of 10 years at December 31, 2020.

1. Assume Akron applies the equity method to its Investment in Zip account:

1. What amount of equity income should Akron report for 2021?
2. On Akron’s December 31, 2021, balance sheet, what amount is reported for the Investment in Zip account?

1. Assume Akron uses fair-value accounting for its Investment in Zip account:

1. What amount of income from its investment in Zip should Akron report for 2021?
2. On Akron’s December 31, 2021, balance sheet, what amount is reported for the Investment in Zip account?

The December 31, 2019 statement of financial position of Howson Limited (Howson) showed Trade Accounts Receivable of $450,000 and a credit balance in Allowance for Doubtful Accounts of $45,000. During 2020, the following transactions occurred: Total service revenue of 2,000,000 was recognized of which 75% was billed on account; collections from customers totaled $1,300,000; accounts written off totaled $37,000; and previously written off accounts of $4,000 were collected.

Required

a) Journalize the 2020 transactions. (6 marks)

b) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 5% of trade accounts receivable, prepare the adjusting entry at December 31, 2020?
   c) Management of Howson wants to show the highest possible net income for the year ended December 31, 2020. The president states, “one of my competitors told me that using % of credit sales method in determining our bad debt expense would increase the Company’s net income. Our industry average % of 2.4% is very reflective of our bad debt experience.”

    Required:

     The president of Howson has two questions she would like addressed.

1. First, would you recommend Howson adopt this method. (2 marks)

2. Secondly, regardless of your recommendation in (i), what amount would the net book value of the Accounts Receivable show on Howson’s Balance Sheet if the method were adopted?

The Trial Balance of Nuqa Ltd is provided below

2020 2019

Bank Overdraft    60,000

Cash 29,000 0

Sales 1,200,000 1,150,000

Cost of Goods Sold 800,000 714,000

Insurance Expense 30,000 27,000

Wages Expense 120,000 121,000

Doubtful Debts Expense 5,000 4,000

Other Expenses 65,000 78,000

Accounts Payable 70,000 75,000

Accounts Receivable 90,000 88,000

Allowance for Doubtful Debts 10,000 11,000

Inventory 80,000 82,000

Accrued Wages 12,000 10,000

Prepaid Insurance 8,000 6,000

Plant & Equipment 550,000 600,000

Accumulated Dep. on Plant & Equip. 125,000 110,000

Loan Payable 150,000 130,000

Share Capital 200,000 200,000

Retained Earnings 10,000 0

Accumulated Losses 0 26,000

Additional Information

Depreciation was $28,000 in 2019 and $25,000 in 2020. Loss on disposal in 2020 was $15,000.

i)Calculate receipts from customers

ii)Calculate payments to suppliers

iii)Calculate payments to employees

iv)Calculate net investing cash flows

v)Calculate financing cash inflows

vi)Calculate net profit for 2020

vii)Reconcile net profit with operating cash flows, using the direct method.

viii)Use your answer for (vii) to suggest two ways in which the company could improve its operating cash flows by managing current assets and liabilities.

Anthony, one of your cousins, is operating a very successful luxury nail salon called An-Toe-Nail. Other than that, Anthony is also work part-time as a freelancer graphic designer.
In 2020, Anthony have the income from his designing job of $100k and the revenue from the An-Toe-Nail salon is $800k. During 2020, below are items that Anthony spend money on:

• Anthony purchased a new car in Jan 2020 which cost $60k. The car is his main vehicle for the year which he will use to drive to and from work.
• Employee salary: $300k in total, paying for 6 nail technicians, each $50k/year.
• Utilities cost: $10k
• Supplies (nail polishes, glitter, chemical, etc.): $10k
• Nail salon equipment: $50k. Anthony told you that these equipment need to be purchased new every year for some reason. Since the nail salon is a luxury one, he spent twice the money to buy this luxury equipment (the similar but lower quality equipment only cost $25k).

Anthony asks for your help in figuring out his taxable income for 2020 before the standard deduction. As a tax expert, you understand that what he means was to help him calculate his AGI.

1. What is Anthony Gross income in 2020? (Show calculation and explanation if needed)
2. What is Anthony Deduction for AGI in 2020? Show calculation and explanation. Answer without explanation will result in no credit
3. Provided that AGI = Total Gross income – Total Deduction for AGI. What is Anthony AGI for 2020?

A used old model testing machine was donated to a University by a company one year ago. It is expected that this machine will continue to serve its function for ten more years provided that a maintenance agreement is signed with another firm requiring 10 yearly payments of $9,000 each, with the first payment made now.

A new model can be leased for ten years.

The terms of lease include maintenance. For leasing the new model, a payment of $35,000 is due now and $40,000 will be due in 3 years.

Should the old model machine be replaced now, at MARR = 10%?

(i) Use present worth (PW) method.

(ii) Use incremental PW method.

(b) Use incremental IRR method.

The budget for the Manchester University Printing Company for 20X1 ​follows:

LOADING...

​(Click the icon to view the budget​ data.)

Edith Gable​, the sales​ manager, has placed a £24,000 bid on a particularly large order with a cost of £5,800 direct material and £6,200 direct labor. The customer informs her that she can have the business for £19,500​, take it or leave it. If GableGable accepts the​ order, total sales for 20X1 will be £1,110,450. Gable refuses the​ order, saying,​ "I sell on a​ cost-plus basis. It is bad policy to accept orders at below cost. I would lose £560 on the​ job."

Requirements

Requirement 1. Begin by computing the operating income without the​ order, then just the​ order, and finally with the order. ​(For amounts with a​ $0 balance, make sure to enter​ "0" in the appropriate​ cell.)

Requirement 2. Give a short description of a​ contribution-margin technique to pricing that Gable might follow to achieve a price of £24,000 on the order. The contribution approach essentially provides a measure of the decrease in immediate ______ that would result from rejecting an order. This is the ________  by rejecting the order. Traditional approaches to pricing__________

The pricing formula that Gable should routinely use if she hopes to achieve a price of £24,000 on the​ order:

Monetary policy focuses on adjusting the supply of money in the economy to manage inflation and unemployment. However, it is not without it's limitations. One of the limits is that by reducing interest rates, the FED seeks to stimulate borrowing and thus purchasing. However, is there a lower limit where if rate goes down any lower people don't borrow any additional money to buy things? Some countries have reached interest rates of zero (Japan and Finland) and even taken them into negative territory - yes, that means you actually pay back less than you borrow! Currently in the U.S. interest rates are at historic lows (and even were negative for a day or two late last year). Have we reached that point where lower rates have no effect on borrowing and spending? Economists call this a "Liquidity Trap." Is the United States entering a liquidity trap?

Salo inc. has assets in place that are financed through debt for $245,000,000 and equity for $53,000,000. At the moment the return on equity is 15% and the company keeps a constant debt-to-equity policy. The company plans to start a new project that will be managed separately from the other company's operations. The project has a 5-year life. The company needs to acquire new assets for $45,000,000. The company thinks to adopt a constant debt policy for this project and plans to raise a debt amount that is 1.4 the raised equity. In order to raise financial resources for the new project, Salo uses as lead underwriter Lindberg Bank, which charges a 3.6% spread to raise equity, and a 0% spread to raise debt. The new project will produce a constant expected net income of $2,500,000, the depreciation tax shield is as risky as the company's debt, while the project's assets are as risky as the company's assets in place. Also, the newly acquired assets will be depreciated straight-line. The corporate tax rate is 32% and the company can borrow at an interest rate of 3.55%.

(a) Calculate the new project's initial (time 0) cash flow, taking into account all side effects (that is, issuance costs).

(b) What is the annual after-tax cash flow from assets from the new project at the end of each of the five years of its life?

(c) Knowing that the depreciation tax shield is as risky as the company's debt, what is the project's NPV?