You are working on the audit of Birmingham Ltd (Birmingham), a clothing retailer, for the year ending 30 June 2017. You have reviewed the audit plan for the related accounts in the sales and collection cycle. The audit plan documents the relevant assertions and the detailed procedure you are to perform in relation to each of these assertions.

An extract from the audit plan is reproduced below:

Required

For each of the items 1 to 4 above:

(a) Indicate whether the audit procedure is a test of details (substantive test) or a test of controls.

(b) Indicate whether the audit procedure correctly addresses the given assertion.  

(c)   For those audit procedures that do not address the given assertion, state the appropriate assertion.  

A company is considering a 5-year project to expand production with the purchase of a new automated machine using the latest technology. The new machine would cost $200,000 FOB St. Louis, with a shipping cost of $8,000 to the plant location. Installation expenses of $15,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $44,000 at the end of the project. If the corporate tax rate is 28%, what is the after tax salvage cash flow for this new machine at the end of the project? (Answer to the nearest dollar.)

MACRS percentages for depreciation each year are as follows:

   Year      %

     1     14.29
     2     24.49
     3     17.49
     4     12.49
     5      8.93
     6      8.93
     7      8.93
     8      4.45

For retirement, you decide to deposit $2438 at the end of each year and you will increase your deposit by $135 per year. How much will you have at the end of 30 years if the bank pays 2% compounded annually?

The possibility of a power outage seems to grow every year because of demand and an aging infrastructure. What can/should companies do to mitigate this risk?

1. The current (year 0) price of the shares of Company XYZ is $50. There are 1 million shares outstanding. Next year (year 1)’s dividend per share is $2, which represents a 60% payout from earnings (net income). Investors expect a ROE of 20%, and a constant growth. (12 points)

1. What will be the dividend per share in year 2 and year 3? (2 points)

2. What is the current market value of the firm? (1 point)

3. What will be the value of the firm next year after the payout? (2 points)

Suppose that the company announces that it will increase its dividend from $2 per share to $4 per share next year (year 1), and that the extra cash needed will be financed by issuing new shares. However, total dividends after next year follow the old schedule.

4. What will be the price of the new shares that the firm issue in year 1? How many new shares will be issued? (2 points)

5. How much dividend will the old shareholders get in year 2? (2 points)

6. Calculate the old shareholder’s present value (today) of discounted future dividends, under the new policy. What should be the current stock price under the new policy? (2 points)

7. Comment on the important assumptions made in this calculation. How would your answer to f) change if the assumptions are changed? (1 points)

Looking for answers e, f, g

1. Lessee enters into a four-year lease of equipment and concludes that the agreement is a finance lease because the lease contains an option for Lessee to purchase the equipment at the end of the lease and the Lessee is reasonably certain to exercise that option. The arrangement provides the following:

Complete the following schedule to show the impact on the income statement and balance sheet.

• Prepare the journal entries at the time of the lease commencement and for Year 1 of the lease term.

Consider the following. a. What is the duration of a four-year Treasury bond with a 8 percent semiannual coupon selling at par?

b. What is the duration of a three-year Treasury bond with a 8 percent semiannual coupon selling at par?

c. What is the duration of a two-year Treasury bond with a 8 percent semiannual coupon selling at par? (For all requirements, do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

A 3.5years

B ? years

C ?years

At the beginning of the first year, the Olympic company issued 10,000 stock options to an executive at an exercise price of US $ 45 (convertible to 10,000 ordinary shares), provided that the executive met the performance requirements and served for 3 years. On the grant date, the estimated fair value of the stock option with an exercise price of $ 45 is $ 15. If the exercise price is $ 25, the estimated fair value of the option is $ 31. If the revenue of the Olympic company grows at an average annual rate of 15% within three years, the execution price will be reduced to $ 25.
In the first year, the company's earnings increased by 16%, and it is expected to continue to grow at this rate in the next two years. In the second year, the company's profit increased by only 3%, the company does not expect the profit target to be achieved. In the third year, the company's earnings increased by 4%. The supervisor completed three years of service and therefore met the performance requirements.

Required:

1. a) Prepare journal entries for Year 1 to Year 3 relating to compensation expense.

2. b) The executive exercised half of the share options on 3 January of Year 4. The executive did not exercise the remaining share options and the right is lapsed in Year 4. Prepare all journal entries for Year 4 relating to the share options.