Sharkey’s Fun Center contains a number of electronic games as well as a miniature golf course and various rides located outside the building. Paul Sharkey, the owner, would like to construct a water slide on one portion of his property. Mr. Sharkey gathered the following information about the slide:

1. Water slide equipment could be purchased and installed at a cost of $360,000. According to the manufacturer, the slide would be usable for 12 years after which it would have no salvage value.
2. Mr. Sharkey would use straight-line depreciation on the slide equipment.
3. To make room for the water slide, several rides would be dismantled and sold. These rides are fully depreciated, but they could be sold for $97,500 to an amusement park in a nearby city.
4. Mr. Sharkey concluded that about 50,000 more people would use the water slide each year than have been using the rides. The admission price would be $3.90 per person (the same price the Fun Center has been charging for the old rides).
5. Based on experience at other water slides, Mr. Sharkey estimates that annual incremental operating expenses for the slide would be: salaries, $84,000; insurance, $4,700; utilities, $13,500; and maintenance, $10,300.

Required:

1. Prepare an income statement showing the expected net operating income each year from the water slide.

2-a. Compute the simple rate of return expected from the water slide.

2-b. Based on the above computation, would the water slide be constructed if Mr. Sharkey requires a simple rate of return of at least 13% on all investments?

Yes

No

3-a. Compute the payback period for the water slide.

3-b. If Mr. Sharkey accepts any project with a payback period of five years or less, would the water slide be constructed?

Yes

No

ACCOUNTING INTERMEDIATE 2 On 1st January 2014 Alex company dealers of electronic products purchased a building for $8,000,000. Its estimated useful life at that date was 20 years and the company applies straight line depreciation method. On 31st December 2018, the government launched a plan to construct a flyover adjacent to the building and the related construction reduced the access to the building due to the inability to park and enter to the building. Due to this reason the value for the building decreased. The company estimated that they can sell the building for $4,700,000 but it has to incur a cost of $205,000. Alternatively, if it continues to use it the present value of the net cash flows that the building would generate is $5,200,000. In 2019 the government constructed a service road parallel to the highway which improved the recoverable amount to $6,000,000. The depreciation for the year 2019 is $440,000 Calculate the carrying amount, recoverable amount and the necessary journal entries for the above scenario. You are required to:

A.Calculate accumulated depreciation & carrying value as at 31st Dec 2018, applying IAS 36.

B. Calculated recoverable amount & Impairment loss as at 31st Dec 2018 applying IAS 36.

C. Record relevant journal entries as at 31st Dec 2018 applying IAS 36 and amount to be recognized in statement of financial position.

D. Calculated carrying amount and amount of appreciation in building as at 31st Dec 2019 applying IAS 36.

E. Record relevant journal entry for regain in the value of impaired asset as at 31st Dec 2019 applying IAS 36.

F. A customer has made a claim against Alex Company for injury suffered following the purchases and use of a defective electronic product. Legal advisers have confirmed that Alex Company will probably have to pay financial compensation of $50,000 to the customers. In turn, Alex Company has made a counter claim against the suppliers of the defective products for $50,000 and believes it is probable that its claim against the supplier will be successful. Justify with reasons what adjustments, if any, should be made by Alex Company in the financial statements.

The Shoe King

You are the owner and manager of in the beautiful Horizon Mall, just outside of Schaumburg, Illinois. You purchased it from Mr. Bundy on December 31, 2018, for $805,000.

For the year 2019, the average price of a pair of shoes that you sold was $80 and over the year, you averaged selling 1,800 pairs per month.

For the shoes that you sold, you paid your suppliers $950,400.

As part of the sales deal, and so you can continue to use the valuable Al Bundy name, you pay Mr. Bundy a royalty of five percent of all sales.

You pay yourself $65,000 per year. You have 10 employees who average $40,000 per year in salary

The payroll taxes and benefits total 15 percent of all salaries.

The rent and other mall services provided (e.g., security) cost $5,000 per month. Electric costs are $2,100 per month, while your phone and internet access cost $900 per month (total for both).

Advertising efforts were distributed over three media. The store has a billboard near the mall that costs $1,000 per month. Sales announcements and coupons were delivered via direct mail at a cost of $2,000 per month. You spent that same amount ($2,000 per month) for radio advertising.

Other costs include:

Insurance $500 per month

Accounting/legal $1,000 per month

Office supplies $1,250 per month

During the year, you became concerned about your profitability. Hence, you hired a consultant to evaluate your operations. She was paid $10,000.

1) Construct the income statement for 2019. Make sure to include a column showing percentage of sales.

2) What is the gross profit in dollars and on a percentage basis?

            -$777,600 -45%

3) What is the operating profit?

4) What was the breakeven sales level for 2019?

5) What was the ROI in 2019?

6) For one pair of Johnston & Murphy Oxford shoes, you pay the supplier $80. Your retail on that pair of shoes is $155. What is your gross profit in dollars on that pair of shoes? What is your markup in dollars? What is your gross profit percentage? What is your markup percentage?

7) Suppose your cost of goods sold in dollars was reduced by 10 percent. What would your gross and operating profits be?

8) In 2020, you project a 20 percent increase in sales. You also plan to give a 6 percent wage increase to your employees, although you intend to pay yourself the same amount as in 2019. The other operating costs remain the same, except that you do not expect to hire the consultant again. The royalty rate remains the same. The cost of goods sold is projected to be 49.50%. What is the projected gross profit in dollars for 2020? What is the projected operating profit in dollars?

Case Study: Heinkel-Fishbein, Inc.

            Heinkel-Fishbein is a large importer and distributor of robotic toys. The toys are stored in the warehouse and are shipped to a several large retail chains at a unit price of $60. The retail stores sell the toys at $99.95, or at discounted prices on sale days. There is almost no possibility in the near future of changing the prices at which Heinkel-Fishbein supplies the retail stores.

            Considering one toy, identified as SKU 2600, the process consists of receiving the boxes as shipped by the manufacturer, and storing in the warehouse to be divided and shipped to the stores as per shipment schedule. The cost factors are described as follows. The supplier has a discount schedule, and the prices are lower for a higher volume of order, or shipment. Two suppliers are considered here, and their discount schedules are shown in Tables C1 and C2, respectively. The inventory holding cost remains the same for both suppliers at 0.25 (25%) of the purchase price. The Ordering Cost (Setup Cost) is also the same at $60. The annual demand for SKU 2600 is 24,000 units[1]. The reason for having alternate suppliers is that the contract is up for review for the next year, and the company needs to determine the best policy.

            Under the current contract, the toys are produced and supplied by Schneider Gmbh in Germany, with an annual contract for regular and timely supply. The discount schedule for the contract, and the prices related to this contract, are shown in Table C1. An alternate set of prices and discounts has been obtained from Yamaguchi in Japan, as shown in Table C2. Heinkel-Fishbein must consider the two set comparatively for the next year.

Table C1.

Table C2.

            From the pricing tables, as given above, it is evident that the Yamaguchi offer is attractive with respect to pricing based on volume. However, there are some concerns. The lead- time for delivery from Germany is typically 10-12 working days, or 2 weeks. The lead-time for delivery from Japan is at least 4 weeks. This places a pressure on Heinkel-Fishbein to stock a larger number of units to account for the variability of demand in lead-time and the possibility of a stockout. The contract requirements with the retail stores state that in the case of a stockout, Heinkel-Fishbein must pay a penalty of $100 per unit of stockout. Typically, a stockout occurs in periods of high demand, such as holidays and special demand periods. There is a need to define the inventory policy for the coming year.

[1] Similar calculations would apply to all other SKUs.

Questions

1. Considering costs alone, what are the respective costs of the different ordering policies? PLEASE INCLUDE CALCULATIONS!

2. In a JIT environment, a typical approach is to consider annual demand as the quantity of an order, with prices that apply to this quantity. Comment on this approach in this context.

3. Comment on the cost of stockouts, and the need for avoiding stockouts in terms of the costs. What does it do to inventory policy?

Cure Limited prepares its financial statements to 31 December each year. The company is involved in the pharmaceuticals industry and its operations are divided into two cash generating units, ‘EU’ and ‘Non EU’. Two issues need to be resolved before the financial statements for the year ended 31 December 2018 can be finalised.

Issue 1:

The following information is available in relation to the two cash generating units.

Requirement

Calculate whether an impairment loss arises for either of the two cash generating units, ‘EU’ and ‘Non EU’and Allocate any impairment loss arising in accordance with IAS 36 Impairment of Assets.

Issue 2:

On 1 January 2017, Cure Limited entered into a contract to have a new distribution depot built at a cost of £15,000,000. In order to finance the cost of the contract, Cure Limited borrowed £15,000,000 on 1 January 2017 at an interest rate of 6% per annum. The borrowings were drawn down in full on 1 January 2017.

While the depot was expected to be completed by 31 March 2018, it was delayed as a result of a strike by workers during the period 1 November 2017 to 28 February 2018. During the period of the strike, no building work was undertaken. Cure Limited invested available funds from 1 November 2017 to 28 February 2018, earning interest income of £24,000. The depot was completed on 31 May 2018 and the loan was repaid on 30 June 2018.

Requirement                                                                                                                           

Calculate and explain how this transaction should be accounted for by Cure Limited in accordance with extant international accounting standards.

Exercise 22.7 Closing an Unprofitable Business Unit (LO22-1, LO22-2, LO22-3, LO22-5) Shown as follows is a segmented income statement for Drexel-Hall during the current month. Profit Centers Drexel-Hall Store 1 Store 2 Store 3 Dollars % Dollars % Dollars % Dollars % Sales $ 1,800,000 100 % $ 600,000 100 % $ 600,000 100 % $ 600,000 100 % Variable costs 1,080,000 60 372,000 62 378,000 63 330,000 55 Contribution margin $ 720,000 40 % $ 228,000 38 % $ 222,000 37 % $ 270,000 45 % Traceable fixed costs: controllable 432,000 24 120,000 20 102,000 17 210,000 35 Performance margin $ 288,000 16 % $ 108,000 18 % $ 120,000 20 % $ 60,000 10 % Traceable fixed costs: committed 180,000 10 48,000 8 66,000 11 66,000 11 Store responsibility margin $ 108,000 6 % $ 60,000 10 % $ 54,000 9 % $ (6,000 ) (1 ) % Common fixed costs 36,000 2 Income from operations $ 72,000 4 % All stores are similar in size, carry similar products, and operate in similar neighborhoods. Store 1 was established first and was built at a lower cost than were Stores 2 and 3. This lower cost results in less depreciation expense for Store 1. Store 2 follows a policy of minimizing both costs and sales prices. Store 3 follows a policy of providing extensive customer service and charges slightly higher prices than the other two stores. Top management of Drexel-Hall is considering closing Store 3. The three stores are close enough together that management estimates closing Store 3 would cause sales at Store 1 to increase by $60,000, and sales at Store 2 to increase by $120,000. Closing Store 3 is not expected to cause any change in common fixed costs. Compute the increase or decrease that closing Store 3 should cause in: a. Total monthly sales for Drexel-Hall stores. b. The monthly responsibility margin of Stores 1 and 2. c. The company’s monthly income from operations.

The following is a series of transactions for Berkeley City. Indicate how Berkeley reports each transaction within the government-wide financial statements and then on the fund financial statements. Assume that Berkeley follows a policy of considering resources as available if they will be received within 60 days. Incurred Liabilities are assumed to be claims to current resources if they will be paid within 60 days.

1. Borrowed money by issuing a 20-year bond for $5 million, its face value. This money is to be used to construct a highway around Berkeley.

2. Transferred cash of $110,000 from the general fund to the debt service funds to make the first payment of principal and interest on the bond in (1).

3. Paid the cash in (2) on the bond. Of this total, $80,000 represents interest; the remainder reduces the principal of the bond payable.

4. Completed construction of the highway and paid the entire $5 million.

5. The highway (in 4) is expected to last 30 years. However, the government qualifies to use the modified approach, which it has adopted for this system. A $400,000 cost is incurred during the year to maintain the highway at an appropriate, predetermined condition. Of this amount, $300,000 was paid immediately but the other $100,000 will not be paid until the sixth month of the subsequent year.

6. Received lights for the new highway donated from a local business. The lights are valued at $300,000 and should last 30 years. The modified approach is not used for this network of infrastructure. Straight-line depreciation is applied using the half-year convention.

7. Agreed to stop collecting property taxes from the Charlie Company for eight years in exchange for the promise that a small manufacturing plant will be built within Berkeley to generate capital investment and new job opportunities for the residents.

8. Recorded cash revenues of $3 million from the local subway system and made salary expense payments of $400,000 to its employees.

9. Opened a solid waste landfill at the beginning of the year that will be used for 25 years. This year an estimated 5 percent of the capacity was filed. The city anticipates closure, and postclosure requirements will be $3 million based on current cost figures although no costs have been incurred to date.

Action Items

1. Read the article below: Information Systems and Internal Control.
2. Write: Develop a bulleted list of 2 issues or best practices that you identified based on your reading of this article and how it may impact you while performing in an accounting position.

Information Systems and Internal Control.:

G1.02 Key Risk Factors

Key risk factors for Information Systems and Internal Control include the following:

• Controls may be designed for processes that are later changed though the introduction of new systems, resulting in the subsequent failure of those controls.
• Automated controls may be turned off in an effort to reduce manual intervention, resulting in erroneous transactions being processed by the system.
• Business process owners and upper management may fail to take action to mitigate technology risks because such risks are not presented in a nontechnical business context.
• Auditors may fail to uncover critical control weaknesses due to a lack of understanding of the technologies used and the inherent risks associated with them.
• Laws and regulations may be unknowingly violated because of a lack of knowledge of how certain customer data is subject to a higher standard of protection.

G1.03 Background

The evolution of computer technology is remarkable. It is common today for office workers to have networked computers on their desks, mobile devices in their pockets, notebook computers to take with them on business trips, wireless connectivity to the office, and Internet and e-mail functionality built into all of these devices. The lower cost of hardware and the convenience of the technology have created an insatiable demand for computing solutions to fit the needs of business.

The rapid pace of change within the IS industry complicates the task of auditing information systems. New technologies often introduce new risks. Today's innovations can become obsolete tomorrow. For this reason, this chapter focuses on broad concepts of internal control within the IS environment. Although certain products are discussed here, internal auditors should gain a solid understanding of the IS environment within their company.

Internal audit departments have always had a chronic shortage of IS auditors, and this is unlikely to change anytime soon. Generally, IS professionals have not gravitated toward the internal audit profession because more challenging and financially rewarding opportunities exist in systems development, systems security, and database management. Due to supply and demand issues and limitations on the number of IS professionals who are well versed in control concepts like COSO and COBIT, internal audit departments cannot always attract sufficient talent. Because of this reality, chief audit executives must develop alternative means to ensure an appropriate level of IS audit coverage.

As the auditing profession continues to try to do more with less, technological advances may overwhelm those audit departments that have not prepared adequately. Computer viruses and other malicious code are being introduced on a weekly basis. Hackers now gain access to computer systems that were thought to be impervious. Million-dollar transactions are routinely carried out via the Internet. Companies are betrayed by employees who sabotage the systems they were entrusted to develop. Despite this gloomy assessment, chief audit executives have tools they can use to address the risks of the new technology.

The foundation for adequate audit coverage of IS risks is technological competence. If the audit department does not have such competence, or does not anticipate recruiting it in the near term, other alternatives must be considered. The chief audit executive may need to recruit from the company's existing IS expertise, such as a rotational assignment on specific audit engagements. By tapping the company's internal IS resources, the chief audit executive may be able to meet short-term audit requirements. Another alternative is to retain the services of an outside service provider, such as one of the Big Four accounting firms or a specialized professional services firm that does not perform financial statement audits. The latter can offer certain cost advantages as well as avoiding conflict of interest and independence issues. The cost of any such outsourcing, sometimes referred to as co-sourcing, will need to be balanced against the risks of the computing environment in question. Although the fees charged by such organizations may at first glance appear prohibitively expensive, given the high cost of training and retaining professionals with hard-to-find skills that must be continuously maintained, it is often cheaper to co-source specific with third party providers than cultivate and maintain these skills internally. Audit departments can also better leverage the cost of bringing in these outside consultants by assigning an internal auditor as a liaison. The assigned internal auditor can expedite the gathering of evidence, thereby reducing the level of effort for the higher-paid consultant, while shadowing these specialists to learn how to perform these technical audits internally.

Practitioner's Tip: Buying Computers

For prospective purchasers of desktop or notebook computers, making the right choice has generally come down to two decision points. The first is whether to buy a top-of-the-line brand name or one that is known more for its economical pricing. When making such a decision, one should carefully weigh the total cost of ownership (TCO). You may save money on the initial purchase, but support issues also factor into the cost equation. If you are a large shop and will require dozens if not hundreds of computers, then support can become a very significant issue, especially when you consider productivity losses when auditors cannot access the data on their desktop or notebook computers. Compatibility between devices can also become more problematic when dealing with lesser known second-tier machines. The second factor to consider is whether to lease or buy. More and more, organizations are choosing to lease computers in order to remain technologically up to date. This is not just a matter of wanting to have cutting-edge equipment. There are also many practical reasons for periodically refreshing equipment. As new business systems and client software are rolled out, incompatibilities with older equipment can result in serious performance issues, including system response time and stability. It is usually asking for trouble to load just-released software on a four- to five-year-old machine. Again, this is where TCO comes into play. If you try to squeeze an extra two years of life out of that three-year-old machine, you will pay several times that amount in loss of productivity and increased support costs.

For this assignment, you will

(1) Find a chart showing the economic growth of an economy in long run.

(2) Briefly discuss the history of economic growth of that economy.

(3) Finally talk about the factors driving economic growth.

Please find below the sample assignment.

Hong Kong GDP per capita (1961 - 2018)

In general, we observed the rising trend of GDP per capita of Hong Kong from 1961 to 2018. Modern history of economic growth of Hong Kong can be broadly divided into 3 phases.

1940s to early 1990s - Rapid industrialization

industrialization accelerated after 1945 with the inflow of money from Mainland China. Immigrants from Mainland China developed textile industry of Hong Kong. Hong Kong’s industry was founded in the textile sector in the 1950s and gradually diversified to clothing, electronics, plastics and other labor-intensive production mainly for exports.

Textile sector was the prominent industry of Hong Kong in 1950s

Early 1990s to early 2000s – Surge in service sector and reintegration into Mainland China

Manufacturing moved out of Hong Kong during the 1980s and 1990s, there was a surge in the service sector. Hong Kong’s economy transformed from manufacturing to services. Furthermore, Hong Kong’s integration with the mainland accelerated and Hong Kong became the main provider of commercial and financial services. From 1978 to 1997, trades between Hong Kong and the PRC grew at an average rate of 28% per annum.

Handover of Hong Kong from UK to China in 1997. This highlights the integration of the economy of Hong Kong with Mainland China.

Early 2000s to 2010s - Deepened reliance on China

Over the recent 20 years, Hong Kong economy has transformed from enhanced integration with China to deepened reliance on China. The four key industries, including financial services, tourism, trading and logistics heavily depend on the businesses with Mainland China. Hong Kong can maintain its economic growth during the global financial crisis primarily due to the help from Mainland China.

Is the economy of Hong Kong nowadays too reliant on the help from Mainland China?

Key factors driving economic growth:

Institutions: Low taxes, lax employment laws, absence of government debt, and free trade are all pillars of the Hong Kong experience of economic development.

Education: The government also pursued an ambitious public education program. By 1966, 99.8% of school-age children were attending primary school, and free universal primary school was provided after 1971. Secondary school provision was expanded in the 1970s, and from 1978 the government offered compulsory free education for all children up to the age of 15.

The current cost of graduate school tuition is $18,093 per year. The cost of tuition is rising at 7% per year. You plan to attend graduate school for 3 years starting 2 years from now.

How much do you have to invest today if your savings account earns 3.90% APR compounded annually to just fund your tuition?