Long-term investments and the time value of money

On January 1, 2019, JP Chemical Company purchases $10,000 of 6% bonds in American Airline at a price of 95. JP Chemical Company intends to hold the bonds until the maturity date on January 1, 2029. The interest dates are January 1 and July 1. JP Chemical Company amortizes any discount or premium using the straight-line method. The fiscal year end of JP Chemical Company is December 31.
 
Required:
 
Prepare the journal entries on:
1. January 1, 2019
2. July 1, 2019
3. December 31, 2019
4. January 1, 2020
 
Explanations are required.

1.Which statement best describes the U.S. framework for determining if an individual who is not a U.S. citizen will be treated as a resident alien for U.S. tax purposes?

Multiple Choice A person must have a green card and meet a substantial presence test to be treated as a resident alien for U.S. tax purposes. A person must have a green card to be treated as a resident alien for U.S. tax purposes. A person must meet a substantial presence test to be treated as a resident alien for U.S. tax purposes. A person with a green card will always be treated as a resident alien for U.S. tax purposes, while a person without a green card may be treated as a resident alien if she meets a substantial presence test.

2.

Boca Corporation, a U.S. corporation, reported U.S. taxable income of $1,000,000 in the current year. Boca also received a dividend of $100,000 from the corporation's 100 percent owned subsidiary in Italy. The dividend qualifies for the 100 percent dividends received deduction. The Italian government imposed a withholding tax of $5,000 on the dividend. Compute Boca Corporation's net U.S. tax liability for the current year.

Multiple Choice

• $231,000

• $227,000

• $210,000

• $205,000

3.

Which of the following foreign taxes is not creditable for U.S. tax purposes?

Multiple Choice

• Direct taxes paid by a U.S. corporation on income earned in a foreign branch.

• Income taxes paid to a foreign taxing authority on a dividend received by a U.S. corporation from its 100 percent owned foreign subsidiary.

• Withholding taxes imposed on a dividend received by a U.S. corporation from its 100 percent owned foreign subsidiary.

• All of these taxes are creditable.

4.

Orono Corporation manufactured inventory in the United States and sold the inventory to customers in Canada. Gross profit from the sale of the inventory was $300,000. Title to the inventory passed FOB: destination. How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year?

Multiple Choice

• $300,000

• $150,000

• $0

• The answer cannot be determined with the information provided.

Growth Rate Calculations. U.S. GDP in 2018 was $20.9 trillion, and U.S. GDP/person in 2018 was about $62,500, while China’s GDP in 2019 is projected to be $14.2 trillion (converted to US$ at market exchange rates), and China’s GDP/person in 2019 is projected to be $19,520 (converted to US$ at PPP-adjusted exchange rates).

a) Suppose that U.S. real GDP continues to grow at its recent pace of 2.3%/yr. What will U.S. real GDP (in 2018$) be in 2028? (Recall that if a series y grows at a constant rate g, then yt = y0 egt, or equivalently, yt = ys eg(t-s).)

b) Suppose instead that U.S. real GDP grows at its longer-run historical rate of 3.25%/yr. What would U.S. real GDP (in 2018$) be in 2028 in that case?

c) Suppose that U.S. real GDP/person continues to grow at its recent pace of 1.6%/yr. What will U.S. real GDP/person (in 2018$) be in 2028?

d) Suppose instead that U.S. real GDP/person grows at its longer-run historical rate of 2.1%/yr. What would U.S. real GDP/person (in 2018$) be in 2028 in that case?

e) Suppose that China’s real GDP continues to grow at its historical average rate of 9.1%/yr. What will China’s real GDP (in 2019US$) be in 2029?

f) Suppose that China’s real GDP/person continues to grow at its historical average rate of 8.2%/yr. What will China’s real GDP/person (in PPP-adjusted 2019US$) be in 2029?

g) If the U.S. grows at the same rate as in part a, and China grows at the same rate as in part e, in how many years from now will China’s real GDP be equal to the U.S.’s real GDP? (Let’s ignore the difference between 2018US$ and 2019US$ and just assume they are the same.)

h) If the U.S grows at the same rate as in part c and China grows at the same rate as in part f, in what year will China’s standard of living be equal to the U.S.’s standard of living? (Again, ignore the difference between 2018US$ and 2019US$.)

Assume it is Sept 1, 2020. Company ABC using AUD as functional currency is concerned about currency risk. The company imports goods from the US and sells them in the Australian market with expected revenues for 2021 of AUD 11.5 million. The contract price for these goods from US suppliers is USD 6.5 million payable in one payment on March 1, 2021. The company has a target profit margin (profit as percentage of revenue) of 20%. The minimum acceptable profit margin below which the company will have difficulties servicing its debt is 15%. The spot AUD/USD rate on Sept 1, 2020 is 0.70. The Australian and US six-month interest rates are 2.5% and 2.0%, respectively. Furthermore, the following option contracts expiring on March 1, 2021 are currently available:

Strike AUD/USD rate           Premium

AUDCall 0.73                        0.015

AUDCall 0.68                        0.021

AUDCall 0.70                        0.017

AUDPut 0.72                       0.0125

AUDPut 0.68                        0.008

AUDPut 0.65                        0.005

Based on this information and the knowledge you gained while studying the FRM unit, respond to the questions below. Give all your answers for profit margins and currency rates with 4 (four) decimal places Problem

1) What would be the profit margin of the company if the current spot rate is used? Problem

2) What is the AUD/USD currency rate at which the company achieves exactly its target rate? Problem

3) What is the critical AUD/USD currency rate for the company? Problem

4) Give two examples of situations in which the company may not need to hedge its currency risks with derivatives.

Copper Bottom Pot Company manufactures one product, The Big Pot. The company has the following standards per unit for the The Big Pot:

Standard quantity Standard price Standard cost

Direct materials 6.0 KGs $14 per KG $84

Direct labour 1.5 Hours $20 per hour $30

The following is recorded by the company for The Big Pot for January 2020:

• The company produced 600 units during the month

• A total of 4000 KGS of material were purchased at a cost of $52,000

• On Jan 1, 2020, there was no beginning inventory of materials on hand, 200 KGs of materials

  remained in the warehouse unused at the end of the month.

• The company employs 12 people to produce The Big Pot. In January, each worked an average of

  65 hours at an average of $21 per hour.

0. Required:

   1. For Direct Materials used in the production of The Big Pot:

      1. Calculate the DM price variance

      2. Calculate the DM quantity variance

      3. The materials were purchased from a new supplier who would like to enter into a long-term

         contract with the company, would you recommend the company enter into this contract? Explain based on your interpretation of the variances for materials.

1. For Direct Labour employed in the production of The Big Pot:

   1. Calculate the DL rate variance

   2. Calculate the DL efficiency variance

   3. In the past, the 12 people employed in the production of The Big Pot consisted of four

      experienced workers and eight inexperienced assistants. During January, the company experimented with shifting the labour mix to six experienced workers and six inexperienced assistants. Would you recommend the new labour mix continue? Explain based on your interpretation of the variances for labour.

Warren Buffett, the billionaire investor and chairman/CEO of Berkshire Hathaway, stated that "diversification is protection against ignorance”. Do you agree with his statement? Why or Why not?

You are a CEO of a healthcare organization. What factors should you consider when developing a consistent HIT strategy. Please answer this question in 200 words or less.

1. Discuss one fringe benefit. Is it taxable? If so, how is it taxed? What type of employee would get these benefits (i.e. CEO, CPA, Administrative Assistant)?