1. The following differences enter into the reconciliation of financial income and taxable income of Abbott Company for the year ended December 31, 2020, its first year of operations. The enacted income tax rate is 20% for all years. Pretax accounting income $800,000 Excess tax depreciation (480,000) Litigation accrual 70,000 Unearned rent revenue deferred on the books but appropriately recognized in taxable income 60,000 Interest income from New York municipal bonds (20,000) Taxable income $430,000

1. Excess tax depreciation will reverse equally over a four-year period, 2021-2024.

2. It is estimated that the litigation liability will be paid in 2024.

3. Rent revenue will be recognized during the last year of the lease, 2024.

4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2024.

(c)   Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).

(d)   Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020.

Update the balance sheet above to reflect the transactions below, which occur on January 6, 2020

1. Buy $15,000 worth of manufacturing supplies on credit
2. Issue $85,000 in stock
3. Borrow $63,000 from a bank
4. Pay $5,000 owed to a supplier
5. Receive payment of $12,000 owed by a customer
6. Purchase equipment for $44,000 in cash
7. Pay $7,000 owed to a supplier

What is the final amount in Accounts Receivable?

Note: Transaction amounts are provided in dollars but the balance sheet units are thousands of dollars.

Please specify your answer in the same units as the balance sheet (i.e., enter the number from your updated balance sheet).

At the end of its fiscal year 2019, an analyst made the following forecast for ABC, Inc. (in millions of dollars):

ABC has a net debt of $823. Assume that free cash flow will grow at 4 percent per year after 2023. ABC had 300 million shares outstanding at the end of 2019, trading at $75 per share. Using a required return of 10 percent, calculate the following for ABC at the end of 2019 (You have to fill in the table below to show your working process):

1. The enterprise value                                                                          

[5 marks]

2. Equity value                                                                                       

[2 marks]

3. Equity value per share                                                                                   

[2 marks]

4. Based on your estimate, should investors buy the share of this company?

[1 mark]

The average age of CEOs is 56 years. Assume the variable is normally distributed, with a standard deviation of 4 years. Give numeric answers with 4 decimal places.

a) If one CEO is randomly selected, find the probability that he/she is older than 63. Blank 1

b) If one CEO is randomly selected, find the probability that his/her mean age is less than 57. Blank 2

c) If one CEO is randomly selected, find the probability that his/her age will be between 53 and 59. Blank 3

d) If 36 CEOs are randomly selected, find the probability that their mean age is between 53 and 59. Blank 4

e) Explain the reason the answers to c) and d) above are differen

Company C is a US C Corporation. It builds and operates energy plants that produce electricity. Country P has significant needs for energy, but it does not have the expertise or financial capability to borrow in the public markets to fund projects of this magnitude. Country P has determined that the best way to entice foreign power investors to invest, operate, and accept the risks inherent with this market is by offering a 10-year income tax holiday on profits derived from constructing and operating the power plant. This would also include any potential withholding taxes on distributing profits. By offering a tax holiday Country P will offer to pay a reduced rate to purchase the power produced by the power plant. In this way the local citizens will benefit by having electricity at a reduced rate. Company C is interested in pursuing this project and is now asking you to determine the US tax consequences of the operating results. You learn that the expected investment is $1B and that 95% of the investment would be funded by offering debt in the public market. Company C would set up a CFC in the Netherlands and subscribe the debt offering. The coupon rate on the debt will be 7%. Company C expects that the Operating Cash Flows in Country P to be 15% of the total investment. The total investment would be the sum of public borrowings plus Company C’s contribution to equity of $50M. Company C does not desire to leave excess cash flow in Country P due to the risks associated with that market and would like the flexibility to invest elsewhere in the world for other projects (i.e. the money is not needed in the US). Consequently, the Company wishes to assert permanent reinvestment under GAAP (ASC 740). The excess cash flow would go to an intermediate holding company in the Netherlands to service the interest expense on the public borrowing. Assume that the Netherlands does not have a tax and that the loan balance is not amortizing (i.e. interest only). Thus, the structure of entities is a U.S. Parent (USP), owning as a first tier CFC (CFC1), a Netherlands Company. CFC1 would be funded with a $50M investment in equity from USP. CFC1 would borrow $950M in the public market. CFC1 would then invest $1B into CFC2 as equity. CFC2 would operate in Country P.

a) Using Pre 2017 rates and rules assume that neither Sec. 904(c) look through nor check the box is available. What, if any, is the expected annual U.S. tax and the underlaying tax rate on the investment?

b) Using Pre 2017 rates and rules assume either 904(c) look through or check the box is implemented. What, if any, is the expected annual U.S. tax and the underlying tax rate on the investment?

c) Using Post 2017 Act rates and rules what, if any, is the expected U.S. tax and tax rate on the investment (rather than guessing what year in service the asset is in assume this is year 1). Further assume that the entity holding the debt has checked open the operating entity (i.e. its one aggregate calculation)

QUESTION 1

Ernest and his partner Mary run a second-hand bookshop. The business is incorporated under the name of Ketchum Ltd, and they are the only shareholders.

As the business is small they do not employ a full-time accountant, but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare             a first draft of the accounts for Ketchum Ltd for the year ending 31^st December 2019.

A list of closing balances reported in Ketchum Ltd’s statement of financial position as at 31^st December 2018 is set out below:

Further information:

1. The shop premises were acquired under a 50-year lease on 1^st January 2016 and are being depreciated to a zero residual value.
2. The fixtures and fittings were also bought on 1^st January 2016 and are being depreciated over 10 years to a zero residual value.
3. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings.
4. The business pays its insurance premium annually on 1^st July to cover the following twelve month period. This is the only prepayment as at 31^st December 2018.
5. The accrued expenses relate to the accountant’s fees for preparing last year’s accountants, paid in March 2019. This is the only accrual as at 31^st December 2018.
6. All profits earned are subject to a 20% corporate income tax paid on 31^st December of the year in which they are earned.

During the year to 31^st December 2019, the following transactions and events took place:

1. The business made cash sales of £107,375. It also made credit sales to internet retailers of £76,787.50.
2. Inventory costing £94,725 was bought during the year. All items were bought on credit. Suppliers were paid £96,437.50 over the course of the year.
3. The inventory of books as at 31^st December 2019 cost £34,375.
4. During the year some fixtures that had cost £2,500 when purchased were sold for £1,375. New fixtures were acquired for cash at a cost of £3,750 and are also being depreciated over 10 years to a zero residual value. No depreciation is charged in the year of disposal but a full year’s depreciation is charged in the year of acquisition.
5. The part-time shop assistant was paid wages of £13,625 over the year.
6. Receipts from credit customers totalled £68,162.50.
7. Electricity bills totalling £2,287.50 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2019 the bill for the quarter ended on 31^st January 2020 had not yet been received, but was estimated to be £862.50.
8. You have been told that the fees charged for preparing the accounts will be the same as last year. The bill will be sent out in March 2020.
9. The insurance premium of £1,125 for the year to 30^th June 2020 was paid during July 2019.
10. In December 2019 £10,000 was paid off the bank loan, and interest of £1,000 was paid on 31^st December 2019. Overdraft interest of £118.75 was charged and paid.
11. Administrative expenses of £1,581.25 were paid as they arose.
12. Ernest and Mary received directors’ wages of £1,250 per month each.

Required:

1. Using the information provided by Ernest and Mary, and Ketchum Ltd’s statement of financial position as at 31^st December 2018, prepare the following:
   1. A table summarising the effects of all transactions and events listed above on assets, liabilities, equity, revenue, and expenses of Ketchum Ltd.

Ernest and his partner Mary run a second-hand bookshop. The business is incorporated under the name of Ketchum Ltd, and they are the only shareholders.

As the business is small they do not employ a full-time accountant, but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare             a first draft of the accounts for Ketchum Ltd for the year ending 31^st December 2019.

A list of closing balances reported in Ketchum Ltd’s statement of financial position as at 31^st December 2018 is set out below:

Further information:

1. The shop premises were acquired under a 50-year lease on 1^st January 2016 and are being depreciated to a zero residual value.
2. The fixtures and fittings were also bought on 1^st January 2016 and are being depreciated over 10 years to a zero residual value.
3. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings.
4. The business pays its insurance premium annually on 1^st July to cover the following twelve month period. This is the only prepayment as at 31^st December 2018.
5. The accrued expenses relate to the accountant’s fees for preparing last year’s accountants, paid in March 2019. This is the only accrual as at 31^st December 2018.
6. All profits earned are subject to a 20% corporate income tax paid on 31^st December of the year in which they are earned.

During the year to 31^st December 2019, the following transactions and events took place:

1. The business made cash sales of £107,375. It also made credit sales to internet retailers of £76,787.50.
2. Inventory costing £94,725 was bought during the year. All items were bought on credit. Suppliers were paid £96,437.50 over the course of the year.
3. The inventory of books as at 31^st December 2019 cost £34,375.
4. During the year some fixtures that had cost £2,500 when purchased were sold for £1,375. New fixtures were acquired for cash at a cost of £3,750 and are also being depreciated over 10 years to a zero residual value. No depreciation is charged in the year of disposal but a full year’s depreciation is charged in the year of acquisition.
5. The part-time shop assistant was paid wages of £13,625 over the year.
6. Receipts from credit customers totalled £68,162.50.
7. Electricity bills totalling £2,287.50 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2019 the bill for the quarter ended on 31^st January 2020 had not yet been received, but was estimated to be £862.50.
8. You have been told that the fees charged for preparing the accounts will be the same as last year. The bill will be sent out in March 2020.
9. The insurance premium of £1,125 for the year to 30^th June 2020 was paid during July 2019.
10. In December 2019 £10,000 was paid off the bank loan, and interest of £1,000 was paid on 31^st December 2019. Overdraft interest of £118.75 was charged and paid.
11. Administrative expenses of £1,581.25 were paid as they arose.
12. Ernest and Mary received directors’ wages of £1,250 per month each.

Required:

1. Using the information provided by Ernest and Mary, and Ketchum Ltd’s statement of financial position as at 31^st December 2018, prepare the following:
   1. A table summarising the effects of all transactions and events listed above on assets, liabilities, equity, revenue, and expenses of Ketchum Ltd.

2. A statement of profit or loss for 2019.

3. A statement of cash flows for 2019.

4. A statement of financial position as at 31^st December 2019.

Show your workings.

The case narrative below will be used to answer the following question:

College Products

College Products is a division of a large manufacturing company. The company makes a variety of collegiate branded products, sold on campuses worldwide. Most employees are paid on an hourly basis. Employees receive yearly reviews to evaluate performance and to determine an appropriate pay increase. College’s payroll is processed by the corporate payroll department from input documents prepared by College. The following HR and payroll procedures are related to the hourly payroll employees at College.

Department supervisors initiate requests for additional employees by filling out a three-part employee requisition form. After a requisition is completed, the department supervisor signs it, files a copy by date, and gives the remaining two copies to the production supervisor. The production supervisor reviews and signs the copies and gives them to the HR manager. The HR manager reviews the request with the division controller. They both sign the requisition. The pay rate for the job also is determined at that time and included on the requisition. If the requisition is approved, the HR manager initiates hiring procedures by placing advertisements in local papers and announcing the opening internally. The HR manager and the supervisor interview the applicants together. They then evaluate the applicants and make a selection. The HR manager and the employee fill out the two-part wage and deduction form. The HR manager files a copy of the wage and deduction form and the personnel requisition by employee name. The remaining copies of each form are given to the division accountant.

The HR manager selects and reviews the records from the personnel file for employees who are due for their annual review. The HR manager puts some basic employee information on a three-part review form and gives it to the appropriate supervisor for evaluation. The supervisor completes and signs the form, files a copy, and gives the remaining copies to the production supervisor, who reviews and signs the evaluation. The production supervisor returns it to the HR manager. The HR manager reviews it with the controller. They assign a new rate and sign the review form, which is given to the division accountant.

The division accountant uses the new employee information and the employee review form to prepare payroll action notices. The accountant signs the payroll action notices and files them with the other related forms by date. Each week, a clerk in the corporate payroll department retrieves the payroll forms from the division accountant, checks the signature on all payroll action notices, and processes the payroll. The forms, checks, and reports are sent back to the division accountant. The division accountant refiles the forms and gives the checks to the production supervisor, who in turn distributes them to the employees.

Source: Cengage, LA, Dull, RB, & Gelinas, UJ 2014, Accounting Information Systems, Cengage Learning Australia, Melbourne.

Question. Alan Harrison has been recently appointed as the CEO of “College Products”. Three days after his appointment, he met with all middle managers and announced that College Products has to adopt a cost leadership strategy. All managers (including the HR manager) have been asked to come up with a plan in their department to adopt this strategy. In approximately 300 words suggest two changes that can be implemented in the above case study to align the process with cost leadership strategy.

College Products

College Products is a division of a large manufacturing company. The company makes a variety of collegiate branded products, sold on campuses worldwide. Most employees are paid on an hourly basis. Employees receive yearly reviews to evaluate performance and to determine an appropriate pay increase. College’s payroll is processed by the corporate payroll department from input documents prepared by College. The following HR and payroll procedures are related to the hourly payroll employees at College.

Department supervisors initiate requests for additional employees by filling out a three-part employee requisition form. After a requisition is completed, the department supervisor signs it, files a copy by date, and gives the remaining two copies to the production supervisor. The production supervisor reviews and signs the copies and gives them to the HR manager. The HR manager reviews the request with the division controller. They both sign the requisition. The pay rate for the job also is determined at that time and included on the requisition. If the requisition is approved, the HR manager initiates hiring procedures by placing advertisements in local papers and announcing the opening internally. The HR manager and the supervisor interview the applicants together. They then evaluate the applicants and make a selection. The HR manager and the employee fill out the two-part wage and deduction form. The HR manager files a copy of the wage and deduction form and the personnel requisition by employee name. The remaining copies of each form are given to the division accountant.

The HR manager selects and reviews the records from the personnel file for employees who are due for their annual review. The HR manager puts some basic employee information on a three-part review form and gives it to the appropriate supervisor for evaluation. The supervisor completes and signs the form, files a copy, and gives the remaining copies to the production supervisor, who reviews and signs the evaluation. The production supervisor returns it to the HR manager. The HR manager reviews it with the controller. They assign a new rate and sign the review form, which is given to the division accountant.

The division accountant uses the new employee information and the employee review form to prepare payroll action notices. The accountant signs the payroll action notices and files them with the other related forms by date. Each week, a clerk in the corporate payroll department retrieves the payroll forms from the division accountant, checks the signature on all payroll action notices, and processes the payroll. The forms, checks, and reports are sent back to the division accountant. The division accountant refiles the forms and gives the checks to the production supervisor, who in turn distributes them to the employees.

Source: Cengage, LA, Dull, RB, & Gelinas, UJ 2014, Accounting Information Systems, Cengage Learning Australia, Melbourne.

Question. Alan Harrison has been recently appointed as the CEO of “College Products”. Three days after his appointment, he met with all middle managers and announced that College Products has to adopt a cost leadership strategy. All managers (including the HR manager) have been asked to come up with a plan in their department to adopt this strategy. In approximately 300 words suggest two changes that can be implemented in the above case study to align the process with cost leadership strategy.

Assume that you are a newly appointed junior auditor in Ernst & Young, an auditing firm. After a 3month rigorous training on the job, you have been awarded the certificate of completion and is now ready to embark on your very first assignment. Today, your first job was to evaluate the audit evidence gathered by your team from Shinas Trading and see if they are reliable or not based on ISA 500. The following are the evidences gathered in various forms: a) You have been analyzing the cash balance of Shinas Trading and comparing it with the bank balance. To properly analyze the difference, you asked for the bank reconciliation prepared by the bookkeeper. She immediately gave it to you properly signed by the staff. b) Your colleague, the auditor in-charge of observing the physical count of inventory, gave to you their team’s report on their observation. You immediately filed it in the audit evidence file. c) During interview with the managing director of the company, she gave verbal confirmation that Shinas Trading has a long-term loan from Bank Muscat and payments are updated. d) Shinas Trading has a computerized system in its purchasing process. This is an indication of a good internal control system. Part of the audit evidences filed are electronic copies of the purchase order forms of the company. e) Also filed in the audit evidence folder are a complete set of photocopies of payroll sheets (salary sheets). Employee signatures contained in the sheets are also photocopies of the original. Required: Evaluate the reliability of each of the documents above and identify the one that is considered the most reliable and least reliable. (2 marks each)