It is January 1st 2020, on the day before, December 31st 2019, Alamo Co. reported a net income
of 4,009,000 dollars. To this date the company is unlevered and its real EBITDA is constant.
The company acquired the year before (on January 1st 2019) a new plant for 36,000,000
dollars, that the fiscal law allowed to depreciate straight line either in 3 (Plan 1) or 6 years
(Plan 2). All other assets are fully depreciated. Today, the company announces a
recapitalization in which it will issue risky debt and retire equity for an amount of 65,000,000
dollars. The company then plans to keep a constant debt level. Before the announcement, the
unlevered equity return is 7.65%. Assume that the inflation rate is 2.5%, that the debt beta is
0, that the expected market return is 8.00%, that the risk free rate is 4.50% and that the tax
rate is 30%. Finally assume that the depreciation tax shield is as risky as the company’s debt.
a) What is the depreciation plan chosen by the firm? Why?
b) What is the return experienced by the shareholders immediately after the
recapitalization announcement (but before the recapitalization is carried out)?
c) What is the beta of levered equity?

On July 1, 2019, ABB Company, Inc. purchased 30% of the outstanding ordinary shares of ABC Company for P5,160,000 cash, including transaction cost of P160,000. ABB Company gained ability to exercise influence over ABC Company as a result of this acquisition. On the date of acquisition, the fair value of ABC’s net assets was P12,400,000. ABB Company has determined that the excess of the cost of the investment over its share of ABC’s net assets is attributable to goodwill. ABC’s profit for the year ended December 31, 2019 was P3,600,000. During 2019, ABC Company declared and paid ABB cash dividends of P400,000. There were no other transactions between the two companies. There was no indication of goodwill impairment.  

The following are the 2 questions:

1. What is the carrying value of the investment at December 31, 2019?  

2. Assuming that the excess of acquisition cost over carrying value of the net assets acquired is attributable to depreciable assets with a remaining life of 10 years, what is the net share of ABB Company on the income reported by ABC Company during 2020?

EXERCISE 4‐1

Parent Company Entries, Liquidating Dividend LO 2

Percy Company purchased 80% of the outstanding voting shares of Song Company at the beginning of 2019 for $387,000. At the time of purchase, Song Company's total stockholders' equity amounted to $475,000. Income and dividend distributions for Song Company from 2019 through 2021 are as follows:

Required:

Prepare journal entries on the books of Percy Company from the date of purchase through 2021 to account for its investment in Song Company under each of the following assumptions:

1. Percy Company uses the cost method to record its investment.
2. Percy Company uses the partial equity method to record its investment.
3. Percy Company uses the complete equity method to record its investment. The difference between book value of equity acquired and the value implied by the purchase price was attributed solely to an excess of market over book values of depreciable assets, with a remaining life of 10 years.

George Young Industries (GYI) acquired industrial robots at the beginning of 2015 and added them to the company’s assembly process. During 2018, management became aware that the $2.0 million cost of the machinery was inadvertently recorded as repair expense on GYI’s books and on its income tax return. The industrial robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method for financial reporting purposes and for tax purposes it is considered to be MACRS 7-year property. Cost deducted over 7 years by the modified accelerated recovery system as follows:

The tax rate is 40% for all years involved.

Required:
1. & 3. Prepare any journal entry necessary as a direct result of the error described and the adjusting entry for 2018 depreciation. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Briefly summarize the key point of the article, but DO NOT include any direct text from the article (i.e., don't quote or copy from the article), tell me in YOUR OWN words. This should be brief. NO LESS THAN 200 words

Explain what other businesses, or your employer, could learn from the key point(s) in this article.

Startups Show Car and Home Insurers They Need to Get Smarter

Industry faces growing threat from technology when profits are already a struggle

When you make an insurance claim with Lemonade, the online-only startup that mainly sells renters policies to young American urbanites, you quickly fill in details on its slick mobile app and then record a quick video to explain the claim again.

Smart software analyzes this video for telltale signs of dishonesty, one of 18 antifraud algorithms that Lemonade says helps it pay claims fast. About one-third are paid instantly, according to Daniel Schreiber, co-founder and CEO, while the average claim is settled in less than a day.

For established insurers this is a risk, especially when insurance policies are relatively small like Lemonade’s or in highly competitive markets where insurers struggle to turn a profit, like auto insurance.

The profits available from simply supplying funds to underwrite risks have been squeezed because capital is plentiful in insurance markets. Smaller, smarter challengers that can manage customers and the claims process at lower cost will find ways to take industry profits, sell more competitive policies, or both.

Lemonade isn’t alone. Another, more established U.S. startup is Snapsheet, which provides its app to U.S. insurers including Chubb and several smaller groups such as Ohio Mutual and NJM insurance. It can assess car damage claims in under three hours based on photos from customers via a mobile app. It closes most claims in less than three days: the traditional process can take up to 30.

Some auto insurers have become more efficient, but the industry remains fragmented. Photo: Bloomberg News

For sure, some auto insurers have become more efficient. Progressive, for example, has its own repair shop network. But the industry remains fragmented and companies know they must improve their processes, especially the efficiency and costs of claims adjusters, according to Tim Zawacki at S&P Global Market Intelligence. Auto insurance is intensely competitive: savings worth just a single cent in every dollar of premiums would make a huge difference.

Big property and casualty insurers give away too much revenue (and potential profit) to a whole network of companies that help insurers deal with clients and claims. About 60 cents of every dollar of premiums gets paid directly or indirectly to these companies, according to forthcoming research by Oliver Wyman.

Just 16 cents of that goes to things like car repairs or physical therapy and so benefits claimants. The rest pays for services from claims adjusters, brokers, software companies and other intermediaries—many of which make better profits than insurers do.

This is a big problem for insurers, which as a group have failed to earn their cost of capital for years, according to Oliver Wyman. They should try to recapture some of this lost value by building their own technology, or buying a company that can cut their costs significantly.

Some have started: Allstate , for example, has its own photo app to speed up claims estimates, while Liberty Mutual, USAA and Intact of Canada all have stakes in Snapsheet.

But insurers will struggle to boost profits while the property and casualty industry is flooded with capital and investment returns remain depressed. Their only option is to get quicker and smarter

Answer the following Questions using the Measles at Disneyland Article listed below:

1. Apply the epidemiological triangle. Describe the agent, person, and environment.

2. How would you classify the Disease?

3. Identify a prevention strategy for each of the 3 levels of prevention. (Prinmary Prevention, Secondary Prevention, Tertiary Prevention)

Article: Measles at Disneyland, a Problem for All Ages

Measles is once again capturing headlines in the United States. Even though only a small portion of the U.S. population is susceptible, international travel, vaccine refusal or delay, and rare vaccine failures combined with high social contacts allow the highly infectious measles virus to infect susceptible individuals of all ages (1). The story of an unvaccinated child or adolescent contracting measles while traveling abroad and transmitting the virus to others upon return to the United States has been repeated many times in recent years. The 2014–2015 Disneyland-associated outbreak has captured public attention because infants too young to receive the vaccine and children with true medical contraindications to vaccination became infected (2). In addition, Disneyland employees contracted measles and possibly contributed to disease transmission. In 2014, there were 23 measles outbreaks and more than 644 cases of measles (2). More outbreaks owing to vaccine refusal will undoubtedly occur because of sufficient numbers of susceptible individuals in many areas.

Several factors have contributed to parents' refusal to vaccinate their children, and rates of refusal have increased in some states in recent years (3). In addition, although great progress has been made in controlling measles globally, it has recently rebounded in many countries (1). In Europe, where most countries do not require measles or other immunizations for children to attend schools, more than 10 000 cases of measles have been reported each year for several years. The flawed and fraudulent study published in 1998 claiming that the measles-mumps-rubella (MMR) vaccine caused autism has contributed to the hesitancy to vaccinate and the resurgence of measles (1, 3, 4) over the 12 years before the study was retracted. However, even after the study was proven to be based on fabricated data, and numerous reviews and reports in the responsible press discredited the study, fears linger. It is hoped that the recent encouragement by Autism Speaks for parents to vaccinate their children should help increase rates (5).

The relative absence of measles in most areas of the United States for many years has led to an under-appreciation of measles-related complications and mortality that occurs at all ages and in all countries, including the United States. A review of more than 67 000 reported cases of measles in the United States from 1987 to 2000 found that complications include otitis media, pneumonia, diarrhea, and encephalitis in children younger than 5 years and that hospitalization for measles complications was required for approximately 25% of infected children (6). The complication rates are lowest among children and adolescents aged 5 to 19 years, but the rate of complications increases after adolescence, and hospitalization and mortality rates are highest in persons 30 years of age or older (6). In fact, case-fatality rates in adults 30 years of age or older are higher than those in children younger than 5 years.

Much can be done to prevent these outbreaks. Children younger than 12 months of age (the recommended age for the first dose of MMR) and those with medical contraindications depend on high levels of immunity in the rest of the population to provide “community protection,” sometimes referred to as “herd immunity.” These individuals are not immune to measles and will remain susceptible during outbreaks. Parents should be able to take all children to Disneyland and other public places without the fear of measles exposure. Some have proposed removing religious, philosophical, and/or personal belief exemptions to school laws, but enacting these changes could inflame public opinion against immunizations (3, 7). How can adult primary care clinicians assist their pediatric colleagues in boosting community protection? They should routinely review immunization records as they see new patients who are transitioning from pediatric care. The current Advisory Committee on Immunization Practices recommendations advise immunization for potentially susceptible individuals to help prevent future outbreaks (8). Primary care practitioners can also be sure to confirm immunization status of their patients who are health care providers or who plan to travel to other countries (including Europe) where measles is a problem (8). Primary care clinicians should also consider confirmation of immunization status of adult patients working in settings with a high likelihood of exposure to large numbers of children or international travelers, such as schoolteachers or theme park staff. Most adults do not know their detailed vaccination history or have access to their pediatric medical records. Verbal reassurance that “I had all my shots” is insufficient. The simplest thing to do if vaccine status is uncertain is to provide a dose of MMR to those without documentation of 2 doses of measles vaccine after 12 months of age (8). Although serologic testing is an option, it requires multiple visits and possible delays. Primary care physicians also need to be familiar with the clinical signs of measles and promptly report suspect cases to local health authorities to try to limit outbreaks when they do occur.

Measles can be eradicated. However, this will take time; ramped-up efforts to ensure that eligible U.S. children are vaccinated; and greater international collaboration to improve prevention of measles in all countries, including highly industrialized countries with ongoing measles problems (1). Maintaining public trust in immunization and our immunization safety system is essential in helping parents to understand the potential adverse consequences of failure to vaccinate and that processes are in place to ensure that their children receive the safest vaccines possible. Coordinated input from all stakeholders with oversight as recommended in 2011 by the National Vaccine Advisory Committee (9) would enhance public confidence in our immunization programs. Following the framework recommended by the Institute of Medicine (10), constant surveillance and additional studies of vaccine safety to address public concerns should be a priority. Adequate funding is necessary to take advantage of the expanded use of electronic health records to conduct epidemiologic studies that identify or rule out even small postvaccination risks. Also, funding of studies to take advantage of advances in immunology and genomics can allow us to better understand the biological mechanisms for adverse events caused by vaccines and for diseases of concern. Such studies would help counter the common misperception that every illness that occurs after vaccination was caused by the vaccine.

Between the beginning of 2020 and the middle of 2020,

A. the typical interest rate on jumbo mortgage went up, relative to the interest rate on conforming mortgages

B. the typical interest rate on conforming mortgages went up, relative to the interest rate on jumbo mortgages

During 2020, the following items caused taxable income to be different than accounting income:

• For tax purposes, CCA was $172,800 in 2020. The year-end book value is $720,000 and the tax value is $691,200.
• In 2020 Killim Inc. paid $72,000 rent in advance for 2020 ($36,000) and 2021 ($36,000). The Canada Revenue Agency (CRA) allows the deduction of actual rent payments when they are paid. By December 31, 2020, Killim had a balance of $36,000 in Prepaid Rent.
• In 2020, dividends of $24,000 were received from a taxable Canadian corporation and included in accounting income. These dividends are not taxable.
• In 2020, a golf club membership of $7,200 was an expense in arriving at accounting income. This is not an allowable deduction for tax purposes.
• In 2020, Killim Inc. offered a warranty on goods sold. Warranty expenses for 2020 were $26,400 and warranty cash payments in 2020 were $9,600. The balance of the warranty liability on the statement of financial position is $16,800. The Canada Revenue Agency (CRA) allows the deduction of actual warranty costs when they are paid.

Required:

( a ) Calculate taxable income for 2020.

( b ) Calculate current income taxes payable for 2020.

( c ) Calculate the balance of any deferred income taxes asset and deferred income tax liability at December 31, 2020. Do this for each item and identify any balances as either a deferred tax asset or a deferred tax liability.

            (d ) Prepare the journal entry(s) to record current income taxes for 2020 and record an entry for of the deferred tax determined in part c.

During 2020, the following items caused taxable income to be different than accounting income:

• For tax purposes, CCA was $172,800 in 2020. The year-end book value is $720,000 and the tax value is $691,200.
• In 2020 Killim Inc. paid $72,000 rent in advance for 2020 ($36,000) and 2021 ($36,000). The Canada Revenue Agency (CRA) allows the deduction of actual rent payments when they are paid. By December 31, 2020, Killim had a balance of $36,000 in Prepaid Rent.
• In 2020, dividends of $24,000 were received from a taxable Canadian corporation and included in accounting income. These dividends are not taxable.
• In 2020, a golf club membership of $7,200 was an expense in arriving at accounting income. This is not an allowable deduction for tax purposes.
• In 2020, Killim Inc. offered a warranty on goods sold. Warranty expenses for 2020 were $26,400 and warranty cash payments in 2020 were $9,600. The balance of the warranty liability on the statement of financial position is $16,800. The Canada Revenue Agency (CRA) allows the deduction of actual warranty costs when they are paid.

Required:

( a ) Calculate taxable income for 2020.

( b ) Calculate current income taxes payable for 2020.

( c ) Calculate the balance of any deferred income taxes asset and deferred income tax liability at December 31, 2020. Do this for each item and identify any balances as either a deferred tax asset or a deferred tax liability.

            (d ) Prepare the journal entry(s) to record current income taxes for 2020 and record an entry for of the deferred tax determined in part c.

The IT Manager’s Dilemma

Sally Lewis graduated from college 4 years ago with a degree in computer science. She currently runs the business application support department for a mid-sized company in Austin. Sally currently earns $73,000 per year and expects an annual raise of 3% per year. Her company does not pay bonuses. Sally is 27 and intends on working for an additional 38 years (until she is 65). She has a fully paid insurance benefit and is currently in the 26% tax bracket. Although Sally enjoys her job she is concerned that her degree and current experience is to narrow and as a result might limit her potential career opportunities and earning potential. Sally is considering two options to further her career.

Option 1 is to do a two-year MBA at Brazonian University. The degree would round out her technical skills with a sound business background. The MBA would require two years of full-time study (where Sally would be unable to work) with an annual tuition amount of $58,000 payable each year. Books and other supplies would be $2,000 per year. After finishing the MBA sally thinks she would be able to get an immediate position and make $105,000 per year and also receive a $10,000 signing bonus. The salary would be expected to grow by 4% per year. She then would be in the 31% tax bracket.

Option 2 is to do a specialize one year program at Olympus University in Data Analytics. The program would be an intense 1-year program (she would be unable to work) and offer her employment opportunities starting at $98,000 growing at 5% per year while also receiving an $8,000 initial signing bonus. The compensation would put her in the 29% tax bracket. The cost for the 12-month program is $75,000 plus an additional $4,200 in fees.

Both programs offer insurance coverage for $3,000 per year. Housing on campus at both programs would be $4,000 less than what Sally is currently paying so would be a net savings. Sally has been a diligent saver in her career and as a result has the money in savings for either of these options and would pay cash and incur no financing fees.

Sally likes her current position but also is intrigued with both options. She see’s herself being happy in either of these options or even with the status quo. What she would like to do is make the decision and pursue the path that provides the best financial upside to her. Sally wants to use a 5.5% discount rate for her analysis.

So consider:

• What other factors (financial or otherwise) should Sally consider when making this decision?

• What risks are there for Sally to pursue either option?

• On a purely economic perspective what is the best decision for Sally to make?

• How does Sally’s age play into making this decision?   Does the decision change if Sally wants to retire in 20 years?

• What initial salaries (one each for the MBA and one for the Data Analytics program) would Sally need to be offered to make her indifferent about leaving her current situation (at what salary points are the future values equal?)

• Assume Sally wanted to borrow the money to attend either option the interest rate was 5.4%, how would this change Sally’s decision?

Early in 2020, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2020 and was completed on December 31, 2020. Dobbs made the following payments to Kiner, Inc. during 2020:

In order to help finance the construction, Dobbs issued the following during 2020:

In addition to the 9% bonds payable, the only debt outstanding during 2020 was a $518,500, 12% note payable dated January 1, 2016 and due January 1, 2023, with interest payable annually on January 1.

Compute the amounts of each of the following: