Respond to the reading below the course name is money and banking.

Chapter 1, Page 19

2. What effect might a fall in stock prices have on business investments?

Any new stock the company issues at the time of falling stock prices reduces the new revenue the firm can acquire through sales of stock. This in turn might lead to a decrease in the firm’s investments. A falling stock price also reduces a firm’s ability to acquire other firms, as such buyouts often include offers of the acquiring firm’s shares in exchange (at a set ratio) for those of the firm to be acquired.

4. Why are financial markets important to the health of the economy?

Purchases and selling of stocks, bonds, and foreign currencies make financial transactions that fund investments made by firms, governments, banks, and consumers. The activities enabled by these funds make the generation of the goods and services desired by consumers. Their financial instruments also serve as stores of wealth for those seeking to accumulate further wealth and are converted to other forms of wealth (such as money) to enable their purchasing of goods and services.

Chapter 2

7. What is the difference between a mortgage and a mortgage-backed security?

According to our text, a mortgage is a form of debt instrument in which is created “a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest and principal payments) until a specified date (the maturity date), when a final payment is made.” The purpose of this borrowing is to allow borrowers to purchase land, housing, or other real structures. On the other hand, mortgage-backed securities are financial instruments created by institutions through the bundling of multiple mortgages into a single instrument, in a manner similar to that of a mutual fund consisting of a collection of shares of stock from a variety of corporations.

10. How does risk sharing benefit both financial intermediaries and private investors?

Risk sharing is a process by which financial intermediaries purchase large amounts of low risk securities in large volumes and at corresponding lower transaction costs/share than a small investor could afford to purchase and sell these to private investors for a profit. This benefits the private investor by transferring to them instruments with low risk at a price lower than the individual investor could obtain on his own. The large amount of funds generated by these sales of low-risk securities enabled the financial intermediaries to purchase smaller values of higher risk instruments than they would otherwise have been able to safely purchase (if some of the high-risk instruments decrease in value/price, they financial intermediary does not become insolvent, as they have not converted all of their profit from selling low-risk instruments into high-risk instruments, it is money they can now afford to lose for the possibility of making rates of return on their higher-risk investments). The financial intermediary is now in possession of higher-risk instruments that they can sell to individual investors able and willing to tolerate greater risk in exchange for the possibility of higher rates of growth (asset transformation from low-risk to high-risk instruments). Financial intermediaries are also capable of repackaging/bundling mixtures of high and low-risk securities from different sectors of the economy so as to create new financial instruments that a spectrum of risk and potential growth rates to appeal to individual investors with a wide variation in appetites for risk (diversifying the investments of individual investors).

PROBLEM: ASC 606: Revenue from Contacts with Customers, Correction of Accounting Errors, Professional Research, and Accounting Theory (Conceptual Framework)

Ian Mathews is a creator of board games. Ian will be selling his most recent game, Radical Rainbows, through his newly formed company, UPR, Inc. UPR was formed in June, 2018. Ian contributed $1,000 to UPR in exchange for 100% of UPR’s voting common stock. Ian has had unprecedented success with the first two games in his most recent game trilogy: unicorns, ponies and rainbows. Ian was looking to finance UPR’s initial production run of the third game, Radical Rainbows at a rate of 7.5% or less.   The best deal offered by several banks had an APR of 8%. That was more than Ian was willing to pay and he felt there were other sources of financing that were less expensive.

As he had done for the first two games in the series: Unstable Unicorns and Perplexed Ponies, Ian turned to Kickstarter to finance the cost of the first production run of Radical Rainbows. Normally, UPR will be selling Radical Rainbows for $50 per game. UPR offered to sell Radical Rainbows to its Kickstarter backers for $45 per game.   The Kickstarter campaign was completed in two days, and on June 1, 2018 UPR received $225,000 in exchange for a promise to deliver 5000 games to its Kickstarter backers on December 1, 2019.  

At a manufacturing cost of $30 per game, UPR will be able to produce 7500 units with the $225,000 raised in the Kickstarter campaign. The 7500 games would be ready for shipment on December 1, 2019.

On June 1, 2018, UPR’s bookkeeper made the following entry to record the receipt of cash:

On December 1, 2019, UPR was able to deliver the 5000 board games to its Kickstarter backers. UPR also sold and delivered the additional 2500 games to other customers for the normal retail price of $50 per game. UPR’s bookkeeper made the following entries to record these transactions:

UPR used the $126,000 in cash available to UPR in December, 2019 to manufacture another 4200 board games. Those games were in finished goods inventory at December 31, 2019 and were sold in January, 2020 for $50 per game

UPR’s Financial Statements at December 31, 2019 and 2018 as prepared by UPR’s bookkeeper showed the following:

*You can assume that the Cash, Inventory, Common Stock and Cost of Goods Sold amounts as shown in both the journal entries and financial statements are correct.

Your analysis of this problem will involve using ASC 606 - Revenue from Contracts with Customers. UPR adopted ASC 606 when Ian formed the company in 2018. UPR has applied ASC 606 incorrectly.

You can assume that a contract is in place and that only one performance obligation exists: the delivery of the board game to the customer. Thus, determining the Transaction Price is the issue that needs to be addressed. The principles for the determining transaction prices can be found in ASC Subtopic 606-10-32-2 through 606-10-32-27. You may also want to refer to the illustrations (examples) contained in ASC 606. A list of the illustrations can be found at ASC Subtopic 606-10-55-93.

QUESTIONS TO BE ANSWERED

You must answer the following questions:

What are the additional entries or correct entries required on the following dates? If the entries made by the bookkeeper are correct, indicate “Bookkeeper made correct entry”. Otherwise use the Journal Entry template to record your answer and then paste into your answer.:

June 1, 2018

December 31, 2018 Adjusting Journal Entry

December 1, 2019

Use the attached Excel Template, show the corrected comparative Balance Sheet and Income Statement at December 31, 2019 and December 31, 2018.   Paste the template into your answer.

Using references to ASC 606 explain how your arrived at your answers in 1. And 2. Above.

From the point of view of a potential investor or lender to UPR, do the corrected financial statements or the original financial statements prepared by UPR’s bookkeeper better reflect the economics of UPR during its initial two years in business? Why?             

• Compare and contrast the use of government spending changes versus tax changes as a means of influencing the course of the economy. Is one or the other preferable in specific situations?

If the government wants to reduce unemployment using fiscal policy, it may do so by increasing government spending.

Group of answer choices

True

False

The savings rate in a country is 25%. The government wants to expand GDP by $300 Billion. How much must they increase Government spending to reach that goal?

when wages and salaries account for 75% GDP and consumption spending is 65% of the GDP, what does that mean? if these numbers go higher, what is the implication?

What do we learn from a person who ends up spending their time attacking others rather than building others up?

Compare and contrast the use of government spending changes versus tax changes as a means of influencing the course of the economy. Is one or the other preferable in specific situations?