Questions #1

The following information is available for the first three years of operations for Faberge Corporation:

1.         Year                Accounting Income

       2020                          $ 250,000

       2021                             280,000

2. Included in the accounting income above is $10,000 annual dividends income from investments in taxpaying Canadian companies.
3. On January 2, 2020, equipment was purchased for $ 500,000. The equipment had an estimated service life of 5 years and no residual value. Straight-line depreciation is used for book purposes and CCA at 30% is used for tax purposes (ignore the half year rule for the first year).
4. On January 2, 2020, $ 210,000 was collected in advance for the rental of a building for three years. The entire $ 210,000 was included in taxable income in 2020, but two-thirds of the $ 210,000 was reported as unearned revenue at December 31, 2020 for book purposes.
5. The enacted tax rate is 40% for 2020, 35% for 2021 and 30% for 2023 and thereafter.

Instructions

1. Prepare a schedule comparing depreciation for book purposes with CCA for tax purposes.
2. Determined the taxable income and income tax payable for 2020.
3. Prepare a schedule of deferred taxable/deductible amounts and the deferred tax asset and/or liability at the end of 2020.
4. Calculate the net deferred tax expense or benefit for 2020.
5. Prepare the adjusting journal entries to record income tax expense, deferred taxes, and income tax payable for 2020.
6. Determined the taxable income and income tax payable for 2021.
7. Prepare a schedule of future taxable/deductible amounts and the deferred tax asset and/or liability at the end of 2021.
8. Calculate the net deferred tax expense or benefit for 2021.
9. Prepare the adjusting journal entries to record income tax expense, deferred taxes, and income tax payable for 2021.
10. Prepare the income tax section of the comparative income statements of 2020 and 2021

Ethical scenario: (Professional Ethics)

In March 2012 the operations director of HFIC, Chris Lee, recommended to the board of directors that the company should purchase a fashion design company based in Hong Kong, Elite Fashion Limited. This was a private company with extensive experience in designing fashion clothing for markets in Asia. The full board of HFIC considered this recommendation and decided to make an offer for the company. After friendly negotiations, 100% of the shares in Elite Fashion were purchased in August 2012 for a substantial price, in cash. On 15 September 2012, the chairman of HFIC, Kenneth Chan, was visited by Jonathan Lu, the Deputy Operations Director, who said that he had acquired some disturbing information about the acquisition of Elite Fashion, which he had found by accident. It would appear that before recommending the purchase of Elite Fashion to the board of HFIC, Chris Lee had bought a substantial quantity of shares in the company from a retiring director, and had paid a low price for them. He had used a company owned by himself to make the purchase, in order to keep his identity hidden. When HFIC bought Elite Fashion, Chris Lee made a large personal profit from the sale of his shares. Jonathan Lu said that he was giving this information to Kenneth Chan in confidence, and expected his identity as the informer to be kept hidden. Kenneth Chan immediately met with Chris Lee in his office, asking whether this information was correct. Kenneth Chan did not tell Chris Lee how he had obtained the information, but Chris Lee suspected that a person in his office must have been the informer. Chris Lee confessed that the information was correct, and that he had been aware when he bought the shares in Elite Fashion that the company’s other major shareholders would be pleased to receive a takeover bid from a company such as HFIC. Chris Lee had, to date, been an excellent Chief Operations Officer, Kenneth Chan had stated his expectation to the rest of the board and also to the financial media that he wanted Chris Lee to be appointed as Chief Executive Officer of the company when the current CEO retired in a few years’ time. Kenneth Chan was shocked and disappointed by Chris Lee’s confession, and was not sure what to do. He did not know whether Chris Lee had acted illegally or was in breach of any regulations or code of conduct, and he was not sure what action (if any) should be taken against Chris Lee. He therefore considers inviting two individuals to a private meeting, to ask for their views and advice. These were people that Kenneth Chan had known for many years, and respected greatly. One of them is Jian Jiang, an enforcement officer at the Stock Exchange of Hong Kong Limited – SEHK. Jian Jiang is also a friend of Chris Lee, and they play golf together regularly. The other person is Mary Leung, a senior manager in Platinum Investments, an investment organisation that owns shares in HFIC. She has been a great supporter of HFIC and was recently responsible for a decision by Platinum Investments to buy an additional 1% of the equity shares of HFIC.

Requirement: Outline the ethical issues from the perspective of the Chairman of the Board of HFIC in the ethical scenario. If you were the Chairman, what actions would you take in both short term and long term when Mr. Chris Lee confessed his act to you.

Linda is assigned to audit some items in the financial statements for Work Hard Sdn Bhd for the year ended 31 August 2020. She has discoverred the following information:

1. Client company’s cash account balance and its bank account balance have shown different figures. The company has prepared a bank reconciliation statement for the month ended 31 August 2020.
2. Linda has been told by the company’s management that there are few cheques outstanding which were issued in July 2020 to pay for some expenses. There is no other issue with the bank reconciliation items.
3. The company has 1000 workers who are paid weekly. The payroll function has not been operating smoothly for some time. Errors often reported where workers received pay cheques for an amount considerably larger than they should have. Further investigation revealed that the mistake was due to wrong number of hours worked reported.
4. In other instance, a computer operator has purposely included a pay rate increase for one of his friends in the factory. This was discovered by chance by another employee.
5. There were also cases of missed payments to workers. They were not detected until the pay cheques for that department were distributed by the supervisors.

Required:

I) Suggest substantive test that Linda can perform for item (a) dan (b).

(6 Markah/Marks) II) Identify the related assertions in item (c) to (e).

(3 Markah/Marks)

III) State one (1) control that should have prevented each item (c) to (e) from occurring on a continuing basis; and

3. Markah/Marks)

IV) State one (1) substantive audit procedure that could uncover the misstatements in each item (c) to (e).

4. Markah/Marks)

CP12-47 (similar to) Tree Top Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America.​ Additionally, the company wants to add another building on their land to offer more services for local customers.

Tree Top Company plans to raise the capital by issuing $800,000 9​%,six​-year

bonds on January​ 2,2020.The bonds pay interest semiannually on June 30 and December 31. The company receive $798,680

when the bonds are issued.

The company also issues a mortgage payable for

$825,000

on January​ 2,

20202020.

The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of $55,000

plus interest for fifteen

​years, payable on December 31. The mortgage interest rate is

10​%

now record the semiannual bond interest payment on December​ 31,

2020

As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 470,000 shares for $550,000 at the beginning of the fiscal year of both companies. On the purchase date, the fair value and book value of AMC’s net assets were equal. During the year, AMC earned net income of $320,000 and distributed cash dividends of 20 cents per share. At year-end, the fair value of the shares is $582,000.

1. Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.

Record any necessary year-end adjusting journal entry when the fair value of the shares held are $582,000 at year-end.

Help me with the name for the credit part. The correct answer is

Dr. Fair value adjustment 320,000

Cr, ? ( unrealized holding gain or loss - OCI is incorrect)   320,000

2. Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.

• Record the cash dividend of 20 cents per share.

Help me with the name for the credit part. The correct answer is

Dr. Cash 18,800

Cr, ? ( Dividend revenue and interest revenue is incorrect)   18,800

Randi Corp. is considering the replacement of some machinery that has zero book value and a current market value of $3,700. One possible alternative is to invest in new machinery that costs $30,900. The new equipment has a 5-year service life and an estimated salvage value of $4,400, will produce annual cash operating savings of $10,300, and will require a $3,100 overhaul in year 3. The company uses straight-line depreciation.

Required:

Prepare a net-present-value analysis of Randi’s replacement decision, assuming an 10% hurdle rate and no income taxes. Should the machinery be acquired? (Negative amounts should be indicated by a minus sign. Round calculations to the nearest dollar.)

Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2021 before any adjusting entries or closing entries are prepared.

1. On December 30, 2017, Rival Industries acquired its office building at a cost of $12,600,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no residual value. Early in 2021, the estimate of useful life was revised to 28 years in total with no change in residual value.
2. At the beginning of 2017, the Hoffman Group purchased office equipment at a cost of $880,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the straight-line method. On January 1, 2021, the company changed to the double-declining-balance method.
3. At the beginning of 2021, Jantzen Specialties, which uses the straight-line method, changed to the double-declining-balance method for newly acquired vehicles. The change decreased current year net income by $625,000.

Required:

1. Identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2021 related to the situation described. (Ignore income tax effects.)

Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2018 before any adjusting entries or closing entries are prepared.

On December 30, 2014, Rival Industries acquired its office building at a cost of $10,200,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no residual value. Early in 2018, the estimate of useful life was revised to 28 years in total with no change in residual value.

At the beginning of 2014, the Hoffman Group purchased office equipment at a cost of $385,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the sum-of-the-years’-digits method. On January 1, 2018, the company changed to the straight-line method.

At the beginning of 2018, Jantzen Specialties, which uses the sum-of-the-years’-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net income by $465,000.

Required:

1. Identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2018 related to the situation described. (Ignore income tax effects.)

Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2021 before any adjusting entries or closing entries are prepared.

1. On December 30, 2017, Rival Industries acquired its office building at a cost of $10,500,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no residual value. Early in 2021, the estimate of useful life was revised to 28 years in total with no change in residual value.
2. At the beginning of 2017, the Hoffman Group purchased office equipment at a cost of $540,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the straight-line method. On January 1, 2021, the company changed to the double-declining-balance method.
3. At the beginning of 2021, Jantzen Specialties, which uses the straight-line method, changed to the double-declining-balance method for newly acquired vehicles. The change decreased current year net income by $495,000.

Required:

1. Identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2021 related to the situation described. (Ignore income tax effects.)

Described below are three independent and unrelated situations involving accounting changes. Each change occurs during 2018 before any adjusting entries or closing entries are prepared.

a- On December 30, 2014, Rival Industries acquired its office building at a cost of $10,700,000. It has been depreciated on a straight-line basis assuming a useful life of 40 years and no residual value. Early in 2018, the estimate of useful life was revised to 28 years in total with no change in residual value.

b- At the beginning of 2014, the Hoffman Group purchased office equipment at a cost of $550,000. Its useful life was estimated to be 10 years with no residual value. The equipment has been depreciated by the sum-of-the-years’-digits method. On January 1, 2018, the company changed to the straight-line method.

c- At the beginning of 2018, Jantzen Specialties, which uses the sum-of-the-years’-digits method, changed to the straight-line method for newly acquired buildings and equipment. The change increased current year net income by $515,000.

Required:

2. Prepare any journal entry necessary as a direct result of the change as well as any adjusting entry for 2018 related to the situation described. (Ignore income tax effects.)