Paulis Kennel uses tenant-days as its measure of activity; an animal housed in the kennel for one day is counted as one tenant-day. During February, the kennel budgeted for 2,500 tenant-days, but its actual level of activity was 2,480 tenant-days. The kennel has provided the following data concerning the formulas used in its budgeting and its actual results for February:

Data used in budgeting:

Actual results for February:

The activity variance for net operating income in February would be closest to:

Garrison 16e Rechecks 2018-06-07

Multiple Choice

• $236 U

• $264 F

• $236 F

• $264 U

1. A. The Table 1 below provides data for the Big Cat Rescue Company. The price of entrance is $60 and Q refers to the number of visitors who can visit the Big Cat Reserve. Calculate TR= Total Revenue, π=profit, MC= Marginal Cost and MR=Marginal revenue and fill in the blanks of the table.

B. Also, calculate TR, MR and π=profit when the entrance price falls to $50.

C. As you look over the completed table, what level of Q maximizes profit when price=$60 and when price=$50?

You are the manager of a local sporting goods store and recently purchased a shipment of 60 sets of skis and ski bindings at a total cost of $25,000 (your wholesale supplier would not let you purchase the skis and bindings separately, nor would it let you purchase fewer than 60 sets). The community in which your store is located consists of many different types of skiers, ranging from advanced to beginners. From experience, you know that different skiers value skis and bindings differently. However, you cannot profitably price discriminate because you cannot prevent resale. There are about 20 advanced skiers who value skis at $400 and ski bindings at $275; 20 intermediate skiers who value skis at $300 and ski bindings at $400; and 20 beginning skiers who value skis at $200 and ski bindings at $350. What is your maximum revenue if you charge a separate price for skis and bindings? $ What is your maximum revenue if you sell skis and bindings as a bundle? $

Colah Company purchased $1.5 million of Jackson, Inc. 8% bonds at par on July 1, 2018, with interest paid semi-annually. When the bonds were acquired Colah decided to elect the fair value option for accounting for its investment. At December 31, 2018, the Jackson bonds had a fair value of $1.75 million. Colah sold the Jackson bonds on July 1, 2019 for $1,350,000.

Required: 1. Prepare Colah's journal entries for the following transactions:

a. The purchase of the Jackson bonds on July 1.

b. Interest revenue for the last half of 2018.

c. Any year-end 2018 adjusting entries.

d. Interest revenue for the first half of 2019.

e. Any entry or entries necessary upon sale of the Jackson bonds on July 1, 2019.

2. Fill out the following table to show the effect of the Jackson bonds on Colah’s net income, other comprehensive income, and comprehensive income for 2018, 2019, and cumulatively over 2018 and 2019:

Cash Disbursement
Timber Company is in the process of preparing its budget for next year. Cost of goods sold has been estimated at 70 percent of sales. Lumber purchases and payments are to be made during the month preceding the month of sale. Wages are estimated at 15 percent of sales and are paid during the month of sale. Other operating costs amounting to 10 percent of sales are to be paid in the month following the month of sale. Additionally, a monthly lease payment of $14,000 is paid for computer services. Sales revenue is forecast as follows

Required
Prepare a schedule of cash disbursements for April, May, and June.
Do not use a negative sign with your answers.

Red Canyon T-shirt Company operates a chain of T-shirt shops in the southwestern United States. The sales manager has provided a sales forecast for the coming year, along with the following information:

• Each T-shirt is expected to sell for $17.
• The purchasing manager buys the T-shirts for $7 each.
• The company needs to have enough T-shirts on hand at the end of each quarter to fill 27 percent of the next quarter’s sales demand.
• Selling and administrative expenses are budgeted at $84,000 per quarter plus 14 percent of total sales revenue.

Required:
1.Determine budgeted sales revenue for each quarter.



2. Determine budgeted cost of merchandise purchased for each quarter.



3. Determine budgeted cost of good sold for each quarter.



4. Determine selling and administrative expenses for each quarter.



5. Complete the budgeted income statement for each quarter.

Solutions Network, Inc. (a GVV case)
Question:

   
    Should Sarah follow Shannon’s advice? What if she does and Paul does not back off? What additional levers can she use to influence Paul and make her values understood?

“We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from DSS,” Sarah Young stated.

“That’s ridiculous,” Paul Henley replied. “Get your head out of the sand, Sarah, before it’s too late.”

Sarah Young is the controller for Solutions Network, Inc., a publicly owned company headquartered in Sunnyvale, California. Solutions Network has an audit committee with three members of the board of directors that are independent of management. Sarah is meeting with Paul Henley, the CFO of the company on January 7, 2016, to discuss the accounting for a software systems transaction with Data Systems Solutions (DSS) prior to the company’s audit for the year ended December 31, 2015. Both Young and Henley are CPAs.

Young has excluded the amount in contention from revenue and net income for 2015, but Henley wants the amount to be included in the 2015 results. Without it, Solutions Network would not meet earnings expectations. Henley tells Young that the order came from the top to record the revenue on December 28, 2015, the day the transaction with DSS was finalized. Young points out that Solutions Network ordered essentially the same software from DSS to be shipped and delivered early in 2016. Therefore, according to Young, Solutions Network should delay revenue recognition on this “swap” transaction until that time. Henley argues against Sarah’s Page 474 position, stating that title had passed from the company to DSS on December 31, 2015, when the software product was shipped FOB shipping point.
Background

Solutions Network, Inc., became a publicly owned company on March 15, 2011, following a successful initial public offering (IPO). Solutions Network built up a loyal clientele in the three years prior to the IPO by establishing close working relationships with technology leaders, including IBM, Apple, and Dell Computer. The company designs and engineers systems software to function seamlessly with minimal user interface. There are several companies that provide similar products and consulting services, and DSS is one. However, DSS operates in a larger market providing IT services management products that coordinate the entire business infrastructure into a single system.

Solutions Network grew very rapidly during the past five years, although sales slowed down a bit in 2015. The revenue and earnings streams during those years are as follows:
Year    Revenues (millions)    Net Income (millions)
2010    $148.0    $11.9
2011        175.8        13.2
2012        202.2        15.0
2013        229.8        16.1
2014        267.5        17.3

Young prepared the following estimates for 2015:
Year    Revenues (millions)    Net Income (millions)
2015 (projected)    $262.5    $16.8
The Transaction

On December 28, 2015, Solutions Network offered to sell its Internet infrastructure software to DSS for its internal use. In return, DSS agreed to ship similar software 30 days later to Solutions Network for that company’s internal use. The companies had conducted several transactions with each other during the previous five years, and while DSS initially balked at the transaction because it provided no value added to the company, it did not want to upset one of the fastest-growing software companies in the industry. Moreover, Solutions Network might be able to help identify future customers for DSS’s IT service management products.

The $15 million of revenue would increase net income by $1.0 million. For Solutions Network, the revenue from the transaction would be enough to enable the company to meet targeted goals, and the higher level of income would provide extra bonus money at year-end for Young, Henley, and Ed Fralen, the CEO.
Accounting Considerations

In her discussions with Henley, Young points out that the auditors will arrive on January 15, 2016; therefore, the company should be certain of the appropriateness of its accounting before that time. After all, says Sarah, “the auditors rely on us to record transactions properly as part of their audit expectations.” At this point Henley reacts angrily and tells Young she can pack her bags and go if she doesn’t support the company in its revenue recognition of the DSS transaction. Young is taken aback. Henley seems unusually agitated. Perhaps he was under a lot more pressure to “meet the numbers” than she anticipated. To defuse the matter, Sarah makes an excuse to end the meeting prematurely and asks if they could meet on Monday morning, after the weekend. Henley agrees.

Over the weekend, Sarah calls her best friend, Shannon McCollough, for advice. Shannon is a controller at another company and Sarah would often commensurate with Shannon over their mutual experiences. Shannon suggests Page 475 that Sarah should explain to Paul exactly what her ethical obligations are in the matter. Shannon thinks it might make a difference because Paul is a CPA as well.

After the discussion with Shannon, Sarah considers whether she is being too firm in her position. On the one hand, she knows that regardless of the passage of title to DSS on December 31, 2015, the transaction is linked to Solutions Network’s agreement to take the DSS product 30 days later. While she doesn’t anticipate any problems in that regard, Sarah is uncomfortable with the recording of revenue on December 31 because DSS did not complete its portion of the agreement by that date. She has her doubts whether the auditors would sanction the accounting treatment.

On the other hand, Sarah is also concerned about the fact that another transaction occurred during the previous year that she questioned but, in the end, went along with Paul’s accounting for this transaction. On December 28, 2014, Solutions Network sold a major system for $20 million to Laramie Systems but executed a side agreement with Laramie on that date which gave Laramie the right to return the product for any reason for 30 days. Even though Solutions Network recorded the revenue in 2014 and Sarah felt uneasy about it, she did not object because Laramie did not return the product; her acceptance was motivated by the delay in the external audit until after the 30-day period had expired. Now, however, Sarah is concerned that a pattern may be developing.

Question:

   
    Should Sarah follow Shannon’s advice? What if she does and Paul does not back off? What additional levers can she use to influence Paul and make her values understood?

Recall that Benford's Law claims that numbers chosen from very large data files tend to have "1" as the first nonzero digit disproportionately often. In fact, research has shown that if you randomly draw a number from a very large data file, the probability of getting a number with "1" as the leading digit is about 0.301. Now suppose you are an auditor for a very large corporation. The revenue report involves millions of numbers in a large computer file. Let us say you took a random sample of n = 223 numerical entries from the file and r = 49 of the entries had a first nonzero digit of 1. Let p represent the population proportion of all numbers in the corporate file that have a first nonzero digit of 1.

(i) Test the claim that p is less than 0.301. Use α = 0.05.

(a) What is the level of significance?


State the null and alternate hypotheses.

H₀: p = 0.301; H₁: p > 0.301

H₀: p = 0.301; H₁: p ≠ 0.301    

H₀: p < 0.301; H₁: p = 0.301

H₀: p = 0.301; H₁: p < 0.301

(b) What sampling distribution will you use?

The Student's t, since np > 5 and nq > 5.

The Student's t, since np < 5 and nq < 5.

The standard normal, since np < 5 and nq < 5.

The standard normal, since np > 5 and nq > 5.

What is the value of the sample test statistic? (Round your answer to two decimal places.)


(c) Find the P-value of the test statistic. (Round your answer to four decimal places.)


Sketch the sampling distribution and show the area corresponding to the P-value.

(d) Based on your answers in parts (a) to (c), will you reject or fail to reject the null hypothesis? Are the data statistically significant at level α?

At the α = 0.05 level, we reject the null hypothesis and conclude the data are statistically significant.

At the α = 0.05 level, we reject the null hypothesis and conclude the data are not statistically significant.    

At the α = 0.05 level, we fail to reject the null hypothesis and conclude the data are statistically significant.

At the α = 0.05 level, we fail to reject the null hypothesis and conclude the data are not statistically significant.

(e) Interpret your conclusion in the context of the application.

There is sufficient evidence at the 0.05 level to conclude that the true proportion of numbers with a leading 1 in the revenue file is less than 0.301.

There is insufficient evidence at the 0.05 level to conclude that the true proportion of numbers with a leading 1 in the revenue file is less than 0.301.    

(ii) If p is in fact less than 0.301, would it make you suspect that there are not enough numbers in the data file with leading 1's? Could this indicate that the books have been "cooked" by "pumping up" or inflating the numbers? Comment from the viewpoint of a stockholder. Comment from the perspective of the Federal Bureau of Investigation as it looks for money laundering in the form of false profits.

Yes. The revenue data file does not seem to include more numbers with higher first nonzero digits than Benford's law predicts.

No. The revenue data file seems to include more numbers with higher first nonzero digits than Benford's law predicts.    

No. The revenue data file does not seem to include more numbers with higher first nonzero digits than Benford's law predicts.

Yes. The revenue data file seems to include more numbers with higher first nonzero digits than Benford's law predicts.

(iii) Comment on the following statement: If we reject the null hypothesis at level of significance α, we have not proved H_o to be false. We can say that the probability is α that we made a mistake in rejecting H_o. Based on the outcome of the test, would you recommend further investigation before accusing the company of fraud?

We have not proved H₀ to be false. Because our data lead us to reject the null hypothesis, more investigation is not merited.

We have not proved H₀ to be false. Because our data lead us to reject the null hypothesis, more investigation is merited.    

We have not proved H₀ to be false. Because our data lead us to accept the null hypothesis, more investigation is not merited.

We have proved H₀ to be false. Because our data lead us to reject the null hypothesis, more investigation is not merited.

Recall that Benford's Law claims that numbers chosen from very large data files tend to have "1" as the first nonzero digit disproportionately often. In fact, research has shown that if you randomly draw a number from a very large data file, the probability of getting a number with "1" as the leading digit is about 0.301. Now suppose you are an auditor for a very large corporation. The revenue report involves millions of numbers in a large computer file. Let us say you took a random sample of n = 218 numerical entries from the file and r = 51 of the entries had a first nonzero digit of 1. Let p represent the population proportion of all numbers in the corporate file that have a first nonzero digit of 1.

(i) Test the claim that p is less than 0.301. Use α = 0.05.

(a) What is the level of significance?


State the null and alternate hypotheses.

H₀: p = 0.301; H₁: p > 0.301

H₀: p = 0.301; H₁: p ≠ 0.301    

H₀: p < 0.301; H₁: p = 0.301

H₀: p = 0.301; H₁: p < 0.301

(b) What sampling distribution will you use?

The Student's t, since np < 5 and nq < 5.

The Student's t, since np > 5 and nq > 5.    

The standard normal, since np > 5 and nq > 5.

The standard normal, since np < 5 and nq < 5.

What is the value of the sample test statistic? (Round your answer to two decimal places.)


(c) Find the P-value of the test statistic. (Round your answer to four decimal places.)


Sketch the sampling distribution and show the area corresponding to the P-value.

(d) Based on your answers in parts (a) to (c), will you reject or fail to reject the null hypothesis? Are the data statistically significant at level α?

At the α = 0.05 level, we reject the null hypothesis and conclude the data are statistically significant.

At the α = 0.05 level, we reject the null hypothesis and conclude the data are not statistically significant.    

At the α = 0.05 level, we fail to reject the null hypothesis and conclude the data are statistically significant.

At the α = 0.05 level, we fail to reject the null hypothesis and conclude the data are not statistically significant.

(e) Interpret your conclusion in the context of the application.

There is sufficient evidence at the 0.05 level to conclude that the true proportion of numbers with a leading 1 in the revenue file is less than 0.301.

There is insufficient evidence at the 0.05 level to conclude that the true proportion of numbers with a leading 1 in the revenue file is less than 0.301.    

(ii) If p is in fact less than 0.301, would it make you suspect that there are not enough numbers in the data file with leading 1's? Could this indicate that the books have been "cooked" by "pumping up" or inflating the numbers? Comment from the viewpoint of a stockholder. Comment from the perspective of the Federal Bureau of Investigation as it looks for money laundering in the form of false profits.

No. The revenue data file does not seem to include more numbers with higher first nonzero digits than Benford's law predicts.

No. The revenue data file seems to include more numbers with higher first nonzero digits than Benford's law predicts.    

Yes. The revenue data file does not seem to include more numbers with higher first nonzero digits than Benford's law predicts.

Yes. The revenue data file seems to include more numbers with higher first nonzero digits than Benford's law predicts.

(iii) Comment on the following statement: If we reject the null hypothesis at level of significance α, we have not proved H_o to be false. We can say that the probability is α that we made a mistake in rejecting H_o. Based on the outcome of the test, would you recommend further investigation before accusing the company of fraud?

We have not proved H₀ to be false. Because our data lead us to reject the null hypothesis, more investigation is not merited.

We have not proved H₀ to be false. Because our data lead us to reject the null hypothesis, more investigation is merited.    

We have proved H₀ to be false. Because our data lead us to reject the null hypothesis, more investigation is not merited.

We have not proved H₀ to be false. Because our data lead us to accept the null hypothesis, more investigation is not merited.