1. Peanut Company acquired 90 percent of Snoopy Company’s outstanding common stock for $319,500 on January 1, 2019, when the book value of Snoopy’s net assets was equal to $355,000. Peanut uses the equity method to account for investments. The following trial balance summarizes the financial position and operations for Peanut and Snoopy as of December 31, 2019:

1. Prepare any equity method journal entry(ies) related to the investment in Snoopy Company during 2019.
2. Prepare a consolidation worksheet for 2019 in good form

Prepare entries under cost and equity methods, and prepare a memorandum.  

PH.4 (LO 2) Writing Wellman Company acquired 30% of the outstanding common stock of Grinwold Inc. on January 1, 2022, by paying $1,800,000 for 60,000 shares. Grinwold declared and paid a $0.50 per share cash dividend on June 30 and again on December 31, 2022. Grinwold reported a net income of $800,000 for the year.

a. Total dividend revenue for 2022 $60,000
b. Revenue from stock investments $240,000

Instructions

a. Prepare the journal entries for Wellman Company for 2022, assuming Wellman cannot exercise significant influence over Grinwold. (Use the cost method.)
b. Prepare the journal entries for Wellman Company for 2022, assuming Wellman can exercise significant influence over Grinwold. (Use the equity method.)
c. The board of directors of Wellman Company is confused about the differences between the cost and equity methods. Prepare a memorandum for the board that explains each method and shows in tabular form the account balances under each method at December 31, 2022.

Paul D. Kimmel. Accounting: Tools for Business Decision Making, 7th Edition (p. H-18).

Instructions: Choose one of the two options described below. Analyze the data using what you have learned in class.

Instructions: Your answer will include the following:

• A statement of the research question
• A description of the source of the data
• A description of the variables used in the analysis
• A contingency table (two-way table)
• Calculations of relevant percentages
• An answer to the question based on your analysis of the data

Option 1: Cheating

Research questions (do both):

• Are college students willing to report cheating?
• Is the willingness to report cheating related to   gender?

Investigate these questions for the students described in    body_image.xls.

This data comes from a survey of university students at Carnegie Mellon University in Pittsburgh, PA.

Here are the survey questions and associated variables:

Are you a male or a female? Gender (male, female) What is your height in inches? Height (in inches) What is your GPA? GPA

What was your high school GPA?    HS GPA

Where do you tend to sit in class?   Seat (F=front, M=middle, B=back)   How do you feel about your weight? WtFeel (OverWt, AboutRt, UnderWt) Would you report cheating if you witnessed it?    (yes, no)

Option 2: Gender and Body Image

Research question: Do female college students tend to feel differently about their weight compared to male college students?

Investigate this question for the students described in   body_image.xls.

This data comes from a survey of university students at Carnegie Mellon University in Pittsburgh, PA.

Here are the survey questions and associated variables:

Are you a male or a female? Gender (male, female) What is your height in inches? Height (in inches) What is your GPA? GPA

What was your high school GPA?    HS GPA

Where do you tend to sit in class?   Seat (F=front, M=middle, B=back)   How do you feel about your weight? WtFeel (OverWt, AboutRt, UnderWt) Would you report cheating if you witnessed it?    (yes, no)

Exercise 16-13

Nash Company issues 3,700 shares of restricted stock to its CFO, Dane Yaping, on January 1, 2020. The stock has a fair value of $116,000 on this date. The service period related to this restricted stock is 4 years. Vesting occurs if Yaping stays with the company for 4 years. The par value of the stock is $5. At December 31, 2021, the fair value of the stock is $155,000.

(a) Prepare the journal entries to record the restricted stock on January 1, 2020 (the date of grant), and December 31, 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

(b) On March 4, 2022, Yaping leaves the company. Prepare the journal entry to account for this forfeiture. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

For each of the unrelated transactions described below, present the entries required to record each transaction. 1. Marigold Corp. issued $22,000,000 par value 10% convertible bonds at 97. If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at 95. 2. Swifty Company issued $22,000,000 par value 10% bonds at 96. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $4. 3. Suppose Sepracor, Inc. called its convertible debt in 2020. Assume the following related to the transaction. The 11%, $10,300,000 par value bonds were converted into 1,030,000 shares of $1 par value common stock on July 1, 2020. On July 1, there was $55,000 of unamortized discount applicable to the bonds, and the company paid an additional $68,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

Discuss historical data from 2010 - 2020 about GDP growth rate (percentage) and Real GDP volume (in dollar value)

1. You are a finance manager for the company JKL Limited based in the US. Your CFO comes to you and tells you that you intend to make a debt funding for a new 5-year project in Austria. Since he is not very familiar with such a funding, he tells you that he has heard of different aspects or variables of such a funding. Please name those and explain briefly.
2. Company JKL Limited has 10 million stocks outstanding. The shares are trading at 60$ per share. It also has 400 bonds outstanding – each valued at 500.000$. The marginal tax-rate is at 30%. For the expected return of the shareholders is about 14% and the interest rate for the bonds is at 8%. What is JKL’s after-tax WACC?

3. Recently you have been invited to the Directors meeting to decide on the future capital structure for the firm. One of your colleagues came with the following argument: “As the firm borrows more and debt becomes risky, both stockholders and bondholders demand higher rates of return. Thus, by reducing the debt ratio we can reduce both the cost of debt and the cost of equity, making everybody better off.”

   Using the argument of M&M Proposition I“The market value of a company is independent of its

   capital structure”, suggest why this argument is not relevant, for simplicity ignore the tax implications.

4. An investor considers whether to invest in debt or equity of STU Corporation. Since he already has to pay a high personal tax rate, he does not want to pay more taxes than necessary. Therefore, he weighs the pros and cons of investing in bonds or equities in the local financial markets. The personal tax rate on interest income is 45%, the corporate tax rate is 27.5% and the tax rate on dividends is 20%. Which strategy do you recommend the investor?  

5. STU Corporation wants to assess the value of interest savings due to the tax deductibility of interest on debt. The corporate tax rate is given above. The total debt stands at $ 7.5mn and the return on debt is 6.5%. Assuming that the current level of debt is permanent, calculate the annual interest payment due and the present value of the perpetual tax shield. Explain in what situations a tax shield might be less relevant and/or even misleading.

6. Most financial managers measure debt ratios from their companies’ book balance sheets. Many financial economists emphasize ratios from market-value balance sheets. Which is the right measure in principle? Does the trade-off theory propose to explain book or market leverage? How about the pecking-order theory?

7. The VWX Inc. has 100,000 bonds outstanding (1000$ each) that are selling at 100%. The bonds are yielding 7.5 percent. The company also has 1 million shares of preferred stock outstanding currently yielding 18.75 percent. It has also 5 million shares of common stock outstanding. The preferred stock sells for $56 per share and the common stock sells for $38 a share. The expected return on the common stock is 13.8%. The corporate tax rate is 34 percent. What is VWX Inc.’s weighted average cost of capital

8. The WACC formula implies that debt is “cheaper” than equity, that a firm with more debt could use lower discount rate. Does this make sense?  

9. The Rockettech Corp. is currently at its target debt ratio of 40%. It is contemplating a $1 million expansion of its existing business. This expansion is expected to produce a cash inflow of $130,000 a year in perpetuity.

   The company is uncertain whether to undertake this expansion and how to finance it. The two options are a $1 million issue of common stock or a $1 million issue of 20-year debt. The flotation costs of a stock issue would be around 5% of the amount raised, and the flotation costs of a debt issue would be around 1.5%.

   Rockettech’s financial manager, estimates that the required return on the company’s equity is 14%, but argues that the flotation costs increase the cost of new equity to 19%. On this basis, the project does not appear viable. On the other hand, she points out that the company can raise new debt on a 7% yield, which would make the cost of new debt 8.5%. She therefore recommends that Rockettech should go ahead with the project and finance it with an issue of long-term debt.

   Is the financial manager right? How would you evaluate the project, considering that the project has the same business risk as the firms other assets?

You are a finance manager for the company JKL Limited based in the US. Your CFO comes to you and tells you that you intend to make a debt funding for a new 5-year project in Austria. Since he is not very familiar with such a funding, he tells you that he has heard of different aspects or variables of such a funding. Please name those and explain briefly.

Question 2
E Inc (“EI”) is a company incorporated and tax resident in the US and recently the Board of Directors of EI (“the Board”) are looking to expand their business operations to Asia. Singapore is being considered one of the desirable locations for setting up the new Asian Headquarter (“HQ”).

Required: (a) From an international tax perspective, comment and appraise the use of Singapore as the Asian HQ. In other words, why should EI choose Singapore as its Asian HQ?

(b) Based on some online tax research, EI’s Board have identified a number of potential tax incentives the Singapore HQ may potentially qualify. For the purpose of this part, illustrate the benefits for EI to obtain Pioneer Service Incentive and Development & Expansion Incentive under the Economic Expansion Incentives (Relief from Income Tax Act) (“EEIA”).

(c) For the purpose of this part, illustrate the benefits for EI to obtain the investment allowance incentive under the EEIA and indicate under what circumstances EI should consider applying for this incentive.

In June 2002, it was discovered that Worldcom, a large US telecommunication company, committed one of the largest accounting frauds. Worldcom illegally capitalized $3.8 billion access fees during the year 2001 and the first quarter of 2002. The fees were paid to local network operators to connect calls from Worldcom services to telephones linked to local networks. This is a typical operating expense item for telecommunication companies. However, Worldcom capitalised these expenditures as assets and amortized them over future fiscal periods. Worldcom was persecuted and the penalties and corrections to the accounts eventually led it into bankruptcy.

The amount of capitalized access fees for each of the quarters are detailed as follows (in USD millions):

Quarter 1, 2001 $780

Quarter 2, 2001 $605

Quarter 3, 2001 $760

Quarter 4, 2001 $920

Quarter 1, 2002 $790

Required:

a) Describe how Worldcom’s accounting treatment of access fees affect the line items in the income statements, balance sheets and statements of cash flows.

b) Which accounting principle did Worldcom violate?

c) Assume that capitalized access fees were amortized over 5 years using the straight-line method. Compute the amount of misstatement for each quarter.

d) Without considering tax effects, prepare the journal entries for correcting the misstatements as of the reporting date of Quarter 1, 2002.