Barry Yellen, CPA, is a sole practitioner. The largest audit client in his office is Rooster Sportswear. Rooster is a privately owned company in Chicken Heights, Idaho, with a 12-person board of directors. Barry is in the process of auditing Rooster's financial statements for the year ended December 31, 2019. He just discovered a related-party transaction that has him worried. For one thing, the relationship has existed for the past two years, but Barry did not discover it. What's just as troubling is that the client hid it from him. Rooster bought out Hen Sportswear two years ago but still operates it as a separate entity, and since then has systematically failed to disclose to the private investors related-party transactions involving the CEO of Rooster, Frank Footer. It seems that Footer is borrowing money from Hen and is deeply in debt to the CEO of that company, who is his brother-in-law. Also, Hen has hired relatives of Footer, most of whom are unqualified for their jobs, and pays them an above-market salary. This has been hidden from Barry as well. Barry was informed by an anonymous tipster that Rooster operates a secret off-balance-sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses, an apartment rental for Footer, and cash and noncash gifts to local government officials to "grease the wheels" when permits need to be expedited in favor of Rooster. Barry doesn't know what to make of it, because he is too focused right now on the related-party transactions with Hen Sportswear. Barry is in the process of questioning Hans Burger, CPA, who is the CFO of Rooster, about these transactions. Burger explains that he had raised these issues with Footer but was instructed in no uncertain terms to leave them alone. He did just that. Burger told Barry he needed this job and wouldn't jeopardize it out of a sense of "ethics." Barry is in his office back at the firm and reflecting on how best to handle this matter.

Questions

1. Who are the stakeholders in this case and what are Barry's obligations to them?

You are CEO of a new firm, DUNSMED, Inc. which has invented a successful Covid-19 vaccine. The US government has given you an exclusive patent on the drug for 10 years. The government, in exchange for granting this exclusive patent, wants all 100,000 doses manufactured for the first year. As CEO of the company, you are in charge of pricing for the drug and the Marginal Cost is equal to the Marginal Revenue at a price of $2,000 per dose. Demand is extremely high for the drug as your firm is the only company that has invented a Covid-19 vaccine and the Marginal Cost is equal Demand at the price of $10,000 per dose but you can only fill the government's order of 100,000 doses. Please answer the following questions given this information.

a. For the first year, what type of market environment is your firm operating in? What characteristics lead you to believe that and why? Explain clearly and thoroughly (5 sentences minimum are required).

b. What is the minimum price your firm should charge for the drug per dose? Why and how did you come up with the pricing? Explain clearly and thoroughly (5 sentences minimum are required).

c. After the patent expires and the drug is no longer in strong demand, assume 10 other companies all create generic versions of the same vaccine. Your competitors are all charging $11 per dose. Marginal Revenue equals Marginal Cost at $11 per dose. What type of market environment is your firm operating in and why? What price should you charge now? Explain clearly and thoroughly (5 sentences minimum are required).

d. Given that 10 other companies are already creating the same vaccine. Would your firm earn an economic profit assuming you priced the vaccine at the same level as your competitors? Additionally, what would happen if your firm would charge more than your competitors? What would happen if you charge less than your competitors? Explain clearly and thoroughly (5 sentences minimum are required).

Question 1 1 pts Horizontal analysis A) compares beginning and ending balances within the same accounts for the same company for a stated year. B) compares beginning and ending balances within the same accounts between two companies for a stated year. C) compares only ending balances within the same accounts for the same company for a stated year. D) compares only ending balances within the same accounts between two companies for a stated year. Flag this Question

Question 2 1 pts Vertical analysis of a balance sheet A) uses net sales as the 100% "base" and compares amounts to it. B) uses total assets as the 100% "base" and compares amounts to it. C) uses total stockholders' equity as the 100% "base" and compares amounts to it. D) cannot be done -- only the income statement can be vertically analyzed. Flag this Question

Question 3 1 pts The working capital of a corporation is calculated by subtracting current liabilities from current assets. A) The resulting number determines whether fixed assets may be depreciated for the current year. B) is expressed as a fraction (or a ratio). C) is a measurement of the company's solvency. D) is a measure of the company's profitability. Flag this Question

Question 4 1 pts The earnings per share ratio is very descriptive; it tells interested parties how much each share of outstanding stock would receive if all of the current year's earnings were distributed. A) A key point about this ratio is the earnings must be changed from accrual to cash. B) it is an important factor in determining the company's ability to borrow money through the use of long-term bonds. C) it is not shown on financial reports of publicly-held companies. D) the earnings are calculated only for the common shares outstanding. Flag this Question

Question 5 1 pts Per the regulatory pronouncements of the Sarbanes-Oxley Act of 2002, a certification as to the internal controls of a corporation being in place and functioning must be made by A) The CEO and CFO only. B) the external auditor only. C) the CEO, CFO, and external auditor. D)the SEC.

PROBLEM 5: FOREIGN CURRENCY (20 MARKS TOTAL)

Use the information here for answering questions 1 to 3 on this page.

On 1 April 2020, Winton Ltd, an Australian entity, places an order for GBP £200,000 of inventory with Austen plc, a UK supplier. On the same date, Winton Ltd enters into a forward exchange contract with the bank to buy GBP £200,000, to be settled on 31 July 2020. The goods are shipped FOB London on 1 May 2020 and are paid for on 31 July 2020. Winton Ltd has a reporting date of 30 June.

The following exchange rates are applicable.

       Spot rate            Forward rate for 31/7/20
1 April 2020          A$1 = 0.63 GBP               A$1 = 0.61 GBP
1 May 2020          A$1 = 0.67 GBP               A$1 = 0.64 GBP
30 June 2020       A$1 = 0.62 GBP               A$1 = 0.60 GBP
31 July 2020         A$1 = 0.59 GBP               A$1 = 0.59 GBP

Q1: Complete the table showing the movement and the change in value of the hedged item

Type text or numbers as appropriate in the following table. Enter numbers as numerals only. Use a negative symbol '-' in front of your number where appropriate to indicate a loss. Enter a 0 if you do not need to enter data in that field.

Q2: Complete the table showing the movement and the change in value of the hedging instrument

Type text or numbers as appropriate in the following table. Enter numbers as numerals only. Use a negative symbol '-' in front of your number where appropriate to indicate a loss or a liability. Enter a 0 if you do not need to enter data in that field.

Q3: Provide the journal entries for Winton Ltd to reflect the above transactions

The following information was obtained from the accounting records and financial statements of Palmer Inc.

Additional information:

• On May 5, 2020 a capital asset with a cost of $225,000 and net book value of $90,000 was sold for $70,000.
• On September 1, 2020, Palmer issued 5% bonds for face value of $ 200,000.
• On October 15, 2020, bonds with a face value of $ 100,000 were retired for $ 110,000.
• On December 20, 2020, Palmer declared and paid cash dividends.

Required:

1. Prepare the cash flow statement, using the direct method, for Palmer for the year ended December 31, 2020.
2. Prepare the cash flows from operating activities, using the indirect method, for Palmer for the year ended December 31, 2020.

Mr. Wong buys gold from gold mines and resells it in the retail market in Country A. Before the gold is sold in the retail market, Mr. Wong needs to store the gold in a warehouse and the storage cost is $10 per kg of gold per day. For examples, if Mr. Wong buys 1kg of gold on 22 April 2020 and sells it on the same day, Mr. Wong has to pay a storage cost of $10. If Mr. Wong buys 1kg of gold on 22 April 2020 and sells it on the next day, Mr. Wong has to pay a storage cost of $10 x 2 = $20. There is no fixed cost in Mr. Wong’s gold business.

Mr. Wong is the sole retailer of gold in Country A and he would like to maximize the profit of his business.

The market demand for gold is Q^d = 3000-75P and

The corresponding marginal revenue is MR = 40 – 2Q/75,

where Q^d is the quantity demanded for gold (kg/day) and P is the price of gold per kg.

For instance, when P = 20, Q^d = 3000-75(20) = 1500 and MR = 40-2(1500)/75 = 0.

(i) Suppose that Mr. Wong buys gold at a price of $10 per kg. What should be the price of gold set by Mr. Wong in the retail market and what is the quantity of gold sold in the retail market? What is the profit of Mr. Wong’s business?      

(ii) Suppose that the government of Country A requires Mr. Wong to pay for a licensing fee for operating his gold business. After paying for a licensing fee of $2,000 per day, Mr. Wong can sell whatever amount of gold in the retail market in Country A. Briefly discuss how this licensing fee may affect your answers in (i).

(iii) Now, Mr. Wong does not need to pay any licensing fee. Yet, because of a logistical problem, gold purchased today can only be sold on the next day. Briefly discuss how this logistical problem will affect your answers in (i).   

(iv) Now, Mr. Wong does not need to pay any license fee and there is no logistical problem. On 22 April 2020, after Mr. Wong purchased 750kg of gold at a price of $10/kg, the government of Country A announced that the people of Country A cannot buy gold anymore. On the same day, a foreign businessman contacted Mr. Wong suggesting to buy 750kg of gold from him at a price of -$5 (minus $5 per kg). This is the only offer to Mr. Wong on that day. If you were Mr. Wong, will you accept this offer and sell your gold at a negative price?  

(v) “A futures contract for U.S. crude (oil) prices dropped more than 100% and turned negative for the first time in history on Monday, showing just how much demand has collapsed due to the coronavirus pandemic (CNBC April 19, 2020)”. With reference to your answer in (iv), briefly explain why crude oil price could be negative.

Pannier Company is the parent company that owns an 80% interest in Jodestar Company. The interest was acquired at book value, and the simple equity method is used to record the ownership interest. The trial balances of the two companies on December 31, 2016, were as follows:

As the year ended, Pannier was planning to transfer a major piece of equipment to Jodestar. The equipment was just purchased by Pannier and is included in its inventory account. The equipment cost Pannier $100,000 and would be transferred to Jodestar for $125,000. There are two options as follows:

a. Sell the equipment to Jodestar for $125,000 and finance it with a 5-year, 10% interest installment note.

b. Lease the equipment to Jodestar on a 5-year lease requiring payments of $29,977 in advance.

Required

2. Prepare a consolidated income statement and balance sheet for the company for 2016. (Note: The effect of the equipment sale is not included in the trial balance.)

Recent election cycles have brought new challenges for corporations and their boards of directors. For example, in the 2016 presidential election campaign, candidate Hillary Clinton unveiled a prescription drug plan to lower prescription prices following the Turing Pharmaceutical price gouging scandal. Yet ironically, the pharmaceutical industry was one of the most generous industry donators to her campaign, as well as those of the other candidates.In fact, the health industry overall (including health professionals, hospitals, HMOs, and pharmaceutical companies) donated over $10 million to the presidential candidates by spring of 2016.

In essence, the pharmaceutical companies and health-care professionals spent money to promote policies that went against their own financial interests. This happened in congressional elections as well. In 2010, the pharmaceutical industry’s trade group, PhRMA, donated funds to nonprofit groups that used those funds to help elect 23 representatives who subsequently voted to limit access to contraceptives.

Some of those funds came from firms like Pfizer, Bayer, and Merck —all manufacturers of contraceptives.Political spending is also an issue with individual companies. Target Corporation, a company that had positioned itself as an LGBT-friendly corporation, found itself the target of angry employees and customers when they learned about Target’s political spending. Target, a sponsor of the annual Twin Cities homosexual Pride Festival, donated money to a business group that supported an homosexual rights candidate for Minnesota governor. Angry employees and consumers conducted protests outside Target stores and threatened a boycott.

These examples show how political spending can have dramatic consequences for corporations. Politicians take positions on a range of policies and so the same politician may hold some positions that support and other positions that damage a corporation’s best interests. This problem was exacerbated when the U.S.Supreme Court’s Citizen United decision changed the political spending landscape for corporations. Before that decision, political spending was constrained to political action committees (PACs), and PAC political activity had to be disclosed to the FEC (Federal Election Commission). Now firms can make unlimited contributions directly to candidates or indirectly to 501c4 nonprofits and trade associations, who can then hide both the donors who provided the money and the way the money was spent. Firms are now freer to become politically involved but, as Target and the pharmaceutical companies found out, that freedom comes with risk.Shareholders and other stakeholders are asking firms to be transparent in their political spending. They want to judge those expenditures for themselves to avoid agency problems and other conflicts of interest.

Ira M. Millstein, founder of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School, proposes a new policy for boards of directors to follow in this new landscape. He suggests that:

1.Companies should require trade associations of which they are members to report to them on their political spending,

2.Companies should require trade associations of which they are members to disclose the donors who provide the money for their political spending,and

3.Companies should then disclose the information they receive from their trade associations when they disclose their other spending to shareholders and other stakeholders.

DISCUSSIONQUESTIONS

1.How would you react to the problem of political spending?

2.As the Chief Executive Officer of a pharmaceutical company, what would you do? Would you retain your PhRMA membership? Would you attach any conditions to your membership?

3.How would you react to the Target situation? What would you do as the CEO?

4.What is your reaction to Ira Millstein’s suggestions? Should corporations demand that trade associations disclose this information before they join?

5.Should companies start disclosing the information they gather? If a trade association refuses to give up that information, should the company decline to join?

Brad Smith has done some analysis about the profitability of the bicycle shop. If Brad builds the large bicycle shop, he will earn $60,000 if the market is favorable, but he will lose $40,000 if the market is unfavorable. The small shop will return a $30,000 profit in a favorable market and a $10,000 loss in an unfavorable market. At the present time, he believes that there is a 50-50 chance that the market will be favorable. His former marketing professor will charge him $5,000 for the marketing research. Furthermore, there is a 0.9 probability that the market will be favorable given a favorable outcome from the study.

What is the highest Expected Monetary Value for Brad’s decision?