1.Can Fred claim a credit disabled tax credit if he is a US resident, 60 years old and is not permanently or totally disabled? Why or why not? Can Donna claim an elderly tax credit if she is 70 years old? Why or why not?

2.Calculate Lisa’s income tax (10% tax rate) if she:

Earned $5,000 in wages

Paid $100 for her work uniform

Paid $200 of interest on her home mortgage

Lost her watch ($300 FMV)

Had a $400 adoption tax credit

3.Calculate Anne’s income tax (10% tax rate) if she:

Earned $3,000 in wages

Paid $100 of alimony to her former spouse

Paid $200 of interest on loan from friend

Held up at gun point and her bracelet ($300 FMV) was taken

Had a $200 child tax credit

Consider the following scenario:

The privately owned Baker Company was founded in 1960. The company manufactures kitchen cabinets and has been very successful, expanding from one facility to twelve facilities in the same and other states. All facilities but the original are located near interstate highways. The original facility, which is no longer the headquarters, is in a downtown area of a major city (which grew up around it) with relatively high real-estate taxes. It has had a negative contribution margin and a net loss for the last five years. The founder is retired and three of his children want to close the facility. The fourth does not, because it "was Dad's first place and I went there every day after school." She believes they can bring the facility back to profitability if the city's downtown revitalization project succeeds and they dedicate the first floor of the facility to retail.

Consider:

• Your definition for "negative contribution margin."
• Whether the fact that the facility is not near an interstate makes a difference in the decision.
• Would it make a difference if the company were publicly traded?
• Might there be additional costs, in addition to revenues, to convert the first floor of the facility to retail?
• What risks may be associated with leasing to retail stores?
• What is your recommendation? Close and sell the facility or modify the first floor to be able to lease to retail stores.

Background

Helio, Inc. (the Company) is a medical device company founded in 2013 in Provo, Utah that specializes in the development and manufacturing of cutting-edge medical devices designed for all types of joint replacement surgeries. In January 2015, the FDA approved Helio’s premier product, a hinged titanium axle designed to provide physicians with more precise placement of joints during joint replacement surgery.

In early 2016, approximately one year after the new product’s approval, the Company hired a new senior vice president (SVP) of sales to oversee sales, physician training, product delivery, and customer service. The broad set of responsibilities allowed the charismatic SVP to significantly influence the Company’s revenue generation. The hiring of the new SVP was also done in large part to help guide the company’s development of an important new sales channel: third-party distributors that are each strategically located in close proximity to key hospitals in regions around the country.

The move to hire the SVP was in direct response to overwhelming disappointment about the first year’s sales volume for the new surgical implant, which was lagging significantly behind expectations. Reports from the field led management to recommend the new sales channel to the board of directors that overwhelmingly approved the new strategy, the execution of which was being led by the new SVP.

Execution of strategy

To help execute the new strategy, the SVP hired five regional sales managers who would become his trusted cohorts. Together, they set aggressive sales targets for the Company’s surgical implants. The sales targets focused on achieving a growth pattern that was characterized by a record high sales volume for each successive quarter in each region. In fact, it is fair to say that the sales targets were intentionally created at almost unreachable levels to remove any question about possible weakness in demand for the Company’s new product.

The strategy focused on the development of a new sales channel with third-party distributors. Each of the distributors had already established close relationships with the physicians that were actually using the product during surgical procedures. To help pay for the launch of their new product, along with the execution of the new strategy, the Company was also working hard to raise a significant amount of new investment capital to fund the resulting increased operating costs. In order to be successful in attracting the new investment capital, top management made it clear to the SVP how important it was to report strong sales for its premier product, the surgical implant for titanium joints. The SVP, in turn, passed along the same message to the regional sales managers.

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 741662

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Management control philosophy

The upper management team of Helio can be described as being aggressive in business practices and often emphasizes speed and efficiency when implementing their decisions. Management rarely hires external consultants because they are of the opinion that consultants are too expensive and often follow a conservative approach. The upper management team meets regularly with its key managers. In general, the upper management team has cooperated with the audit team in order to provide fair and adequate financial reporting, but there have been disagreements in the past. The Company has a strict policy for following all established internal control procedures.

Incentive compensation

Top management focuses significant attention on achieving short-term performance measures based on the audited financial statements when determining compensation and making promotion decisions. Revenue earned is the most important criterion in performance assessment throughout the organization. As part of the launch of its new surgical implant, a new bonus plan was established to provide additional incentives for the entire organization to focus on this new opportunity, with revenue earned as the key criterion used to determine incentive compensation.

Preliminary results

Despite the SVP’s optimism about sales in 2017, internal reports have indicated that the actual sales volume of the surgical implant was well below budget each quarter. The SVP responded to these reports by repeatedly communicating his disappointment to the regional sales managers. Furthermore, he consistently warned that if the team could not boost sales, the Company would likely not be able to raise additional investment capital and would then be forced to significantly downsize its headcount.

Unfortunately, boosting revenue of the new surgical implants was not as simple as merely shipping the product to distributors. The distributors were hesitant to purchase product until the sale to the final customer was finalized as the distributors did not want to be stuck with the inventory on their own balance sheets. Further, the terms of the sales do not include any refund or rebate conditions. In addition, the Company has no intention of changing those terms and accepting any return. Therefore, any sale to distributors are final.

By the end of 2017, the Company had signed on a total of 73 distributors to sell its surgical implants in more than 20 different states throughout the United States. Each distributor was independently owned and operated but the company routinely shared best practices among its network. The SVP monitored sales closely from the distributor network through his regional sales managers. In fact, he even maintained a monthly sales report from each of the 73 distributors.

The Company invoices customers when the goods are shipped, and invoicing triggers the recording of revenue. The Company does not include freight costs in sales revenue but does offset shipping costs with any freight charged to customers.

The following relevant financial data is taken from the Company’s unaudited trial balance, which was used to produce the unaudited financial statements:

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 741662

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Audit approach

Your audit team is currently in the midst of year-end testing in the revenue and accounts receivable cycle for the audit of the calendar year 2017 financial statements. Your testing will focus on the existence/occurrence, cutoff, and accuracy assertions for sales revenue, as well as the existence and valuation assertions for accounts receivable. The audit team has assessed the risk of material misstatement (RMM) for each relevant assertion in order to determine the nature, timing, and extent of the procedures to be performed at Helio.

Other members of the audit team have already completed a walk-through of the revenue and accounts receivable processes, identified “what could go wrongs” within the process, and identified the controls that have been placed in operation to mitigate the risks. Based on the work performed, the team decided to test the operating effectiveness of certain key controls during interim testing. The results are found below.

Tests of controls – Revenue and accounts receivable cycle – Interim

Four key application controls were tested at interim. The information technology (IT) auditors tested the general controls (GITCs) over program changes, access to programs, and computer operations that are relevant to the revenue and accounts receivable cycle. The GITCs were found to be effective. In addition, the IT auditors tested the system to make sure that proper segregation of duties occurred throughout the period and were operating effectively.

The first control is an automated three-way sales match. The control matches the details from 1) an approved sales order; 2) relevant shipping documents; and 3) the sales invoice before revenue is recorded. A test of the control’s operating effectiveness was conducted at the interim. No exceptions

new customers, including the new distributors. A test of the control’s operating effectiveness was conducted at interim. No exceptions were noted.

The third control is an automated sales authorization control. When a sales order is entered into the system, the amount of the sale is added to the existing accounts receivable balance for that customer. The sum is then compared to the customer’s credit limit. A test of the control’s operating effectiveness was conducted at interim. No exceptions were noted.

The fourth control is a monthly review of the adequacy of the allowance for doubtful accounts, completed by the controller. A test of the control’s operating effectiveness was conducted at interim. No exceptions were noted.

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 741662

were noted.

The second control requires the credit department at Helio to conduct a detailed credit check for all

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Roll-forward period

By the end of the third quarter of 2017, sales revenue for the company’s premier surgical implant was still lagging far behind expectations. To help ensure that Helio delivered impressive fourth quarter revenue numbers, the entire sales team, led by the SVP and the regional sales managers, began to exert pressure on a number of distributors in an attempt to improve sales in 2017. This effort seemed to be paying off as the sales team successfully persuaded more than a dozen distributors to purchase product in advance of final customer demand.

These circumstances presented a problem for the Company, because the distributors began to ask for concessions from Helio. For example, in order to persuade the distributors, the Company agreed to hold the inventory in their own warehouse.

The SVP’s actions led to a dramatic increase in revenue for the fourth quarter of 2017. In fact, sales increased year-over-year by 214 percent for the fourth quarter alone. The upward trajectory of sales revenue helped the Company raise the much-needed investment capital as Helio issued more than 10 million shares of common stock for $40 million in early 2018.

1. [5 points] Based on your understanding of fraud risk assessment and material:
   • Identify at least three (3) specific fraud risk factors related to Helio.

2020 Election ~ Bernie Sanders is a popular presidential candidate among university students for the 2020 presidential election. Leading into Michigan’s presidential primary election in 2020, a journalist, Lauren took a random sample of 11,663 university students and found that 8,891 of them support Bernie Sanders.

Using this data, Lauren wants to estimate the actual proportion of university students who support Bernie Sanders.

What is the required sample size to calculate a 95% confidence interval within 3.05 percentage points? Use z*=1.96.z*=1.96.

n=p*(1−p*)(z*ME)2

There is a hotel in Imatra (Finland) which is very close to Russian border. The
demand function of Finnish consumers for this hotel is Q = 1000 - P. The demand
function of Russian consumers for this hotel would be Q = 1400 - P if they had not
travel to Imatra, but they have to travel and cost of travelling is 200. MC of hotel is
200 for one visitor. Find the difference of profits with price discrimination and without
price discrimination.

You are a managing partner of a prestigious investment counseling firm that specializes in individual rather than institutional accounts. The firm has developed a national reputation for its ability to blend modern portfolio theory and traditional portfolio methods. You have written a number of articles on portfolio management and you are considered an authority on the subject of establishing investment policies and programs for individual clients tailored to their particular circumstances and needs.

Dr. and Mrs. A.J. Mason have been referred to your firm and to you in particular. At your first meeting on August 1, 2012, Dr. Mason explained that he is an electrical engineer and long-time professor at a local university. He is also an inventor and, after 30 years of teaching, the right to one of his patented inventions has just been acquired by a new electronics company, ACS, Inc.

In anticipation of the potential value of his invention, Dr. Mason has followed his accountant’s advice and established a private corporation, wholly owned by the Masons to hold the title to the patented invention.   It was this private corporation that sold the right to Dr. Mason’s invention to ACS, Inc. ACS, Inc. has agreed to pay $1 million in cash, payable at the closing on September 30, 2012, for the right to Dr. Mason’s invention. In addition, ACS, Inc. has agreed to pay royalties to Dr. Mason’s private corporation on its sales of systems that utilize the invention.

While all parties are optimistic about prospects for success, they are also mindful of the risks associated with any new firm, especially those exposed to the technological obsolescence of the electronics industry. The management of ACS, Inc. has indicated to Dr. Mason that he might expect royalties of as much as $100,000 in the first year of production and maximum royalties of as much as $500,000 annually thereafter.

During your counseling meeting Mrs. Mason expressed concern for the proper investment of the $1 million initial payment. She pointed out that Dr. Mason has invested all of their savings into his inventions. Thus, they will have only their Social Security retirement benefits and a small pension from the local university to provide for their retirement. Dr. Mason will be 65 at September 30, 2013. His salary from the local university is currently $55,000 per year and he does not expect this amount to change between now and his planned retirement on his 65th birthday. After retirement Dr. Mason expects to continue earning $10,000 - $25,000 annually from consulting and speaking engagements.   The expected Social Security benefits are expected to be $1,800 per month beginning in October, 2013 and the annual pension from the local university is expected to be $15,000 per year beginning at the same time.

Assuming the royalty payments from ACS, Inc. are equal to $100,000 in the first year and an average of $300,000 per year thereafter, the Masons are planning to help with the education of their six grandchildren. The grandchildren range in age from 8 to 12 years old. In addition, the Masons wish to establish a scholarship fund in the name of Dr. Mason at the local university that would provide $5,000 per year to one selected electrical engineering student. This scholarship should be self- sustaining with its own investments.

Both Dr. and Mrs. Mason have strongly indicated during the first appointment that they are conservative investors and want a minimum risk of any losses.

Requirements

You and your fellow partners are to present a proposal that specifically meets the retirement investment objectives of the Masons listed below. Your proposal should be from 4 – 6 pages double spaces, Times Roman 12 pt. In addition, your team should include a cover page listing each member of your team and a separate list of any references used in preparing the proposal. The proposal must follow APA rules in structure and presentation.

Dr. & Mrs. Mason’s Retirement Investment Objectives

*Provide $65,000 of withdrawals from the investment account each year. This amount will be in addition to the university pension and Social Security received each year.

*Minimize income tax.

*Include at least three types of investments.

*Provide for active management of the portfolio with an annual fee of 1% - 1 ½% of value in the investment portfolio.

*Provide an annual growth after all withdrawals and fees of 4% - 5%.

*Provide funding for the six grandchildren’s education that will total $40,000 each when they reach the age of 18.

*Provide for a continuing scholarship at the local university in the amount of $5,000 per year.

Question 3

1. Identify 3 of the 5 advantages of using investment funds over making an investment in an individual security.
2. Explain briefly why the returns earned by investors in index funds has typically been higher than the returns earned by investors in traditional mutual funds.
3. In February of 2019, you bought 800 units in an actively managed mutual fund for $24.66 each. As a result of your purchase, the number of units outstanding was 1,240,768. Over the last 12 months, the fund earned a 42% return, increased asset under management by 288%, and incurred $0.88 per unit in management fees (paid at the end of the period). What is the fund’s current NAV?
4. What is the main difference between a mutual fund and an ETF? (1 mark)
5. Why did ETFs not exist in the 1950s? (1 mark)

1. Identify 3 of the 5 advantages of using investment funds over making an investment in an individual security.
2. Explain briefly why the returns earned by investors in index funds has typically been higher than the returns earned by investors in traditional mutual funds.
3. In February of 2019, you bought 800 units in an actively managed mutual fund for $24.66 each. As a result of your purchase, the number of units outstanding was 1,240,768. Over the last 12 months, the fund earned a 42% return, increased asset under management by 288%, and incurred $0.88 per unit in management fees (paid at the end of the period). What is the fund’s current NAV?
4. What is the main difference between a mutual fund and an ETF? (1 mark)
5. Why did ETFs not exist in the 1950s? (1 mark)

Consider a simple Earned Income Tax Credit (EITC) that is equal to a subsidy of .40 on each dollar earned up to $10,000, then constant up to earnings of $20,000. Beyond earnings of $20,000 the credit is phased out at a rate of .50 for each additional dollar earned.

a. Draw the budget constraint before and after the EITC for a worker earning $10 per hour, and able to allocate 4000 hours per year to work and leisure (T=4000). Label the intercepts and all kink points in the budget constraint on both axes.

b. What is the effect of the EITC on the average labor force participation rate of eligible individuals? Why? Explain using income and substitution effects.

c. On a graph, illustrate a case in which the EITC reduces the number of hours worked by an individual. Explain using income and substitution effects.