Case Study 2

Customs Changes, Tariff Reduction Among Measures Responding to COVID-19

Monday, March 30, 2020

Sandler, Travis & Rosenberg Trade Report

Countries around the world are taking a variety of measures to ensure adequate access to and supplies of medical goods to deal with the COVID-19 pandemic. A recent Congressional Research Service report examines some of these actions, including the following.

Imposing Export Restrictions. The European Union has introduced measures that prohibit the export of personal protective equipment (e.g., masks, protective glasses, and garments) without prior regulatory approval. India has restricted exports of 26 pharmaceutical components as well as medicines and vitamins made from them. Dozens of other countries have also imposed export restrictions to address potential supply shortages. The U.S. has generally not supported such measures, but it is unclear whether they are inconsistent with World Trade Organization rules or may qualify for one of the available exceptions regarding critical shortages of essential products, protection of human life, or national security.

Reducing Tariffs. The U.S. has removed some of its Section 301 tariffs on medical goods from China, but the Trump administration has come under pressure to remove or suspend others as well. The report points out that Congress could potentially do this itself since it has the constitutional authority to “lay and collect duties.” Another option would be for the administration to permit duty-free imports of food, clothing, and medical, surgical, and other supplies for use in emergency relief work under Section 318 of the Tariff Act of 1930.

Revising Import Procedures. Most countries regulate imports of medical goods for public health and safety reasons, but some have taken steps to streamline their customs procedures to address issues that could delay access to medical goods. For example, China created a “green lane” system that prioritizes the inspection and review of imported medical goods. Similarly, the EU recently introduced guidelines instructing its member states to create “green lanes” for freight transport to ensure access to essential products such as medicines and medical equipment.

The U.S. has not yet publicly proposed amending its customs or other regulatory procedures in response to the COVID-19 pandemic. However, U.S. Customs and Border Protection may be able to create a “green lane” system using its congressional authorization to develop and implement screening and targeting capabilities, including prioritizing of passengers and cargo. The report notes that creating such a system may require CBP to complete a rulemaking process, which could take time, but that Congress could consider using its constitutional authority to regulate foreign commerce to more quickly implement new customs prioritization procedures.

Prioritizing Domestic Production. Many countries import more health-related products than they export. As an alternative to reliance on cross-border supply chains, the U.S. and some of its trading partners have sought to prioritize domestic production of necessary goods, either by requiring manufacturers to complete orders of medical goods before orders of non-medical goods or by imposing increased production requirements on these manufacturers. Such measures may be permitted under WTO rules provided (a) they are not unlawful subsidies (e.g., those that harm the industries of other WTO members) under the WTO Agreement on Subsidies and Countervailing Measures or (b) if they are potentially WTO-inconsistent, they fall within an exception.

Questions:

1.   What do your understand of the term ‘green lane’ as mentioned in the paragraph? What will happen if the ‘green lane’ system is not being applied in this time of COVID-19 pandemic? Explain.

2.   In this case, why do you think most countries in the world are introducing custom changes and tariff reduction? Have these changes in trade policies helped the countries’ economy or created even bigger barriers for trade. Discuss.

Exercise 14-4 Prepare a Statement of Cash Flows [LO14-1, LO14-2] The following changes took place last year in Pavolik Company’s balance sheet accounts: Asset and Contra-Asset Accounts Liabilities and Stockholders' Equity Accounts Cash $ 5 D Accounts payable $ 35 I Accounts receivable $ 110 I Accrued liabilities $ 4 D Inventory $ 70 D Income taxes payable $ 8 I Prepaid expenses $ 9 I Bonds payable $ 150 I Long-term investments $ 6 D Common stock $ 80 D Property, plant, and equipment $ 185 I Retained earnings $ 54 I Accumulated depreciation $ 60 I D = Decrease; I = Increase. Long-term investments that cost the company $6 were sold during the year for $16 and land that cost $15 was sold for $9. In addition, the company declared and paid $30 in cash dividends during the year. Besides the sale of land, no other sales or retirements of plant and equipment took place during the year. Pavolik did not retire any bonds during the year or issue any new common stock. The company’s income statement for the year follows: Sales $ 700 Cost of goods sold 400 Gross margin 300 Selling and administrative expenses 184 Net operating income 116 Nonoperating items: Loss on sale of land $ (6 ) Gain on sale of investments 10 4 Income before taxes 120 Income taxes 36 Net income $ 84 The company’s beginning cash balance was $90 and its ending balance was $85. Required: 1. Use the indirect method to determine the net cash provided by operating activities for the year. 2. Prepare a statement of cash flows for the year.

1. From the 'Rolling with the Changes-HFMA' article (Summer 2020):
   • How did COVID-19 pandemic...'accelerate telehealth?'
2. What two things appeared to be true for all U.S. healthcare organizations?
3. Provide four examples of how staff and medical practitioners were redeployed:
4. Why did Virginia Commonwealth University Health System 'project a positive financial outlook?'
5. Why would patient volume declining affect revenue?

Exercise 12-4 Prepare a Statement of Cash Flows [LO12-1, LO12-2]

Logan B. Taylor is a widower whose wife, Sara, died on June 6, 2014. He lives at 4680 Dogwood Lane, Springfield, MO 65801. He is employed as a paralegal by a local law firm. During 2016, he had the following receipts:

Logan inherited securities worth $60,000 from his uncle, Daniel, who died in 2016. Logan also was the designated beneficiary of an insurance policy on Daniel's life with a maturity value of $200,000. The lot in St. Louis was purchased on May 2, 2011, for $85,000 and held as an investment. As the neighborhood has deteriorated, Logan decided to cut his losses and sold the lot on January 5, 2016, for $80,000. The estate sale consisted largely of items belonging to Sara and Daniel (e.g., camper, boat, furniture, and fishing and hunting equipment). Logan estimates that the property sold originally cost at least twice the $9,000 he received and has declined or stayed the same in value since Sara and Daniel died.

Logan's expenditures for 2016 include the following:

Logan and his dependents are covered by his employer's health insurance policy for all of 2016. However, he is subject to a deductible, and dental care is not included. The $10,500 dental charge was for Helen's implants. Helen is Logan's widowed mother, who lives with him (see below). Logan normally pledges $2,400 ($200 per month) each year to his church. On December 5, 2016, upon the advice of his pastor, he prepaid his pledge for 2017.

Logan's household, all of whom he supports, includes the following:

Helen receives a modest Social Security benefit. Asher, a son, is a full-time student in dental school and earns $4,500 as a part-time dental assistant. Mia, a daughter, does not work and is engaged to be married.

Required:

Using the Form 1040, Form 8949 and Schedule A and Schedule D, compute Logan's income tax for 2016. Federal income tax of $5,500 was withheld from his wages. If Logan has any overpayment on his income tax, he wants the refund sent to him. Assume that the proper amounts of Social Security and Medicare taxes were withheld. Logan does not want to contribute to the Presidential Election Campaign Fund.

Make realistic assumptions about any missing data.

Enter all amounts as positive numbers except any losses. Use the minus sign to indicate a loss.

If an amount box does not require an entry or the answer is zero, enter "0".

It may be necessary to complete the other tax schedules before completing Form 1040.

When computing the tax liability, do not round your immediate calculations. If required round your final answers to the nearest dollar.

Follow-up Advice Letter

In early 2017, the following take place:

Helen decides that she wants to live with one of her daughters and moves to Arizona.

Asher graduates from dental school and joins an existing practice in St. Louis.

Mia marries, and she and her husband move in with his parents.

Using the insurance proceeds he received on Daniel’s death, Logan pays off the mortgage on his personal residence.

Logan believes that these events may have an effect on his tax position for 2017. Therefore, he requests your advice. Complete the letter to Logan explaining in general terms the changes that will occur for tax purposes. Assume that Logan’s salary and other factors not mentioned (e.g., property and state income taxes) will remain the same. The personal exemption for 2017 is $4,050. Use the 2017 tax rate schedules (click here) in projecting Logan’s tax for 2017.

Milea Inc. experienced the following events in 2018, its first year of operations:

1. Received $14,500 cash from the issue of common stock.
2. Performed services on account for $45,000.
3. Paid the utility expense of $1,200.
4. Collected $30,150 of the accounts receivable.
5. Recorded $7,100 of accrued salaries at the end of the year.
6. Paid a $1,100 cash dividend to the stockholders.

2. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for the 2018 accounting period.

• Req B1
• Req B2
• Req B3
• Req B4

Prepare the income statement.

• Req B2
• Req B3
• Req B4

Prepare the statement of changes in stockholders’ equity.

Prepare the balance sheet.

Prepare the statement of cash flows for the 2018 accounting period. (Amounts to be deducted should be indicated with a minus sign.)

FCA Company“ produces and sells three products (A), (B) and (C).The following data and information are now accessible for the last year ended December 31, 2015:

To plan for the next year, some alternative views are expressed as under:

The first view : Although product ( C ) showed last year   a net loss, it is recommended not to delete product ( C ) but to continue producing and selling the same three products without any changes from last year ended.

The Second View : Continue product ( C ) because studies indicated that deleting this product in the next year will decrease the sales quantities of each of the other products by 10% without any changes in selling prices , contribution margin ratio , special and common committed fixed costs of the last year and no alternative use of the vacated facilities of product ( C ) .

The Third View: Deleting products ( C ) and ( A ) and use the vacated facilities of these products to increase the sales quantities of product ( B ) to the maximum units of the local market demand of 50,000 units , without any changes in selling prices , contribution margin ratio , special and common committed fixed costs of the last year .

Required: Prepare the detailed income statement which is expected under each alternative view, then comment briefly on the decision rules involved therein. (Show the necessary supporting computations)

Please use the following information to answer the next question:

For BB Incorporated:

Cash Flows from Assets -------------------------------------------------------------------- 100 dollars
EBIT (from 1999 INCOME STATEMENT) -------------------------------------------0 dollars
Depreciation Expense (from 1999 INCOME STATEMENT) ---------------------- 0 dollars
Taxes (from 1999 INCOME STATEMENT) ------------------------------------------ 0
Net Fixed Assets from BALANCE SHEET dated December 31, 1998-------------1400 dollars
Net Fixed Assets from BALANCE SHEET dated December 31, 1999------------ 1300 dollars
Additions to (Changes in) NWC for 1999 ---------------------------------------------- 0 dollars

For KK Incorporated:

Cash Flows from Assets ---------------------------------------------------------------------0 dollars
EBIT (from 1999 INCOME STATEMENT) -------------------------------------------500 dollars
Depreciation Expense (from 1999 INCOME STATEMENT) ----------------------100 dollars
Taxes (from 1999 INCOME STATEMENT) ------------------------------------------100
Net Fixed Assets from BALANCE SHEET dated December 31, 1998------------1400 dollars
Net Fixed Assets from BALANCE SHEET dated December 31, 1999------------1800 dollars
Additions to (Changes in) NWC for 1999 ----------------------------------------------0 dollars

For LL Incorporated:

Cash Flows from Assets --------------------------------------------------------------------100 dollars
EBIT (from 1999 INCOME STATEMENT) -------------------------------------------0 dollars
Depreciation Expense (from 1999 INCOME STATEMENT) ----------------------100 dollars
Taxes (from 1999 INCOME STATEMENT) -------------------------------------------0
Net Fixed Assets from BALANCE SHEET dated December 31, 1998-------------1400 dollars
Net Fixed Assets from BALANCE SHEET dated December 31, 1999-------------1300 dollars
Additions to (Changes in) NWC for 1999 -----------------------------------------------0 dollars

*Based only on the numbers provided, which Company is doing the BEST?
*In other words, if you were an individual investor, in which Company would you invest?

Santana Rey expects second-quarter 2020 sales of Business Solutions’s line of computer furniture to be the same as the first quarter’s sales (reported below) without any changes in strategy. Monthly sales averaged 42 desk units (sales price of $1,270) and 22 chairs (sales price of $520).

* Reflects revenue and expense activity only related to the computer furniture segment.
† Revenue: (126 desks × $1,270) + (66 chairs × $520) = $160,020 + $34,320 = $194,340
‡ Cost of goods sold: (126 desks × $770) + (66 chairs × $270) + $30,600 = $145,440

Santana Rey believes that sales will increase each month for the next three months (April, 50 desks, 34 chairs; May, 54 desks, 37 chairs; June, 58 desks, 40 chairs) if selling prices are reduced to $1,170 for desks and $470 for chairs and advertising expenses are increased by 10% and remain at that level for all three months. The products’ variable cost will remain at $770 for desks and $270 for chairs. The sales staff will continue to earn a 10% commission, the fixed manufacturing costs per month will remain at $10,200 and other fixed expenses will remain at $6,200 per month.
Required:
1. Prepare budgeted income statements for the computer furniture segment for each of the months of April, May, and June that show the expected results from implementing the proposed changes. Use a three-column format, with one column for each month.
2. Recommend whether Santana Rey should implement the proposed changes.

1. An increase in wages of oil rig workers has increased the cost of producing oil. How is the supply curve affected by this newly incurred cost? Represent graphically plot against the demand curve, label all points, and explain.

2. How does a $20 dollar subsidy effect the supply curve of Oil per barrel? Represent graphically, plot against the demand curve and explain.

3. Identify the type of good. Explain how the changes will affect demand. Pepsi price declines what happens to the demand for Coca Cola?

4. Illustrate and explain how changes in price effects substitute goods. The price of margarine declines what happens to the demand for butter?

5. A free market has a demand curve where the demand curve Qd= 600-30p and the supply curve Qs= - 360 +60p

A. Calculate PD, QD, PE, QE, PS

B. Graph against Q, P axis. (Label all points)

C. Calculate CS, PS, TS

D. Illustrate and explain what occurs to this market when the number of sellers is increased.

E. Explain what happens to PE, QE and demand.

6. Illustrate and explain how changes in price effects substitute goods. The price of margarine declines what happens to the demand for butter?   
7. A. List the determinants of Demand. B. List the determinants of Supply.

8. A free market has a demand curve where the demand curve Qd= 984-3p and the supply curve Qs= - 798 +14p

A. Calculate PD, QD, PE, QE, PS

B. Graph against Q, P axis. (Label all points)

C. Calculate CS, PS, TS

D. Illustrate and explain what occurs to this market when technology is upgraded.

E. Explain what happens to PE, QE and demand.

9. I would like to know the answer number 5,6,7,8