(1) On August 1, 2018, We R Clean Company signed a 9-month contract with a hotel chain to provide pool and spa cleaning services for 3 hotel sites. The contract price of $14,850 was collected on the date the contract was signed. The services will be provided evenly over the next 9 months, starting on August 1. The adjusting entry on December 31, 2018 will

Credit Service Revenue for $6,600

Debit Earned Revenue for $6,600

Credit Service Revenue for 8,910

Debit Unearned Revenue for $8,250

(2) Collegiate Fitness Centers have 15,000 members whose monthly dues are $30 each. The company does not send individual bills to customers, who have until the 10th day of the month following the month of service to pay their monthly dues. On December 31, 2017, the company’s records show that 7,000 customers have already paid their December dues, and the payments were properly recorded. The adjusting entry to be recorded on December 31 will include

John Hanning owns a small hotel. The following balances were taken from his books on 31 December 2016

Takings (Sales)
Premises, at Cost
Fixtures and Fittings at cost

Minibus
Provision for depreciation, 1 January 2016: Fixtures and fittings

Minibus
Stock of wine, 1 January 2016 Debtors
Creditors
Bank overdraft
Cash in hand
Wages
Cleaning
Purchase of food and wine Running expenses of minibus Bank interest (Dr Balance) Advertising
General expenses
Capital

Drawings

$

283,670.00 396,000.00 100,000.00

10,000.00

45,600.00 3,600.00 1,200.00 6,500.00 3,970.00

16,450.00 700.00 61,020.00 27,830.00 121,700.00 4,800.00 1,520.00 5,880.00 13,140.00 427,000.00 30,000.00

Page 2 of 6

Additional information:

1. Depreciation policies:

   The fixtures and fittings should be depreciated at 15% on cost. The minibus should be depreciated at 20% of the written down value.

2. $3,000 of the total for the purchase of food and wine was in respect of food used by Larsen and his family.

3. Stock of wine at 31 December 2016 was $1,340.

4. Bank interest of $280 had accrued at 31 December 2016.

5. Advertising, costing $900, had been paid in December 2016. This was for advertising leaflets to be published in 2017.

6. Bad debts, $1,190, were to be written off.

REQUIRED

1. (a) Prepare the Income Statement for the year ended 31 December 2016.

   [20 Marks]

2. (b) Prepare the Statement of Financial Position as at 31 December 2016.

   [20 Marks]

Question 2:
Yankee Hotel Foxtrot initiated operations on July 1, 2014. To manage the company
officers and managers have requested monthly financial statements starting July 31, 2014.
The adjusted trial balance amounts at July 31 are shown below.
Debits Credits
Cash $ 7,680 Accumulated Depreciation-
Equipment $ 840
Accounts Receivable 810 Notes Payable 6,000
Prepaid Rent 1,965 Accounts Payable 2,140
Supplies 1,160 Salaries and Wages Payable 360
Equipment 11,400 Interest Payable 40
Owner's Drawings 800 Unearned Service Revenue 580
Salaries and Wages Expense 7,145 Owner's Capital 10,640
Rent Expense 2,740 Service Revenue 14,390
Depreciation Expense 665
Supplies Expense 580
Interest Expense 45
Total debits $ 34990 Total Credits $34990
Instructions
(A) Determine the net income for the month of July
(B) Determine the amount for Owner’s, Capital at July 31, 2014
(C) Determine the Balance Sheet at July 31, 2014 fo

Question 2: Yankee Hotel Foxtrot initiated operations on July 1, 2014. To manage the company officers and managers have requested monthly financial statements starting July 31, 2014. The adjusted trial balance amounts at July 31 are shown below.

Instructions

(A) Determine the net income for the month of July

(B) Determine the amount for Owner’s, Capital at July 31, 2014

(C) Determine the Balance Sheet at July 31, 2014 for

After operating a successful US hotel corporation (H Corp) for several years, Donald decides to set up a wholly owned subsidiary in the export business (X Corp). His initial investment in this corporation is $1,000. Through a stroke of luck, the US tax laws change and X Corp becomes worth $100,000 overnight, even though its balance still only reflects $1,000 cash and $1,000 equity.

Donald is considering selling the operation but is concerned about the tax ramifications.

a. What would H Corps gain be if it sold the stock of X Corp for $100,000?

b. Instead, Donald has offered to sell X Corp to Bill Corp in a tax free exchange of 100% of       X Corp for $100,000 of Bill Corp stock. Assuming Bill Corp accepts this offer, what is Bill Corps basis in X Corp stock? What is H Corps gain, if it immediately sells its stock in Bill Corp for $100,000?

c. What alternative structure might Bill Corp offer which might provide additional tax benefits to Bill Corp? Explain and show calculations

d. What might Bill Corp do to entice H Corp to accept the revised deal?

All Clean of Alberta manufactures individual shampoos for hotel/motel clientele. The fixed manufacturing overhead costs for 2019 will total $576,000. The company uses good units finished for fixed overhead allocation and anticipates 300,000 units of production. Good units finished on average 92 percent of total units produced. During January, 20,000 units were produced. Actual fixed overhead cost per good unit averaged $2.82 in January.

Required (20 Points - Show formula and calculation for full points).

A. Determine the fixed overhead rate for 2019.

B. Determine the fixed overhead static-budget variance for January.

C. Determine the fixed overhead production-volume variance for January.

D. Determine the fixed overhead rate variance for January.

Sleep-EZ Suites Inc., operates a downtown hotel property that has 600 rooms. On average, 90% of Sleep-EZ Suites's rooms are occupied on weekdays, and 60% are occupied during the weekend. The manager has asked you to develop a direct labor budget for the housekeeping and restaurant staff for weekdays and weekends. You have determined that the housekeeping staff requires 40 minutes to clean each occupied room. The housekeeping staff is paid $10 per hour. The restaurant has 12 full-time staff (eight-hour day) on duty, regardless of occupancy. However, for every 20 occupied rooms, an additional person is brought in to work in the restaurant for the eight-hour day. The restaurant staff is paid $8 per hour.

Determine the estimated housekeeping, restaurant, and total direct labor cost for an average weekday and average weekend day. Enter percentages as whole numbers.

4. Assume you own and operate a hotel near a busy international airport. Your property caters directly to business travelers. Assume also that your historical records indicate a complete room’s sell­out every Tuesday and Wednesday night for the past six months. Your hotel’s director of sales (DOS) informs you that she forecasts Tuesday and Wednesday night sell­outs for the coming six months as well. What does that information tell you about business traveler’s willingness to purchase rooms on those specific nights? Would you encounter an ethical dilemma instituting a differential pricing strategy that valued the rooms you have available for sale on Tuesday and Wednesday nights higher than those rooms you sell on other nights? Explain your position

I am thinking about going into the hotel business through acquiring 12 hotels spread throughout the Rocky Mountain region. I have projected out the costs of hiring managers to run the hotels, as well as the other many costs of operating them. Based on this, I have a good handle on the cash flows the project will generate, and I now need to estimate the cost of equity I will use to discount these cash flows.

Unfortunately, I am out of time, and so I need you, my brilliant financial protege, to give me an estimate of a reasonable cost of equity for this project. Obviously, I don't have the 10 million needed to acquire the hotels myself and will need to attract additional equity financing from outside investors. So when I meet with these investors, I need a logical estimate and explanation for what the cost of equity is that they should be earning. So don't just give me a number, you have to tell me why you pick what you do.

Obviously, they could invest in many other hotel chains and management companies, many of which are publicly traded. So your best approach is to look at the cost of equity for these pure-plays (the ticker for Hilton is HLT, but I would rely on estimates from more than one company so look up their competitors) and make adjustments based on our situation. For instance, consider the following differences:

Are your pure-play firms more or less risky based on geographic dispersion relative to us?

Are your pure-play firms more or less risky based on easier access to additional capital?

Am I or these pure-plays more likely to achieve operating efficiency (higher profit margins) over the next four or five years?

There are certainly other considerations you might come up with that I am missing right now, so feel free to include them as well. But make adjustments to your estimates to fit my situation. Then write up your conclusions in a professional sounding report that is no longer than one page. Put any additional tables in an appendix.

(The 12 hotels are not relevant. They only give you the industry that you are researching. If you want to value a company, you have to figure out what companies in that same industry are selling for, or what kind of discount rate investors expect for firms in that industry. So you have to look at other firms in the same industry. So you will look up hotel firms, and calculate their cost of equity. And then you will make adjustments to their costs based on the subject firm with 12 hotels. So think about this logically. Would you rather invest in Hilton, with thousands of hotels, or this company with 12? Which is less risky? Which has more growth potential? These are the kinds of issues you would think about when estimating the cost of equity using the pure play approach. But no, this is not based on an actual firm, so there won't be stuff on the internet about it. )

1. Please analyze how to potentially avoid “Red Ocean Traps” using a hotel, retail, restaurant, healthcare, or entrepreneurship example.

Using a fast food example, how would they avoid each of the five red ocean traps as in the article.

TRAP ONE

Seeing Market-Creating Strategies as Customer-Oriented Approaches Generating new demand is at the heart of market- creating strategies. It hinges on converting non- customers into customers, as Salesforce.com did with its on-demand CRM software, which opened up a new market space by winning over small and midsize firms that had previously rejected CRM enterprise software.

The trouble is that managers, especially those in marketing, have been quite reasonably brought up to believe that the customer is king. It’s all too easy for them to assume, therefore, that market-creating strategies are customer led, which causes them to re exclusively stick to their focus on existing customers and how to make them happier.

This approach, however, is unlikely to create new markets. To do that, an organization needs to turn its focus to noncustomers and why they refuse to patronize an industry’s offering. Noncustomers, not customers, hold the greatest insight into the points of pain and intimidation that limit the boundary of an industry. A focus on existing customers, by contrast, tends to drive organizations to come up with better solutions for them than what competitors currently o er—but keeps companies moored in red oceans.

Consider Sony’s launch of the Portable Reader System (PRS) in 2006. The company’s aim was to unlock a new market space in books by opening the e-reader market to a wide customer base. To gure out how to realize that goal, it looked to the experi- ence of existing e-reader customers, who were dissat- is ed with the size and poor display quality of current products. Sony’s response was a thin, lightweight de- vice with an easy-to-read screen. Despite the media’s praise and happier customers, the PRS lost out to Amazon’s Kindle because it failed to attract the mass of noncustomers whose main reason for rejecting e-readers was the shortage of worthwhile books, not the size and the display of the devices. Without a rich choice of titles and an easy way to download them, the noncustomers stuck to print books.

Amazon understood this when it launched the Kindle in 2007, offering more than four times the number of e-titles available from the PRS and mak- ing them easily downloadable over Wi-Fi. Within six hours of their release, Kindles sold out, as print book customers rapidly became e-reader custom- ers as well. Though Sony has since exited e-readers, the Kindle grew the industry from around a mere 2% of total book buyers in 2008 to 28% in 2014. It now o ers more than 2.5 million e-titles.

TRAP TWO

Treating Market-Creating Strategies
as Niche Strategies
The eld of marketing has placed great emphasis on using ever ner market segmentation to identify and capture niche markets. Though niche strategies can often be very e ective, uncovering a niche in an ex- isting space is not the same thing as identifying a new market space.

Consider Song, an airline launched in 2003 by Delta. Delta’s aim was to create a new market space in low-cost carriers by targeting a distinct segment of i- ers. It decided to focus on stylish professional women travelers, a segment it gured had needs and prefer- ences di erent from those of the businessmen and other passengers most airlines targeted. No airline had ever been built around this group. After many focus group discussions with upwardly mobile and professional women, Delta came up with a plan to cater to them with organic food, custom cocktails, a variety of entertainment choices, free in- ight work- outs with complementary exercise bands, and crew members dressed in Kate Spade. The strategy was intended to ll a gap in the market. It may well have done that successfully, but the segment proved too small to be sustainable despite competitive pricing. Song ew its last ight in April 2006, just 36 months after its launch.

Successful market-creating strategies don’t fo- cus on a finer segmentation. More often, they “deseg- ment” markets by identifying key commonalities across buyer groups that could help generate broader demand. Pret A Manger, a British food chain, looked across three di erent prepared-lunch buyer groups: restaurant-going professionals, fast food customers, and the brown bag set. Although there were plenty of di erences across these groups, there were three key commonalities: All of them wanted a lunch that was fresh and healthful, wanted it fast, and wanted it at a reasonable price. That insight helped Pret A Manger see how it could unlock and aggregate untapped de- mand across those groups to create a commercially compelling new market. Its concept was to offer restaurant-quality sandwiches made fresh every day from high-end ingredients, preparing them at a speed even greater than that of fast food, and deliv- ering that experience in a sleek setting at reasonable prices. Today, nearly 30 years on, Pret A Manger con- tinues to enjoy robust pro table growth in the new market space it established.

TRAP THREE

Confusing Technology Innovation
with Market-Creating Strategies
R&D and technology innovation are widely recog- nized as key drivers of market development and in- dustry growth. It’s understandable, therefore, that managers might assume that they are also key drivers in the discovery of new markets. But the reality is that market creation is not inevitably about technological innovation. Yellow Tail opened a new market (in its case, for a fun and simple wine for everyone) with- out any bleeding-edge technologies. So did the chain Starbucks and the performing arts company Cirque du Soleil. Even when technology is heavily in- volved, as it was with market creators Salesforce.com, Intuit’s Quicken, or Uber, it is not the reason that new o erings are successful. Such products and services succeed because they are so simple to use, fun, and productive that people fall in love with them. The technology that enables them essentially disappears from buyers’ minds.

Consider the Segway Personal Transporter, which was launched in 2001. Was it a technology innova- tion? Sure. It was the world’s rst self-balancing hu- man transporter, and it worked well. Lean forward and you go forward; lean back and you go back. This engineering marvel was one of the most-talked- about technology innovations of its time. But most people were unwilling to pay up to $5,000 for a prod- uct that posed di culties in use and convenience: Where could you park it? How would you take it with you in a car? Where could you use it—sidewalks or roads? Could you take it on a bus or a train? Although the Segway was expected to reach breakeven just six months after its launch, sales fell way below initial predictions, and the company was sold in 2009. Not everyone was surprised. At the time of the product’s release, a prescient Time magazine article about Dean Kamen, Segway’s inventor, struck a cautionary note: “One of the hardest truths for any technologist to hear is that success or failure in business is rarely determined by the quality of the technology.”

Value innovation, not technology innovation, is what launches commercially compelling new mar- kets. Successful new products or services open mar- ket spaces by o ering a leap in productivity, simplic- ity, ease of use, convenience, fun, or environmental friendliness. But when companies mistakenly as- sume that market creation hinges on breakthrough technologies, their organizations tend to push for products or services that are too “out there,” too complicated, or, like the Segway, lacking a necessary ecosystem. In fact, many technology innovations fail to create new markets even if they win the company accolades and their developers scienti c prizes.

TRAP FOUR

Equating Creative Destruction
with Market Creation
Joseph Schumpeter’s theory of creative destruction lies at the heart of innovation economics. Creative destruction occurs when an invention disrupts a market by displacing an earlier technology or existing product or service. Digital photography, for example, wiped out the photographic lm industry, becoming the new norm. In Schumpeter’s framework, the old is incessantly destroyed and replaced by the new.

But does market creation always involve destruc- tion? The answer is no. It also involves nondestruc- tive creation, wherein new demand is created with- out displacing existing products or services. Take Viagra, which established a new market in lifestyle drugs. Did Viagra make any earlier technology or ex- isting product or service obsolete? No. It unlocked new demand by o ering for the rst time a real solu- tion to a major problem experienced by many men in their personal relationships. Grameen Bank’s cre- ation of the micro nance industry is another exam- ple. Many market-creating moves are nondestructive, because they o er solutions where none previously existed. We’ve also seen this happen with the social networking and crowdfunding industries. And even when a certain amount of destruction is involved in market creation, nondestructive creation is often a larger element than you might think. Nintendo’s Wii game player, for example, complemented more than replaced existing game systems, because it attracted younger children and older adults who hadn’t previously played video games.

Con ating market creation with creative destruc- tion not only limits an organization’s set of opportu- nities but also sets o resistance to market-creating strategies. People in established companies typically don’t like the notion of creative destruction or disrup- tion because it may threaten their current status and jobs. As a result, managers often undermine their company’s market-creating e orts by starving them of resources, allocating undue overhead costs to the initiatives, or not cooperating with the people work- ing on them. It’s critical for market creators to head this danger o early by clarifying that their project is at least as much about nondestructive creation as it is about disruption.

TRAP FIVE

Equating Market-Creating
Strategies with Differentiation
In a competitive industry companies tend to choose their position on what economists call the “produc- tivity frontier,” the range of value-cost trade-offs that are available given the structure and norms of the industry. Di erentiation is the strategic position on this frontier in which a company stands out from competitors by providing premium value; the trade- o is usually higher costs to the company and higher prices for customers. We’ve found that many man- agers assume that market creation is the same thing.

In reality, a market-creating move breaks the value-cost trade-off. It is about pursuing differen- tiation and low cost simultaneously. Are Yellow Tail and Salesforce.com di erentiated from other play- ers? You bet. But are Yellow Tail and Salesforce.com also low cost? Yes again. A market-creating move is a “both-and,” not an “either-or,” strategy. It’s impor- tant to realize this difference, because when com- panies mistakenly assume that market creation is synonymous with di erentiation, they often focus on what to improve or create to stand apart and pay scant heed to what they can eliminate or reduce to simultaneously achieve low cost. As a result, they may inadvertently become premium competitors in an existing industry space rather than discover a new market space of their own. Take BMW, which set out to establish a new mar- ket in urban transport with its launch of the C1 in

2000. Tra c problems in European cities are severe, and people waste many hours commuting by car there, so BMW wanted to develop a vehicle people could use to beat rush-hour congestion. The C1 was a two-wheeled scooter targeting the premium end of the market. Unlike other scooters, it had a roof and a full windshield with wipers. BMW also invested heavily in safety. The C1 held drivers in place with a four-point seat-belt system and protected them with an aluminum roll cage, two shoulder-height roll bars, and a crumple zone around the front wheel.

With all these extra features, the C1 was expen- sive to build, and its price ranged from $7,000 to $10,000—far more than the $3,000 to $5,000 that typical scooters fetched. Although the C1 succeeded in di erentiating itself within the scooter industry, it did not create the new market space in transportation BMW had hoped for. In the summer of 2003, BMW announced it was stopping production because the C1 hadn’t met sales expectations.

TRAP SIX

Equating Market-Creating Strategies with Low-Cost Strategies
This trap, in which managers assume that they can create a new market solely by driving down costs, is the obvious ip side of trap ve. When organizations see market-creating strategies as synonymous with low-cost strategies alone, they focus on what to elim- inate and reduce in current o erings and largely ig- nore what they should improve or create to increase the o erings’ value.

Ouya is a video-game console maker that fell into this trap. When the company began selling its prod- ucts, in June 2013, big players like Sony, Microsoft, and Nintendo were o ering consoles connected to TV screens and controllers that provided a high- quality gaming experience, for prices ranging from $199 to $419. With no low-cost console available, many people would play video games either on handheld devices or on TV screens connected to mobile devices via inexpensive cables.

An attempt to create a market space between high-end consoles and mobile handhelds, the $99 Ouya was introduced as a low-cost open-source

“microconsole” offering reasonable quality on TV screens and most games free to try. Although people admired the inexpensive, simple device, Ouya didn’t have the rich catalog of quality games, 3-D intensity, great graphics, and processing speed that traditional

gamers prized but the company had to some extent sacri ced to drop cost and price. At the same time, Ouya lacked the distinctive advantage of mobile handheld devices—namely, their play-on-the-go functionality. In the absence of those features, poten- tial gamers had no compelling reason to buy Ouyas. The company is now shopping itself to acquirers—on the basis of its sta ’s talent more than the strength of its console business—but as yet hasn’t found one.

Our point, again, is that a market-creating strat- egy takes a “both-and” approach: It pursues both di erentiation and low cost. In this framework, new market space is created not by pricing against the competition within an industry but by pricing against substitutes and alternatives that noncustomers are currently using. Accordingly, a new market does not have to be created at the low end of an industry. Instead it can be created at the high end, as Cirque du Soleil did in circus entertainment, Starbucks did in co ee, and Dyson did in vacuum cleaners.

Even when companies create new markets at the low end, the o erings also are clearly di erentiated in the eyes of buyers. Consider Southwest Airlines and Swatch. Southwest stands out for its friendly, fast, ground-transportation-in-the-air feel, while stylish, fun designs make Swatches a fashion state- ment. Both companies’ offerings are perceived as both di erentiated and low cost.