Millington Materials is a leading supplier of building equipment, building products, materials, and timber for sale, with over 200 branches across the Mid-South. On January 1, 2021, management decided to change from the average inventory costing method to the FIFO inventory costing method at each of its outlets.

The following table presents information concerning the change. The income tax rate for all years is 25%.

	Income before Income Tax
	FIFO			Average Cost			Difference
Before 2020	$	21	million	$	14	million	$	7	million
2020		20	million		11	million		9	million
2021		16	million		15	million		1	million

Required:
1. Prepare the journal entry to record the change in accounting principle.
2. Determine the net income to be reported in the 2021–2020 comparative income statements.
4. Indicate the affect of the change in the 2021–2020 comparative statements of shareholders’ equity assuming cash dividends were $5.00 million each year and that no dividends were paid prior to 2020.

On January 1, 2020, Whispering Winds Limited paid $575,560.90 for 12% bonds with a maturity value of $535,000.00. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2020, and mature on January 1, 2020, with interest receivable on December 31 of each year. Whispering Winds applies ASPE using the effective interest method, and has a December 31 year end. Assume that Whispering Winds hopes to make a gain on the bonds as interest rates are expected to fall. Whispering Winds accounts for the bonds at fair value with changes in value taken to net income, and separately recognizes and reports interest income. The fair value of the bonds at December 31 of each year end is as follows:

2020 $571,600

2021 $551, 050

2022 $548,910

2023 $542,490

2024 $535,000

Prepare the journal entry at the date of the bond purchase.

Prepare the journal entries to record interest income and interest received and recognition of fair value as December 31, 2020, 2021, and 2022.

Magpie Ltd enters into a non-cancellable two-year lease agreement with Tiger Ltd for an item of machinery on 1 January 2020. Magpie Ltd pays $15,000 on signing the agreement with Tiger Ltd on 1 January 2020. There are eight quarter payments of $10,000, the first being made on 31 March 2020. Included within the $10,000 lease payments is an amount of $1,000 representing payment to the lessor for insurance and maintenance of the machinery. The machinery is to be depreciated on a straight-line basis. The machinery is expected to have an economic life of five years, after which time it will have a zero-salvage value. There is a purchase option Magpie Ltd will be able to exercise at the end of the second year for $30,000. If this purchase option is exercised, the machinery will be transferred to Magpie Ltd. The rate of interest implicit in the lease is 12%. Refer to the appendix for the tables of Present Value Factor for a single future amount and Present Value of an ordinary annuity of $1.

Prepare the lease payments schedule for Magpie Ltd from 1 January 2020 to 30 June 2020.

Betty is an aspiring CPA. In 2020, she finished her last semester at San Diego State, where she graduated with an undergraduate degree in accounting. Betty was a full-time student and paid $3,500 in tuition and to San Diego State in 2020 and paid $750 for required textbooks. Betty already claimed the American Opportunity Tax Credit in 2017, 2018 and 2019.

Betty’s husband, Barry, is a nurse. He is also pursuing his Masters in Nursing at University of San Diego. In 2020, he spent $8,000 on tuition for his graduate program. Barry also paid $500 for required textbooks. The tuition and books were not reimbursed by Barry’s employer.

Betty and Barry will file a joint tax return for 2020, and neither can be claimed as a dependent on anyone else’s tax return. Their modified AGI is below the phaseout threshold for both the American Opportunity Tax Credit and Lifetime Learning Credit.

What is the maximum amount of education tax credits that Betty and Barry can claim on their 2020 tax return?

What is the 95 percent confidence intervals for the average daily inventory holding cost Pre- and Post- COVID-19 (X_1&〖 X〗_2 )? And what do you conclude by comparing these intervals? Also what is the 99 percent confidence interval for the average daily inventory holding cost Post- COVID-19 (X_2 )? And what do you conclude by comparing the 95 and 99 percent confidence intervals for the average daily inventory holding cost Post- COVID-19 (X_2 )?

Date		1/Nov/2019	2/Nov/2019	3/Nov/2019	4/Nov/2019	5/Nov/2019
Pre-COVID-19	Y1	4614.6	4615.0	4614.6	4614.9	4616.1
	X1	8.4	8.1	9.2	8.4	6.1
Date		1/Apr/2020	2/Apr/2020	3/Apr/2020	4/Apr/2020	5/Apr/2020
Post-COVID-19	Y2	2938.2	2942.9	2937.9	2941.2	2934.4
	X2	11.7	8.0	10.2	9.3	11.3

4. On January 1, 2019, Roberts Inc. purchased 10% of the outstanding 1,000,000 common shares of Sunk for $200,000. Roberts Inc. considers this investment to be a non-strategic investment. At the

December 31, 2020-year end, the fair value of this investment was $208,000. Sunk's profit in 2020 was $100,000. Sunk paid a dividend of $.60 per common share. On January 1, 2021, Robert decided to buy an additional 25% of Sunk's 1,000,000 common shares for $500,000. This second purchase allowed Robert to significantly influence Sunk. In 2021, Sunk's profit was $140,000. Sunk paid dividends of $.50 per common share in 2021.

For 2020, the investment is considered to be a fair value through profit and loss investment:

Required:

1. Make journal entries for 2020 and 2021 on Robert’s books with respect to the Investment in Sunk.

For 2020, the investment is considered to be a fair value through profit and loss inv.

2. Which method of Investment Accounting is Robert Inc using? Justify your response.

Machinery purchased for $41,200 by Swifty Corp. on January 1, 2015, was originally estimated to have an 8-year useful life with a residual value of $6,000. Depreciation has been entered for five years on this basis. In 2020, it is determined that the total estimated useful life (including 2020) should have been 10 years, with a residual value of $7,000 at the end of that time. Assume straight-line depreciation and that Swifty Corp. uses IFRS for financial statement purposes.

Prepare the entry that is required to correct the prior years’ depreciation, if any

Prepare the entry to record depreciation for 2020.

Repeat part (b) assuming Swifty Corp. uses ASPE and the machinery is originally estimated to have a physical life of 8.5 years and a salvage value of $0. In 2020, it is determined that the total estimated physical life (including 2020) should have been 11 years, with a salvage value of $400 at the end of that time.

Repeat part (b) assuming Swifty Corp. uses the double-declining-balance method of depreciation.

4. Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe the payoffs to alternative trade policies are as follows:

United States' Decision Mexico's Decision
Low Tariffs U.S. gains $25 billion Mexico gains $25 billion
High Tariffs U.S. gains $20 billion Mexico gains $20 billion
US low tariff/Mexico high tariff U.S. gains $10 billion Mexico gains $30 billion
US high tariff/Mexico low tariff U.S. gains $30 billion Mexico gains $10 billion

a. What is the dominant strategy for the United States? For Mexico? Explain?
b. Define Nash equilibrium. What is the Nash equilibrium for trade policy?
c. In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United States and Mexico agreed to reduce trade barriers simultaneously. Do the perceived payoffs shown here justify this approach to trade policy? Explain.
d. Based on your understanding of the gains from trade (discussed in Chapters 3 and 9), do you think that these payoffs actually reflect a nation's welfare under the four possible outcomes?

Consider the exchange rate between the U.S. $ and the U.K. £. Suppose the exchange rate E ∗ is defined as £/$. (a) Denote the one-year forward exchange rate (at time t) for time t+1 by F ∗ t+1. Suppose the nominal interest rate in the U.S. is 8%, the nominal interest rate in the U.K. is 5%, the current exchange rate E ∗ t is £0.67/$, and the forward exchange rate F ∗ t+1 is £0.625/$. Are the numbers given here consistent with the interest rate parity equation? Clearly show all calculations. Based on this information, would you prefer to invest in the U.S. or in the U.K.? (5 points) (b) What effect will the difference between the effective rate of return in the two countries (if any) from part (a) have on the exchange rate (E ∗ ). Clearly show all calculations, and illustrate your answer using a well-labeled graph. (10 points) (c) Consider the exchange rate determined in part (b). Suppose that the Fed (the U.S. central bank) adopts a policy to lower the inflation rate by 2% in the U.S. Explain the effect of such a monetary policy on the exchange rate (E ∗ ). Clearly explain your answer, and illustrate your answer using a well labeled graph. (10 points)

Accounting Cycle Review 15 a-e

Ivanhoe Corporation’s trial balance at December 31, 2020, is presented below. All 2020 transactions have been recorded except for the items described below.

		Debit		Credit
Cash		$27,700
Accounts Receivable		54,000
Inventory		23,100
Land		65,800
Buildings		86,900
Equipment		31,000
Allowance for Doubtful Accounts				$440
Accumulated Depreciation—Buildings				27,000
Accumulated Depreciation—Equipment				15,000
Accounts Payable				19,000
Interest Payable				–0–
Dividends Payable				–0–
Unearned Rent Revenue				8,000
Bonds Payable (10%)				50,000
Common Stock ($10 par)				32,000
Paid-in Capital in Excess of Par—Common Stock				6,400
Preferred Stock ($20 par)				–0–
Paid-in Capital in Excess of Par—Preferred Stock				–0–
Retained Earnings				26,860
Treasury Stock		–0–
Cash Dividends		–0–
Sales Revenue				615,000
Rent Revenue				–0–
Bad Debt Expense		–0–
Interest Expense		–0–
Cost of Goods Sold		408,000
Depreciation Expense		–0–
Other Operating Expenses		39,300
Salaries and Wages Expense		63,900
Total		$799,700		$799,700

Unrecorded transactions and adjustments:

1.		On January 1, 2020, Ivanhoe issued 1,200 shares of $20 par, 6% preferred stock for $26,400.
2.		On January 1, 2020, Ivanhoe also issued 1,100 shares of common stock for $26,400.
3.		Ivanhoe reacquired 320 shares of its common stock on July 1, 2020, for $50 per share.
4.		On December 31, 2020, Ivanhoe declared the annual cash dividend on the preferred stock and a $1.30 per share dividend on the outstanding common stock, all payable on January 15, 2021.
5.		Ivanhoe estimates that uncollectible accounts receivable at year-end is $5,400.
6.		The building is being depreciated using the straight-line method over 30 years. The salvage value is $5,900.
7.		The equipment is being depreciated using the straight-line method over 10 years. The salvage value is $3,100.
8.		The unearned rent was collected on October 1, 2020. It was receipt of 4 months’ rent in advance (October 1, 2020 through January 31, 2021).
9.		The 10% bonds payable pay interest every January 1. The interest for the 12 months ended December 31, 2020, has not been paid or recorded.

(Ignore income taxes.)

1. Prepare journal entries for the transactions and adjustment listed above. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

2. Prepare an updated December 31, 2020, trial balance, reflecting the journal entries in part(a).

3. Prepare a multiple-step income statement for the year ending December 31, 2020. (List other revenues before other expenses.)

4. Prepare a retained earnings statement for the year ending December 31, 2020. (List items that increase retained earning first.)

5. Prepare a classified balance sheet as of December 31, 2020. (List Current Assets in order of liquidity. List Property, Plant and Equipment in order of Land, Buildings and Equipment. Enter account name only and do not provide descriptive information.)