Module 7 &8: Management Issues for Non-Depository Institutions

The Save You Insurance Company has the following financial statements.                                                                           2020                      2019

Net Premiums Written                           48,612             47,398

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Income Statement ($ mils.)

Premiums Earned                                   42,624             48,321

Loss Expenses                                         30,746             34,364

Operating Expenses                                17,720             17,693

Total Policy Expenses                             48,466             52,057

Net Underwriting Gain/Loss                             (5,842)             (3,736)

Net Investment Income                           15,700            19,995

Operating Income before taxes              9,858               16,259

Dividends to Policyholders                     6,517              10,361

Income Tax                                              1,294               1,670

Net Income                                              $2,047            $ 4,228

Ave Investment Yield                           4.94%                 5.89%

(mils.)                                                       2020               2019

Total Assets                                         $381,972          $406,529

Liabilities

Total Liabilities                                    $349,069         $369,700

Total Equity                                            32,903             36,829

Total Liabs. & Equity                           $381,972        $406,529  

Dupont Analysis:

                   Asset Turnover                                

                  Net Profit Margin                              

                     ROA                                                 

                     ROE                                                 

                     OROA                                              

           Equity Multiplier (EM)        

Give an overview for why the insurance companies overall profitability changed in 2020 including trends in the expense ratio, loss ratio, and combined rate, and average investment yield. Also do a Dupont analysis explaining why the ROE and ROA for the insurance company changed in 2020 (based on the Operating Profit Margin, Asset Utilization, and the Equity Multiplier.

Mike's Company purchased equipment that cost $118,000 on August 1, 2018. The equipment has an estimated useful life of eight years with an estimated salvage of $10,000. Mike's Company has a December 31 year-end. Calculate the following, showing all of your computations well-labeled and in good form under each of the followingindependent scenarios:

1. The equipment is depreciated using machine hours. The machine is expected to be used for a total of 110,000 hours over it estimated useful life. The following hours of usage were recorded in 2018, 2019, and 2020:

2018
2019
2020

6,000 hours 13,000 hours 12,000 hours

(a) Calculate the depreciation for 2019 using the above data. Round to the nearest hundredth.
(b) Calculate the book value on the machine at December 31, 2020.

Straight-line method.

(a) Calculate the depreciation for 2019 using the above data.
(b) Calculate the book value on the machine at December 31, 2020.

Sum-of-the-years’ digits method

(a) Calculate the depreciation for 2019 using the above data.

(b) Calculate the book value on the machine at December 31, 2019.

Double declining-balance method. Round your calculations to the nearest dollar.

(a) Calculate the depreciation for 2019 using the above data.
(b) Calculate the book value on the machine at December 31, 2019.

Chapter 16- prob. 7

Zekany Corporation would have had identical income before taxes on both its income tax returns and income statements for the years 2018 through 2021 except for differences in depreciation on an operational asset. The asset cost $290,000 and is depreciated for income tax purposes in the following amounts:

2018       $ 95,700

2019       127,600

2020           43,500

2021          23,200

The operational asset has a four-year life and no residual value. The straight-line method is used for financial reporting purposes.

Income amounts before depreciation expense and income taxes for each of the four years were as follows:

                                                                                              2018 2019 2020                 2021

Accounting income before taxes and depreciation           $155,000                $175,000             $165,000               $165,000

Assume the average and marginal income tax rate for 2018 and 2019 was 30%; however, during 2019 tax legislation was passed to raise the tax rate to 40% beginning in 2020. The 40% rate remained in effect through the years 2020 and 2021. Both the accounting and income tax periods end December 31.

Required: Prepare the journal entries to record income taxes for the years 2018 through 2021. (If no entry is required for a transaction/event, write “No journal entry required” in the first account field.)

Laura Leasing Company signs an agreement on January 1, 2020, to lease equipment to Novak Company. The following information relates to this agreement.

Prepare all of the journal entries for the lessee for 2020 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answers to 2 decimal places, e.g. 5,265.25. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Problem 16-1 Single temporary difference originates each year for four years [LO16-1]

Alsup Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to six months after services commence. Alsup recognizes service revenue for financial reporting purposes when the services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections, and pretax accounting income for 2017–2020 are as follows:

There are no differences between accounting income and taxable income other than the temporary difference described above. The enacted tax rate for each year is 40%.

(Hint: You may find it helpful to prepare a schedule that shows the balances in service revenue receivable at December 31, 2017–2020.)

Required:
1. Prepare the appropriate journal entry to record Alsup's 2018 income taxes, Alsup’s 2019 income taxes and Alsup’s 2020 income taxes. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands.)

Rodriquez Corporation’s comparative balance sheets are presented below:

Additional information:

Prepare a statement of cash flows for 2020 using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000, or in parenthesis e.g. (15,000).)

Compute free cash flow. (Enter negative amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

On January 1, 2019, Garner issued 10-year, $200,000 face value, 6% bonds at par. Each $1,000 bond is convertible into 30 shares of Garner $2 par value common stock. The company has had 10,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2020. (Ignore all tax effects.)

Requirement 1: Accounting

1. Prepare the journal entry Garner would have made on January 1, 2019, to record the issuance of the bonds.
2. Garner’s net income in 2020 was $30,000 and was $27,000 in 2019. Compute basic and diluted earnings per share for Garner for 2020 and 2019.
3. Assume that 75% of the holders of Garner’s convertible bonds convert their bonds to stock on June 30, 2021, when Garner’s stock is trading at $32 per share. Garner pays $50 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.

Requirement 2: Analysis

Show how Garner will report income and EPS for 2020 and 2019. Briefly discuss the importance of GAAP for EPS to analysts evaluating companies based on price-earnings ratios. Consider comparisons for a company over time, as well as comparisons between companies at a point in time.

(a) Prepare a Statement of Cash Flows for the year ended 30 June 2020 using the direct method, ignoring GST.

Show all workings on the Workings page.

(b) Using the relevant information from the question above, identify two (2) specific items (including their values) which causes a difference between Net Profit and Net Cash from Operating Activities and analyse why it causes a difference.

The following financial statements relate to Clarke Ltd for the financial year ended 30 June 2020.

Balance Sheet as at 30 June

Clarke Limited's Income Statement for the year ended June 2020

Additional information:

Interest expense is classified as an operating cash flow.

The company paid dividends in 2020.

Land was revalued during the 2020 financial year.

Pearson Industries uses platinum in its manufacturing process.  The company will need 1,000 troy ounces of platinum in January of 2020 for a production run in that month.  The company is concerned that the price of platinum will rise during the next several months.  On October 14, 2019, Pearson acquired a futures contract to buy 1,000 troy ounces of platinum On January 2, 2020 at a price of $480 per troy ounce.   Spot prices and current futures prices per troy ounce of platinum are as follows:

                                                            Oct. 14            Dec. 31            Jan 2               

Futures price per oz (current)              $480                $525                $525                             

Spot price per oz                                 $480                 $524               $525    

Fair Value of Contract            $  0    

On January 2, 2020, the company settled the options and purchased 1,000 troy ounces of platinum for $525 per ounce.

11)  This is:   A Fair Value Hedge      A Cash Flow Hedge      Not a Hedge            Pick one

12) On the December 31, 2019 Statement of Financial Position, what amount, if any, would be listed for the Derivative- Platinum Futures Contract?    

13) If your answer to 12 was not zero, would the amount be an asset or liability? If zero put neither.

14) On the December 31, 2019 Statement of Financial Position, what amount, if any, would be listed for the Inventory of Platinum?    

15) If your answer to 14 was not zero, would the amount be an asset or liability? If zero put neither.

16)  On the Income Statement for year ended December 31, 2019, what amount, if any, would appear as a gain or loss from the Derivative- Platinum?  

17) If your answer to 16 is nonzero, is it a gain or loss? If zero put neither.  

18)  On the Statement of Comprehensive income for year ended December 31, 2019, what amount, if any, would appear as a gain or loss as Other Comprehensive Income?  

19) If your answer to 18 is nonzero, is it a gain or loss? If zero put neither.                                       

20) Assume the platinum purchased on January 2, 2020 was used to make inventory that was sold in 2020. On the Income Statement for year ended December 31, 2020, what amount, if any, would be included in cost of goods sold related to the platinum?  ___________________

Pasti Berhad values advertise and sell residential property on behalf of its customers. The company has been in business for only a short time and is preparing a cash budget for the first four months of the year 2020. The expected sales of residential properties are as follows.

The average price of each property is RM180,000 and Pasti Berhad charges a fee of 3% of the value of each property sold. Pasti Berhad receives 1% in the month of sale and the remaining 2% in the month after sale. The company has ten employees who are paid monthly. The average salary per employee is RM36,000 per year. If more than 20 properties are sold each month, each employee will be paid in that month a bonus of RM1,500 for each additional property sold.

Variable expenses are incurred at the rate of 50% of the value of each property sold and these expenses are paid in the month of sale. Fixed overheads of RM44,300 per month are paid in the month in which they arise. Pasti Berhad pays interest every three months on a loan of RM200,000 at a rate of 6% per year. The last interest payment in each year is paid in December.

Outstanding tax liability of RM95,800 is due to be paid in April. In the same month, Pasti Berhad intends to dispose of surplus vehicles, with a net book value of RM15,000, for RM20,000. The cash balance at the start of January 2020 is expected to be a deficit of RM40,000.

Required:
a) Prepare a monthly cash budget for the period from January to April. Your budget must clearly indicate each item of income and expenditure, and the opening and closing monthly cash balances.
b) Discuss the factors to be considered by Pasti Berhad in planning ways to invest any cash surplus forecast by its cash budgets.
c) Discuss the TWO (2) advantages and TWO (2) disadvantages to Pasti Berhad of using overdraft finance to fund any cash shortages forecast by its cash budgets.