On October 5, 2020, Diamond in the Flounder Recruiting Group Inc.’s board of directors decided to dispose of the Blue Division. A formal plan was approved. Diamond derives approximately 73% of its income from its human resources management practice. The Blue Division gets contracts to perform human resources management on an outsourced basis. The board decided to dispose of the division because of unfavourable operating results. Net income for Diamond was $95,970 for the fiscal year ended December 31, 2020 (after a charge for tax at 30% and after a writedown for the Blue assets). Income from operations of the Blue Division accounted for $4,270 (after tax) of this amount. Because of the unfavourable results and the extreme competition, the board believes that it cannot sell the business intact. Its final decision is to auction off the office equipment. The equipment is the division’s only asset and has a carrying value of $23,000 at October 5, 2020. The board believes that proceeds from the sale will be approximately $6,000 after the auction expenses. Currently, the equipment’s estimated fair value is $9,600. The Blue Division qualifies for treatment as a discontinued operation. Diamond prepares financial statements in accordance with ASPE.

Prepare a partial income statement for Diamond in the Flounder Recruiting Group. The income statement should begin with income from continuing operations before income tax.

Mikkeli OY acquired a brand name with an indefinite life in 2015 for 43,200 markkas. At December 31, 2017, the brand name could be sold for 35,200 markkas, with zero costs to sell. Expected cash flows from the continued use of the brand are 45,500 markkas, and the present value of this amount is 34,200 markkas. Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes. Required: Prepare journal entries for this brand name for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017 and December 31, 2018 conversion worksheet to convert IFRS balances to U.S. GAAP.

A)

1. Record the entry for the loss on impairment of brand as per IFRS.

2. Record the entry for the loss on impairment of brand as per U.S. GAAP.

B)

1. Record the conversion entry needed for 12/31/17.

2. Record the conversion entry needed for 12/31/18.

At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year-end. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. The company issued a two-year, 12%, $600,000 note in exchange for a tract of land. The current market rate of interest is 12%.
2. Lambert acquired some office equipment with a fair value of $94,643 by issuing a one-year, $100,000 note. The stated interest on the note is 6%. The current market rate of interest is 12%.
3. The company purchased a building by issuing a three-year installment note. The note is to be repaid in equal installments of $1 million per year beginning one year hence. The current market rate of interest is 12%.

Required:
Prepare the journal entries to record each of the three transactions and the interest expense at the end of the first year for each. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars.)

As the financial manager of Wilmore Company Limited, with a passion to boost employment creation through intraregional tourism in Ghana, you have acquired a land at Ho to put up an exquisite amusement park that features a number of attractions including games, pools, gardens, rides etc. The project will cost a total of GH₵100,000. The following cash flows are expected from the project. The beta of the project is 1.5 and the market return is 15%. The risk-free rate of return is 8%.
Year
₵

0
(100,000)

1
20,000

2
25,000

3
32,000

4
35,000

Using the CAPM approach, what is the cost of equity on this project?
[2 marks]
Wilmore Company Limited is a levered entity with percentage of debt out of total capital being 40%. If the interest rate on a bank loan is 10%, the tax rate is 20%, and the cost of equity is as computed in (a), what will be the after tax cost of debt? [2 mark]
What will be the weighted average cost of capital (WACC)? [2 mark]
Using the WACC computed in (c), what will be the NPV of the investment? ` [3 marks]
Compute the IRR for the project? [3 marks]
What will be your overall advice concerning viability of the project?
[2 marks]

A.
As the financial manager of Wilmore Company Limited, with a passion to boost employment creation through intraregional tourism in Ghana, you have acquired a land at Ho to put up an exquisite amusement park that features a number of attractions including games, pools, gardens, rides etc. The project will cost a total of GH₵100,000. The following cash flows are expected from the project. The beta of the project is 1.5 and the market return is 15%. The risk-free rate of return is 8%.

Year                                    ₵

   0                                     ( 100,000)    
   
   1                                      20,000
  
   2                                      25,000

   3                                      32,000

   4                                      35,000

(i) Using the CAPM approach, what is the cost of equity on this project?

(ii) Wilmore Company Limited is a levered entity with percentage of debt out of total capital being 40%. If the interest rate on a bank loan is 10%, the tax rate is 20%, and the cost of equity is as computed in (a), what will be the after tax cost of debt?

(iii) What will be the weighted average cost of capital (WACC)?

(iv) Using the WACC computed in (c), what will be the NPV of the investment? `
(v) Compute the IRR for the project?
(vi) What will be your overall advice concerning viability of the project?

E2-9 (L06) GROUPWORK (Accounting Principles and Assumptions—Comprehensive) Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc. Instructions In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles. (a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The fol- lowing journal entry was made. Miscellaneous Expense 29,000 Cash 29,000 (b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value. Inventory 70,000 Sales Revenue 70,000 (c) The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry. Loss from Lawsuit 500,000 Liability for Lawsuit 500,000 (d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made. Depreciation Expense 16,000 Accumulated Depreciation—Equipment 16,000 (e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a con- sequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows. Retained Earnings 800,000 Goodwill 800,000 (f) Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000. The following entry was made. Equipment 200,000 Cash 155,000 Sales Revenue 45,000

Crowley Company has the following ledger accounts and adjusted balances as of December 31, 2017. All accounts have normal balances. Crowley’s income tax rate is 40%.

Accounts Payable……………………………. 28,125

Accounts Receivable………………………… 202,500

Accumulated Depreciation-Building………… 56,250

Administrative Expenses……………………. 60,750

Allowance for Doubtful Accounts………….. 22,500

Bonds Payable (Mature 2020)………………. 281,250

Building……………………………………… 416,250

Cash…………………………………………. 28,125

Common Stock……………………………… 300,000

Cost of Goods Sold…………………………. 450,000

Dividends…………………………………… 18,000

Gain on Sale of Land…………………………..21,000

Interest Revenue…………………………….. 22,500

Inventory…………………………………….. 315,000

Land…………………………………………. 258,750

Loss from Operations of Division X………… 52,500

(Division X is a component of Larson Company) Loss from Sale of Division X........................... 49,500

(Division X is a component of Larson Company) Patent………………………………………… 33,750

Paid-In Capital in Excess of Par ……………. 150,000

Prepaid Rent…………………………………. 11,250*

Retained Earnings, January 1, 2017………… 247,050

Sales Returns and Allowances……………… 10,500

Sales Revenue………………………………1,023,000

Selling Expenses……………………………. 112,500

*Three years rent paid in advance for offsite document storage. Crowley has 200,000 shares of $10 par common stock authorized and has no treasury stock. Instructions:

Use this information to prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.

A company has an EPS of US$12 per share. It pays out its entire earnings as dividend. It has a growth rate of zero and a required return on equity of 8 percent per annum. Assuming all cashflows are perpetuities, what will be the price of the company’s stock?

Select one:

a. USD83.43

b. USD155.00

c. USD85.00

d. USD150.00

1)You observed the bid rate of the New Zealand dollar is $.3232 while the ask rate is $.3245 at Bank X. The bid rate of a New Zealand dollar is $.3324 while the ask rate is $.3342 at Bank Y. What would be your dollar amount profit if you use $1,000,000 to execute locational arbitrage?

2)Derek Jones, a foreign exchange trader at Charles Schwab, can invest $1 million, or the foreign currency equivalent of the bank’s short-term funds, in a covered interest arbitrage with Japan. Using the following quotes, can Derek make a covered interest arbitrage profit? If so, show the steps and calculate the amount of profit in USD.

3)Heidi Jensen is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward rate is ¥84.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day yen deposit rate is 4.700%, and the 360-day dollar deposit rate is 9.500%.

a)Calculate whether interest rate parity, purchasing power parity, and international fisher effect conditions hold between Japan and the US.

b)Find the forecasted change in the Japanese yen/US dollar exchange rate one year from now.

4)In China a Big Mac costs Yuan 16 (local currency), while in the US the same Big Mac costs $4.56. The exchange rate between Yuan and US dollar is Yuan6.1341/$. According to purchasing power parity, is Chinese Yuan overvalued or undervalued? Why?

5) The interest rate in the U.K. is 2%, while the interest rate in the U.S. is 1.5%. The spot rate for the British pound is $1.55. According to the international Fisher effect (IFE), what is new level of the British pound?

6) Bronco Co. is a U.S.-based MNC that has subsidiaries in Spain and Germany. Both subsidiaries frequently remit their earnings back to the parent company. The Spain subsidiary generated a net outflow of €1,000,000 this year, while the German subsidiary generated a net inflow of €2,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.18.

7)If one-year nominal interest rate in the U.S. is 3%, while the one-year nominal interest rate in Australia is 5%. The spot rate of the Australian dollar is $.97. Interest Parity is held. You will need 1 million Australian dollars in one year. Today, you purchase a one-year forward contract in Australian dollars. How many U.S. dollars will you have in one year from your forward contract?

8)Today, the one-year U.S. interest rate is 2.53%, while the one-year interest rate in Mexico is 6%. The spot rate of the Mexico peso (MXP) is $.08 The one-year forward rate of the MXP exhibits a 11% discount. Determine the yield (percentage return on investment) to an investor from Mexico who engages in covered interest arbitrage.

9)Current one-year interest rates in Europe are 2 percent, while one-year interest rates in the U.S. are 1.6 percent. You convert $100,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.28.

a. According to the IFE, what should the spot rate of the euro in one year be?

b. If the spot rate of the euro in one year is $1.20, what is your percentage return from your investment?

c. If the spot rate of the euro in one year is $1.35, what is your percentage return from your investment?

d. What must the spot rate of the euro be in one year for your strategy to be successful?