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?

JCX Ltd operates in a highly competitive market and is involved in the production of parts for the farming industry. It has plants in Auckland, Wellington, Christchurch and Dunedin. One of its plants, the Wellington Plant, specialises in the production of two parts: JCX-1 and JCX-2. Part JCX-1 produced the highest volume of activity, and for many years, it was the only part produced by the plant. Five years ago, Part JCX-2 was added. Profits increased for the first few years after the addition of the new product. However, in the last two years the plant has faced intense competition and its sales of Part JCX-2 has dropped. In fact, the plant showed a small gross loss in the most recent reporting period. Much of the competition was from foreign sources, and the plant manager was convinced that the foreign producers were guilty of selling parts below their cost of production. The plant currently uses a traditional costing system where only manufacturing overhead costs are allocated to products using a predetermined plant-wide overhead rate based on direct labour hours. The company’s CEO Jim James has recently attended a leadership conference in London and was very impressed by a presentation given by Nicola Toms, CFO of a large manufacturing company, on ABC. Jim managed to arrange a private meeting with Nicola to explore her experiences with the development and implementation of ABC in her organisation. After the meeting, Jim was convinced that JCX could benefit from the implementation of ABC. He agreed with Nicola’s view that as the level of external environment factors increases, more reliable product cost information is needed. He was very impressed with how Nicola went about her implementation strategy. In particular, he noted Nicola’s emphasis on the importance of clearly addressing up-front major issues that are likely to arise when seeking buy-in of the managers in the organisation. Jim took notes of those issues as follows. ABC is too complex and expensive to implement. ABC can be prone to misuse by constant revision of the cost pools or cost drivers. In ABC, not all overhead costs, such as CEO salary, can be allocated to specific activities. If ABC is implemented, other systems, such as variance analysis, may have to be changed resulting in disruptions and costs. While many organisations have experimented with ABC as a one-off exercise, not many adopted ABC as an ongoing costing system.

Present five arguments to support why ABC should be implemented given the issues raised. Your arguments must address the five issues, which are: a) ABC is too complex and expensive to implement b) ABC can be prone to misuse by constant revision of the cost pools or cost drivers c) In ABC, not all overhead costs, such as CEO salary, can be allocated to specific activities d) If ABC is implemented, other systems, such as variance analysis, may have to be changed resulting in disruptions and costs e) While many organisations have experimented with ABC, not many organisations have adopted it.

The Carseat is a data set containing sales of child car seats at 400 different stores. Your task is to develop a regression model to predict sales and use this data to estimate your model.

Description of variables:
Sales: Unit sales (in thousands) at each location
CompPrice: Price charged by competitor at each location
Income: Community income level (in thousands of dollars)
Advertising: Local advertising budget for company at each location (in thousands of dollars)
Population: Population size in region (in thousands)
Price: Price company charges for car seats at each site
ShelveLoc: A factor with levels Bad, Good and Medium indicating the quality of the shelving location for the car seats at each site
Age: Average age of the local population
Education: Education level at each location
Urban: A factor with levels No and Yes to indicate whether the store is in an urban or rural location
US: A factor with levels No and Yes to indicate whether the store is in the US or not

a. Which variables are categorical variable? For each categorical variable, define the corresponding dummy variables. [1pt]

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys debt securities, not intending to profit from short-term differences in price and not necessarily to hold debt securities to maturity, but to have them available for sale in years when circumstances warrant. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020.

(Hint: Interest must be accrued.)

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year end. For any sales, prepare entries to update the fair-value adjustment, record any reclassification adjustment, and record the sale.
2. Indicate any amounts that Ornamental Insulation would report in its 2021 income statement, 2021 statement of comprehensive income, and 12/31/2021 balance sheet as a result of these investments. Include totals for net income, comprehensive income, and retained earnings as a result of these investments.

Journal entry worksheet

• Record the acquisition of 5% Distribution Transformers Corporation bonds costing $600,000 at face value.

Note: Enter debits before credits.

• Record the acquisition of $1,200,000 of American Instruments’ 7% bonds at face value.

Note: Enter debits before credits.

• 
  Record the entry for the semiannual interest received on the Distribution Transformers bonds.

Note: Enter debits before credits.

• Record the entry to adjust to fair value on the date of sale of the Distribution Transformers bonds.

Note: Enter debits before credits.

• 
  Record the entry for the reclassification adjustment on the date of sale.

Note: Enter debits before credits.

• 
  Record the entry for sale of Distribution Transformers bonds for $645,000.

Note: Enter debits before credits.

• 
  Record the acquisition of $1,600,000 of M&D Corporation 3% bonds at face value.

Note: Enter debits before credits.

• 
  Record the interest accrual for American Instruments bonds.

Note: Enter debits before credits.

• 
  Record the interest accrual for M&D bonds.

Note: Enter debits before credits.

• 
  Record the entry to adjust fair value of the investments at year-end.

Note: Enter debits before credits.

Interpreting Acquisition Footnote with In-Process Research and Development

On October 3, 2017, Gilead Sciences, Inc. (Gilead) acquired 100% of the outstanding common stock

of Kite Pharma, Inc. (Kite). According to Gilead’s December 31, 2017 Securities and Exchange Com-

mission Form 10-K, “[t]he acquisition of Kite was accounted for as a business combination using the

acquisition method of accounting.” The following excerpt is from Note 5 (i.e., Acquisitions) of Gilead’s

2017 10-K:

The following table summarizes the preliminary acquisition date fair values of assets acquired and

liabilities assumed, and the consideration transferred (in millions):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 652

Identifiable intangible assets

Indefinite-lived intangible assets—IPR&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,950

Outlicense acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,606)

Other assets acquired (liabilities assumed), net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Total identifiable net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,168

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,987

Total consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,155

a. What did Gilead need to demonstrate for the Kite acquisition to qualify as a business

combination? (In answering this question, ignore the information in part d of this problem.)

b. Given the individual identifiable net assets acquired, describe why business combination

accounting might seem unusual for the Kite acquisition. (In answering this question, ignore the

information in part d of this problem.)

c. For this question only, assume the Kite acquisition qualified as an asset acquisition that is not a

business combination. How would the accounting for the acquisition of Kite’s net assets differ?

d. According to Gilead’s 2017 10-K, in October 2017, after the acquisition date of Kite, the “FDA

approv[ed] Yescarta for the treatment of adult patients with relapsed or refractory DLBCL after

two or more lines of systemic therapy.” (This technology was technically considered unproven

and presented as part of in-process research and development at the balance acquisition date.)

The footnote states that the fair value of the technology for this proven Yescarta therapy is $6,200

million. If this technology was proven and patented, how will the above-presented information in

the acquisition footnote change in the December 31, 2017 financial statements of Gilead?

#4

REVISED PROBLEM 13-42

ACC 650 - Management Accounting

Megatronics Corporation, a massive retailer of electronic products, is organized in four separate divisions.
The four divisional managers are evaluated at year-end, and bonuses are awarded based on ROI.
Last year, the company as a whole produced a 13 percent return on its investment.
During the past week, management of the company’s Northeast Division was approached about the
possibility of buying a competitor that had decided to redirect its retail activities. (If the competitor is
acquired, it will be acquired at its book value.) The data that follow relate to recent performance of the
Northeast Division and the competitor:

Management has determined that in order to upgrade the competitor to Megatronics’ standards, an
additional $275,000 of invested capital would be needed.

REQUIRED:

4. Would the division be better off if it didn’t upgrade the competitor to Megatronics’ standards?
Show computations to support your answer.