Deloitte Trueblood Case

A Network of Ideas

Spider-Web Corporation (“Spider”) owns and operates various Web sites, including YourSpace, a social networking Web site, and Bling, a Web site search engine. Spider is a nonpublic U.S.-based company with headquarters in Silk Valley, CA, and it earns most of its revenue through advertising. Spider not only manages the advertisement space on its own Web sites, but it also assists other Web site owners with filling their ad space.

To generate revenue, Spider enters into agreements with various third-party advertisers (the “advertisers” or the “customers”) whereby Spider agrees to place advertisers’ ads on Web sites owned by Spider. Spider can also place these ads on Web sites owned by its network partners (the “partners”), for which it has agreements to do so (see discussion below). Spider gives the advertisers a list of Web sites to choose from; the advertisers specify which Web sites are suitable to reach their intended demographic. If the desired advertising space is not available, the advertiser and Spider must agree on an alternative Web site. The advertisers are not made aware of who owns the partner Web sites, and the fees charged to each advertiser are from Spider’s standard list prices, which are specified in the agreement between the advertiser and Spider.

Spider offers the advertisers the option to have their ad displayed on a home page or linked to key search words. The pricing structure differs depending on which type of advertising is selected. For example, Spider will charge a fee each time an ad (also known as an impression) is displayed. Alternatively, if an advertiser selects its ad to be linked to key search words, Spider will charge a fee only when an end user clicks on the linked ad. The advertisers are invoiced the month after their ads are displayed, and payments are submitted directly to Spider.

To offer the advertisers a choice of Web sites on which to display their ads, Spider enters into agreements with the partners that own other Web sites. This expanded offering allows Spider to potentially increase its revenue from the advertisers; however, it comes with a cost to Spider. The partners charge a fee to Spider for use of their Web site ad spaces. The fee structure allows the partners to receive a minimum base fee that is equal to the cost to maintain the ad space (as predetermined on a quarterly basis) and up to 51 percent of the adjusted gross advertising revenue earned monthly. As defined in the agreement, the adjusted gross advertising revenue is equal to the amounts invoiced to the advertiser less chargebacks, credits, bad debt, refunds, and certain out-of-pocket expenses, including agency commissions and fees, sales commissions and fees, and creative services; however, the amount beyond the base fee is paid to the partner only after it is collected by Spider from the advertiser. The advertisers are not a party to any agreement with the partners; advertisers only have an agreement with Spider. Spider is solely responsible for fulfilling its contracts with the advertisers. Therefore, if suitable advertising space is not available on a partner’s Web site or if the partner does not believe the ad is suitable for its Web site, Spider and the advertiser will agree on an alternative Web site.

Spider’s agreement with the partners also specifies the space, size, and location on the partner’s Web site that must be available for ads. During the term of the agreement, the partner is also required to keep Spider’s network footer at the bottom of its home page because Spider is paying for the base fee. Since the advertisers are charged a fee either (1) for each time a user clicks their ad on a partner’s Web site or (2) each time an ad is displayed, the partners are required to install and use the tracking software provided by Spider. This tracking software is given to the partner at no charge, and it gives Spider monthly usage reports; Spider uses these reports to determine the invoice for the customer.

Spider will identify ads or marketing messages from the advertisers, along with its own ads, to be placed on a partner’s Web site. Spider will also pay the partner a nominal fee that is based on the number of times Spider’s ad is displayed on the partner’s Web site. Although Spider tries to identify ads that are best suited for the partner’s Web site, it sometimes selects ads that are not a good fit for the partner’s audience. The terms and conditions of the agreements between Spider and its partners allow the partners to request that Spider remove ads that are not suitable for their Web sites. If this situation occurs, Spider can find an alternative partner Web site to post the advertiser’s ad.

Required:

On the basis of the case facts, should Spider record the revenue it earns from placing ads for various third-party advertisers on Web sites owned by the partners on a gross or net basis? Provide an analysis supporting your conclusion based on US GAAP (Section 606) and IASB IFRS.

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.60 per case, has not had the market success that managers expected and the company is considering dropping Bubbs.

The product-line income statement for the past 12 months follows:

All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year’s corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow:

Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs:

Required:

a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further? (Round your answer to 2 decimal places.(i.e., 32.21))

Luke Corporation produces a variety of products, each within their own division. Last year, the managers at Luke developed and began marketing a new chewing gum, Bubbs, to sell in vending machines. The product, which sells for $5.60 per case, has not had the market success that managers expected and the company is considering dropping Bubbs.

The product-line income statement for the past 12 months follows:

All products at Luke receive an allocation of corporate overhead costs, which is computed as 5 percent of product revenue. The 5 percent rate is computed based on the most recent year’s corporate cost as a percentage of revenue. Data on corporate costs and revenues for the past two years follow:

Roy O. Andre, the product manager for Bubbs, is concerned about whether the product will be dropped by the company and has employed you as a financial consultant to help with some analysis. In addition to the information given above, Mr. Andre provides you with the following data on product costs for Bubbs:

Required:

a. Bunk Stores has requested a quote for a special order of Bubbs. This order would not be subject to any corporate allocation (and would not affect corporate costs). What is the minimum price Mr. Andre can offer Bunk without reducing profit any further? (Round your answer to 2 decimal places.(i.e., 32.21))

b. How many cases of Bubbs does Luke have to sell in order to break even on the product? (Round variable cost percentage to 2 decimal places, fixed costs to whole dollar amount and profit per case to 3 decimal places for intermediate calculations. Round your final answer up to the nearest whole unit.)

c. Suppose Luke has a requirement that all products have to earn 5 percent of sales (before tax after corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped? (Round your minimum price per case to 2 decimal places and do not round your other intermediate calculations. Round your final answer up to the nearest whole unit.)

d. Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke’s profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped. (Use variable cost percentage to 2 decimal places. Round intermediate calculations and final answers to nearest whole dollar amount.)

b. How many cases of Bubbs does Luke have to sell in order to break even on the product? (Round variable cost percentage to 2 decimal places, fixed costs to whole dollar amount and profit per case to 3 decimal places for intermediate calculations. Round your final answer up to the nearest whole unit.)

c. Suppose Luke has a requirement that all products have to earn 5 percent of sales (before tax after corporate allocations) or they will be dropped. How many cases of Bubbs does Mr. Andre need to sell to avoid seeing Bubbs dropped? (Round your minimum price per case to 2 decimal places and do not round your other intermediate calculations. Round your final answer up to the nearest whole unit.)

d. Assume all costs and prices will be the same in the next year. If Luke drops Bubbs, how much will Luke’s profits increase or decrease? Assume that fixed production costs can be avoided if Bubbs is dropped. (Use variable cost percentage to 2 decimal places. Round intermediate calculations and final answers to nearest whole dollar amount.)

The adjusted trial balance of Eldrich Real Estate Appraisal at June 30 comma 2018 , follows: LOADING... (Click the icon to view the adjusted trial balance.) Read the requirements LOADING.... Requirement 1. Prepare the company's income statement for the year ended June 30 comma 2018. (If a box is not used in the statement, leave the box empty; do not select a label or enter a zero. Use a minus sign or parentheses to show a net loss.) Eldrich Real Estate Appraisal Income Statement Year Ended June 30, 2018 Revenues: Service Revenue $47,500 Expenses: Insurance Expense $4,000 Salaries Expense 34,000 Utilities Expense 2,200 Depreciation Expense—Building 7,900 Interest Expense 8,900 Supplies Expense 500 Total Expenses 57,500 Net Income (Loss) $(10,000) Requirement 2. Prepare the company's statement of retained earnings for the year ended June 30 comma 2018. (Use a minus sign or parentheses to show a net loss.) Eldrich Real Estate Appraisal Statement of Retained Earnings Year Ended June 30, 2018 Retained Earnings, July 1, 2017 $37,000 Dividends (25,800) Net loss for the year (10,000) Retained Earnings, June 30, 2018 $1,200 Requirement 3. Prepare the company's classified balance sheet in report form at June 30 comma 2018. (If a box is not used in the balance sheet, leave the box empty; do not select a label or enter a zero.) Eldrich Real Estate Appraisal Balance Sheet June 30, 2018 Assets Current Assets: Cash $4,200 Accounts Receivable 4,500 Office Supplies 2,500 Prepaid Insurance 2,300 Total Current Assets $13,500 Property, Plant, and Equipment: Land 12,400 Building $79,000 Less: Accumulated Depreciation—Building (25,300) 53,700 Total Property, Plant, and Equipment 66,100 Total Assets $79,600 Liabilities Current Liabilities: Accounts Payable $20,500 Interest Payable 8,900 Salaries Payable 2,700 Unearned Revenue 9,300 Total Current Liabilities $41,400 Long-term Liabilities: Notes Payable 36,000 Total Liabilities 77,400 Stockholders' Equity Common Stock 1,000 Retained Earnings 1,200 Total Stockholders' Equity 2,200 Total Liabilities and Stockholders' Equity $79,600 Requirement 4. Journalize the closing entries. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) Start by closing revenues. Date Accounts and Explanation Debit Credit Jun. 30 Service Revenue 47,500 Clos. (1) Income Summary 47,500 To close revenue. Close expenses for the period. Date Accounts and Explanation Debit Credit Jun. 30 Income Summary 57,500 Clos. (2) Interest Expense 8,900 Insurance Expense 4,000 Supplies Expense 500 Utilities Expense 2,200 Salaries Expense 34,000 Depreciation Expense—Building 7,900 To close expenses. Close Income Summary. Date Accounts and Explanation Debit Credit Jun. 30 Retained Earnings 10,000 Clos. (3) Income Summary 10,000 To close Income Summary. Close Dividends. Date Accounts and Explanation Debit Credit Jun. 30 Retained Earnings 25,800 Clos. (4) Dividends 25,800 To close Dividends. Requirement 5. T-accounts have been opened using the balances from the adjusted trial balance. Post the closing entries to the T-accounts. Use "Clos." and the corresponding number as shown in the journal entry as posting referenceslong dash "Clos.(1)", "Clos.(2)", etc. The adjusted balance of each account has been entered for you. Post any closing entries to the accounts and then calculate the post-closing balance ("Bal.") of each account (including those that were not closed). For any accounts with a zero balance after closing, enter a "0" on the normal side of the account. For Income Summary, calculate and enter the balance ("Bal.") before posting the entry to close out the account. Post the entry to close Income Summary account on the same line as you entered the balance prior to closing (the second line) and then show the post-closing balance ("Bal.") on the last (third) line of the account. Review the closing journal entries you prepared above. LOADING... Cash Accounts Payable Service Revenue Bal. 4,200 20,500 Bal. 47,500 Bal. Accounts Receivable Interest Payable Insurance Expense Bal. 4,500 8,900 Bal. Bal. 4,000 Office Supplies Salaries Payable Salaries Expense Bal. 2,500 2,700 Bal. Bal. 34,000 Prepaid Insurance Unearned Revenue Supplies Expense Bal. 2,300 9,300 Bal. Bal. 500 Land Notes Payable Interest Expense Bal. 12,400 36,000 Bal. Bal. 8,900 Building Common Stock Utilities Expense Bal. 79,000 1,000 Bal. Bal. 2,200 Accumulated Depr.—Building Dividends Depreciation Expense—Building 25,300 Bal. Bal. 25,800 Bal. 7,900 Retained Earnings 37,000 Bal. Income Summary

Eldrich Real Estate Appraisal,,,
Adjusted Trial Balance,,,
"June 30, 2018",,,
,,Balance,
,Account Title,Debit,Credit
,Cash,"$4,200",
,Accounts Receivable,"4,500",
,Office Supplies,"2,500",
,Prepaid Insurance,"2,300",
,Land,"12,400",
,Building,"79,000",
,Accumulated Depreciation—Building,,"$25,300"
,Accounts Payable,,"20,500"
,Interest Payable,,"8,900"
,Salaries Payable,,"2,700"
,Unearned Revenue,,"9,300"
,Notes Payable (long-term),,"36,000"
,Common Stock,,"1,000"
,Retained Earnings,,"37,000"
,Dividends,"25,800",
,Service Revenue,,"47,500"
,Insurance Expense,"4,000",
,Salaries Expense,"34,000",
,Supplies Expense,500,
,Interest Expense,"8,900",
,Utilities Expense,"2,200",
,Depreciation Expense—Building,"7,900",
,Total,"$188,200","$188,200"

Prepare the company's income statement for the year ended

June 30 comma 2018June 30, 2018.

2.

Prepare the company's statement of retained earnings for the year ended

June 30 comma 2018June 30, 2018.

3.

Prepare the company's classified balance sheet in report form at

June 30 comma 2018June 30, 2018.

4.

Journalize the closing entries.

5.

T-accounts have been opened using the balances from the adjusted trial balance. Post the closing entries to the T-accounts.

6.

Prepare the company's post-closing trial balance at

June 30 comma 2018June 30, 2018.

Background You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queensland and Ballarat in Victoria. Although a medium-sized firm by national standards, SBF includes Australia’s largest regionally-based auditing practice. Most of SBF’s audit clients are in the manufacturing and service industries. SBF recently acquired a major new audit client, Dudley Health Limited (DHL), which fully owns:
• St Neville's, a highly regarded private hospital located in Tamworth • Acuity Vision, a network of day surgery clinics across NSW and Queensland • Pellegrino Shores, a retirement village located in Port Macquarie

Its a chilly evening in early July 2019 and you are meeting with your audit senior, Jek Porkins, to discuss the findings of his preliminary work for the 30 June 2019 audit of DHL.
Fraud at Pellegrino Shores Last month a senior staff member at Pellegrino Shores was dismissed after it was discovered that she had worked in collusion with a number of residents to reduce their fees and receive secret payments from them in return. The senior staff member had access to the resident database. Whilst she was only supposed to update room location changes for residents, she was able to reduce the resident's period of stay and the value of other services provided. The fraud was detected by a fellow employee who overheard the senior staff member discussing the 'scam' with a resident.
St Neville's patient revenue system On Sunday 10 March 2019 St Neville's switched from its 'homegrown' patient revenue system to the DHL 'off the shelf' revenue system. The DHL internal audit unit was involved throughout the switchover. DHL was confident that its revenue system would perform all of the functions that the St Neville's patient system had performed. The 'homegrown' St Neville's revenue system consisted of:
1. Billing system: produces the invoice to charge the patient for services provided such as accommodation, medications, and medical services. This software includes a complex formula to calculate the patient bill after allowing for government subsidies, pensioner benefits and private medical insurance benefits. 2. Patient database: a master file containing personal patient details as well as the period of stay, services provided and client medical insurance details. 3. Rates database: a master file that shows all accommodation billing rates, rebate discounts, and government assistance benefits.
Jek Porkins spoke with a number of St Neville's administration staff about the impact of switching to the DHL patient revenue system:
• 'There was some sort of power surge last Friday and we had to re-enter every patient invoice that we processed in the last two weeks'. • 'Lately, we've had an unusually high number of complaints from recently discharged patients that the fee invoice we sent them does not line up with the agreed medical fund and pensioner subsidy rates. We found out that halfway through last month someone from the IT team made a software change to fix a bug in the billing calculation formula'. • 'There were some occasions where we invoiced people that were past patients. This seems to have happened when they shared the same surname as a current patient'. • 'We seem to have some patient fee invoices where for no reason we have billed patients at a lower room rate than we hold on the rates database'.
Acuity Vision sales team During the financial year, Acuity Vision released its own range of medical supplies which are sold via direct marketing by a sales team employed by Acuity. The sales team receive a fairly low base salary plus a bonus based on the dollar value of the sales they generate. Jek Porkins selected a sample of customer payments received by Acuity just after year end and traced them back to the general ledger and customer account balance.

DHL accounts payable Whilst on site at DHL's Head Office in early July, Jek Porkins undertook two accounts payable tests: Test Result Conclusion
1
15 suppliers were selected from the list of trade creditors at year-end. Balances were traced to supplier invoices and goods received notes to ensure goods were received prior to year-end. For two creditors out of 15 tested the balance was only marginally overstated.
Accepted as no material errors were located.
2
Selected 20 suppliers' invoices and checked that the pricing and discount terms have been reviewed and authorised by the purchase manager. Three out of the 20 invoices tested had not been authorised and incorrect discounts had been applied to them. A follow up of the three samples with deviations did not highlight a pattern or specific reason for the errors.
Accepted as the errors in discounts claimed were immaterial.
Pellegrino Shores payroll
In addition to full-time staff, Pellegrino Shores employs a significant number of casual nursing, cleaning and administrative staff. Overtime is often worked on weekends and night shifts due to a shortage of staff. Payment at overtime rates for standard weekend and night shifts has been a common occurrence.
Required
Write a memo to Jek Porkins, the audit senior on the DHL assignment, that advises him on: Question 1 (4%) The business risk impactandthe accounts (as well as related audit assertions) most likely affected by the fraud atPellegrino Shores.
Question 2 (6%)
Additional audit work to be undertaken in relation to the switchover of the new patient revenue system atSt Neville's. Specifically:
a. the associated audit risks b. two key questions to ask internal audit c. a justification for the audit strategy to be adopted for the audit of patient revenue at St Neville's

Question 3 (6%)
Additional information required in relation toAcuity Vison'ssale of medical supplies. Specifically:
a. the key account balance(s) and associated assertions at risk due to Acuity Vision's arrangements for paying its sales team b. the implications for the control environment within DHL, including specific issues management would need to consider c. the effectiveness of his customer payments testing
Question 4 (5%)
Both accounts payable tests he has undertaken. Specifically:
a. whether each is a test of control or substantive test b. the key assertion addressed by each test c. the reasonableness of the conclusion reached for each test d. additional audit procedures, if any, that need to be performed.
Answer this question using the following table: Test type of test keyassertion reasonableness of conclusion additional audit procedures 1 2
Question 5 (4%)
The key assertion at risk in relation to the payment of overtime atPellegrino Shores, a preventative internal controlanda detective internal control that would directly address the risk.

Land Rent(x) = Revenue(x)/unit area - Transport Costs(x)/unit area or R(x) = pA - tAx for all farmed locations. Assume that in the base case p = 10, A = 100, and t = 2.

Use the table to calculate R(x)

a) Draw rent as a function of distance from the central railyard.

b) What is the land rent at x = 12.5? Explain.

c) Suppose that the price of apples doubles, so that p = 20. Draw rent as a function of distance from the central railyard. Provide an economic explanation of why the slope of the rent function is 200.

d) (2) Return to the situation where p = 10 and t = 2. Now suppose that there is an increase in agricultural productivity, which causes A to increase to 200. Draw rent as a function of distance from the central railyard.

8/1       YOU filed a charter with the State of Louisiana to form the YOUR Accounting Corporation. The charter authorizes you to issue 5000 shares of $2 par common stock. The state charged you a $75 fee to file the charter. Since your business is not yet approved, you had to pay this fee using personal funds.

9/1       You received your charter from the State of Louisiana and officially opened your business.   Your first order of business was to become a shareholder of YOUR Accounting Corp. To do this, you purchased 500 shares of common stock by issuing a check to YOUR Accounting Corp for $10,000. You used this money to open a checking account at First Funds Bank.

9/1       You rented an office for YOUR Accounting Corp. The monthly rent is $500, with the first month’s rent due immediately. You issue check #100 to Office Builders for the first month’s rent.

9/2       You then went to the Apple store and purchased a new computer system for your business. Your Mac Pro cost $2700 and your new printer cost $450. You set up a 30-day account with Apple to make this purchase.

9/3       You ordered business cards and stationary from Marketing Media on account. The order totaled $250 and will be shipped FOB Destination. (Record all purchases of supplies in the Supplies on Hand account).

9/4       You decided to purchase a new vehicle for your business. Upon visiting Pro-Auto, you decide on a new SUV at a cost of $55,000. This vehicle will be used 100% for business purposes. You finance the vehicle with Pig E Bank at a rate of 5% for 6 years. Your first monthly payment is due on October 4.

               NOTE: You will need to create a loan amortization schedule to determine the amount of the monthly note and the interest expense for each month. You can use a website such as www.bankrate.com to create the schedule. When recording your journal entries, round all amounts to the nearest dollar.

9/5       You went to the KEM Supply to purchase supplies for your business at a cost of $600. KEM opened a customer charge account for you. The payment terms on your account will be 2/10, net 30. The time period for determining the payment amount begins on the purchase date.

9/6       You purchased a one-year auto insurance policy from InsureMart for $1200. InsureMart will send you a bill for the policy. YOUR Accounting Corporation capitalizes all insurance policies on the date of purchase and records the necessary expense at year-end as an adjusting entry.

9/10    Your first client, Red Fische, came in today needing assistance with filing the appropriate paperwork to start his new seafood restaurant. You issued invoice #1 to Red Fische and he paid you an initial $2,000 Engagement Fee. Red Fische also agreed to contract with you to provide accounting services for $2,500 per month.

9/12    You issue check #101 to YOUR Accounting Corp to establish a $500 Petty Cash Fund. You will use this account to make small cash purchases.

9/12    You reimburse yourself for the filing fees associated with forming your corporation.

9/14 You paid KEM Supply by issuing check #102

9/15    You hire an administrative assistant, Mandi Handi, she will be paid a monthly salary of $1500. You have decided that all pay periods will end on the last day of the month and that checks will be issued on the 5^th of each month.

               NOTE: Assume the following rates when preparing the payroll: federal income tax 15%, state income tax 5%, and FICA 7.65%.

               YOUR Accounting Corp. has state and federal unemployment insurance rates of 1% (FUTA) and 2% (SUTA) on the first $7,700 of wages per employee. The employer FICA rate is 7.65%.

9/16    Marketing Media delivered your business cards and stationary. Check #103 was issued to pay for the supplies.

9/20    You visited a new client, Anita Cooke, to set up a Quickbooks accounting system for her new business, Cooking For You. You gave Anita and invoice #2 for the Engagement Fee and she paid you by issuing a check in the amount of $2,000. Anita also agreed to a monthly fee of $1,500 for you to handle her ongoing accounting needs.

9/22    You purchased $50 of fuel for your new SUV from Get ‘n Go. You charged this to your Get ‘n Go account.

9/30    Mandi sent pro-rated invoices, #3 & #4 , to Red Fische and Cooking For You for Monthly Accounting Services. The payment terms are 1/10, net 30.

9/30    You accrued interest on the Pig E. Bank note. Accrue interest based on the number of days in the month.

9/30    You computed and accrued the payroll for September.

9/30    You received monthly bills for the following:

                              Max Power Company - $100, terms n/30

                              WaterWorks #1 - $20, terms n/30.

CHART OF ACCOUNTS

ASSIGNMENT

In proper General Journal format, record the transactions for the month; include descriptions of each transaction with your journal entry. Use only the accounts shown in the chart of accounts.

A 6-year investment (current) requires initial capital of PLN 300,000 at the beginning and additional payment of PLN 50,000 at the begining of second year. Investment will generate revenue of PLN 20,000 at the end of second and third year, then it will generate PLN 110,000 at the end of four year and finally PLN 280,000 at the end of fifth and sixth year. It is expected that market rates will be fixed in time at 3% per 3M under yearly capitalization? Calculate PI of this (current) investment and determine wheter this (current) investment would be better (or not) than alternative investment (which has PI of 1.14)?

For each of the following characteristics, indicate whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither. (Note: If the characteristic describes neither, leave the entire row unchecked.) Check all that apply.

When price exceeds average variable cost in the short run, a competitive firm's marginal cost curve is regarded as its supply curve because