Suppose on 31-Dec-2019 you entered into a forward contract to buy one share of stock XYZ for delivery price = L = $50 with delivery date 31-Dec-2020. You enter t and S(t) into your formula for V(S,t) to figure out today’s value of the contract. Now suppose you learn to your surprise that interest rates are not constant; they can change in an uncertain way over the time period from today to 31-Dec-2020.
[A] Assume that today’s stock price and the interest rates that prevail today have not changed. Will the forward price that you compute today (for delivery date 31-Dec-2020) change because of your revised view that future interest rates are uncertain?
[B] Will V(S,t), the value of the forward contract, change? Why or why not?
In: Finance
2. This problem asks you to work through the partial equilibrium analysis of some scenarios involving trade, consumer and producer welfare, and government tariff revenue. (a) Assume that the US does not participate in the international trade of kumquats (a small, citrus fruit) and therefore the kumquats market in the US clears domestically. Use a digram to show how the price (pa) and quantity (qa) traded are determined, and identify consumers’ surplus and producers’ surplus. (b) Assume that now the US opens to international trade to kumquats. The world price of kumquats is lower than the autarky price in the US, prior to trade (pW < pa). Will the US become an importer or an exporter of kumquats? Draw a diagram of the US market consistent with this assumption and discuss the welfare implications for each side of the market. Identify areas representing the welfare change. Is the US better or worse off, as a whole? (c) Redo (b), on a new diagram, but now under the assumption that the world price is higher than US’s autarky one (pW > pa). (d) Go back to the pW < pa case. The US government is considering a tariff on kumquats. Use a diagram for the equilibrium in world markets (hint: MD and XS*) to show the consequences of such a tariff for: i) the volume of international trade, ii) the price in the US market, iii) the price in the World market. Assume that the US is large relative to the rest of the world, when it comes to the demand for kumquats. (e) Redo (d), on a new diagram, under the assumption that the US is small relative to the rest of the world, when it comes to the demand for kumquats. (f) Go back to the large US case. Use a digram for the foreign/RoW market to show which side of the market is better-off and which is worse-off with the US tariff in place. Identify key areas representing welfare changes. (g) Use either a diagram for the US market or for world markets to show that the US can be, overall, better off with an unilateral tariff on kumquats, assuming that the governments in kumquat-exporting countries do not react to this policy. Be sure to identify the tariff revenue that gets collected by the US government. (h) The US is an importer of kumquats and the US government does impose the tariff we previously analyzed. On the other hand, the US is a big exporter of high-tech medical devices. How could foreigns governments react to the US tariff, in order to improve their terms of trade with respect to the US? How would US consumers and producers of medical devices feel about that reaction?
In: Economics
Fresh Ltd. (Fresh) manufactures organic fruit drinks and its year end is December 31, 2020. You are an audit manager of Lea & Bettiol CPAs and are currently planning the audit of Fresh. You attended the planning meeting with the audit engagement partner and CFO last week and made the following notes:
Notes of planning meeting for Fresh
Fresh’s sales have been strong and the company is forecasting revenue of $40 million this year, which is a 25% increase over the prior year. During the year, the company invested significantly in its beverage production process at its factory to ensure it can keep up with the product demand. It also spent $4 million updating, repairing and replacing most of the machinery used in its production process. Because of the significant demand, the company also expanded the number of warehouses it uses to store inventory. It now utilises 15 warehouses; some are owned by Fresh and some are rented from third parties. There will be inventory counts taking place at all 15 of these sites at the year end.
A new accounting general ledger was introduced at the beginning of the year, with the old and new systems being run in parallel for a period of two months. In addition, Fresh spent $1.3 million on developing a new brand of protein drinks. The company started this process in July 2020 and is close to launching their new product into the market.
As a result of the increase in revenue, Fresh recently recruited a new credit manager to collect outstanding receivables. The CFO is sure the new manager will be successful and so he does not think Fresh needs to continue to maintain a general allowance for doubtful accounts and so he has not booked one for 2020.
The CFO stated that there was a problem in the mixing of raw materials within the production process which resulted in a large batch of drinks tasting different. A number of these products were sold; but due to complaints by customers, no further sales of these beverages have been made. No adjustment has been made to the valuation of the damaged inventory, which will still be held at a cost of $1 million at the year end.
As in previous years, the management of Fresh is due to be paid a significant annual bonus based on the value of year-end total assets.
Required:
(a) Using the notes provided, identify and explain SEVEN audit risks
(b) If the auditor determines the engagement is high risk- what does this mean for detection risk and materiality?
(b) Assuming the auditor determines the inventory is overvalued, what would be the impact, if any, on the audit report?
(c) What type of audit procedure would provide the auditor the best evidence for the existence of the inventory? (1 Mark)
In: Accounting
In 2019, Lila Done Ltd explored two different areas of interest and spent $340,000 for Area X and $260,000 for Area Y. The results of exploration and evaluation (E&E) activities suggested that Areas X and Y may contain mineral reserves, so the company acquired leases over these two areas. The leases cost $300,000 for each area.
In 2020, Lila Done Ltd commenced a drilling program to evaluate Areas X and Y. Two exploratory wells were drilled in Area X and one in Area Y at a cost of $240 ,000 each. The two wells drilled in Area X indicated that the company had discovered economically recoverable reserves. Management was uncertain about the likelihood of finding economically recoverable reserves for the well in Area Y. Therefore, Lila Done Ltd decided to continue E&E activities in Area Y. After incurring costs of $120 ,000 to confirm the technical feasibility and commercial viability of extracting the mineral resources, development of Area X commenced.
In 2021, to evaluate the area of interest further, three more wells were drilled in Area X. Of these, two were dry. Each well costs $250 ,000. The successful wells in Area X were developed for a total cost of $600,000. After further dry wells costing $150 ,000 were drilled in Area Y, management concluded that Area Y did not contain any commercially viable quantities of mineral resources, so it was abandoned. Assume that the company's financial year starts on 1 January and closes on 31 December.
REQUIRED
Determine what amounts would be recognised as an expense (in the profit or loss) versus capitalised as an asset, in relation to each area of interest for each financial year assuming Lila DoneLtd capitalises successful E&E costs on an area of interest basis (i.e., expenses dry holes).
In: Accounting
In recent years, Concord Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods have been used. Information concerning the machines is summarized in the table below. Machine Acquired Cost Salvage Value Useful Life (in years) Depreciation Method 1 Jan. 1, 2020 $ 96,600 $ 14,000 8 Straight-line 2 July 1, 2021 88,500 12,000 5 Declining-balance 3 Nov. 1, 2021 92,500 8,500 6 Units-of-activity For the declining-balance method, Concord Company uses the double-declining rate. For the units-of-activity method, total machine hours are expected to be 28,000. Actual hours of use in the first 3 years were 2021, 800; 2022, 4,300; and 2023, 6,300. Compute the amount of accumulated depreciation on each machine at December 31, 2023. For Bus #3, calculate depreciable cost per mile under units-of-activity method. Depreciable cost $enter depreciable cost per mile in dollars 3 per mile Accumulated depreciation MACHINE 1 $enter the amount of accumulated depreciation in dollars MACHINE 2 $enter the amount of accumulated depreciation in dollars MACHINE 3 $enter the amount of accumulated depreciation in dollars (Round answer to 2 decimal places, e.g. 0.50.)
On July 1, 2022, Pina Colada Corp. invested $740,160 in a mine estimated to have 771,000 tons of ore of uniform grade. During the last 6 months of 2022, 104,000 tons of ore were mined. (a1) Calculate depletion cost per unit. (Round answer to 2 decimal places, e.g. 0.50.) Depletion cost per unit $enter depletion cost per unit amount in dollar (Round answer to 2 decimal places, e.g. 0.50.)
In: Accounting
As a recently hired accountant for a small business, SMC, Inc., you are provided with last year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business.
You are also given the following information that summarizes the business activity for the current year,2020
|
As arecently hired accountantfor a smallbusiness,SMC,Inc., you are providedwithlast year’s balance sheet, income statement, and post-closing trial balance to familiarize yourself with the business. SMC, Inc. Balance Sheet December 31, 2019 Assets Cash ......................................................................................................... $34,500 Accounts receivable ................................................................................ 25,000 Inventory .................................................................................................. 10,000 Supplies ................................................................................................... 200 Total assets.............................................................................................. $69,700 Liabilities and Stockholders’ Equity Liabilities: Accounts payable ............................................................................. $12,000 Salaries payable ............................................................................... 1,000 Income taxes payable ...................................................................... 3,675 Total liabilities.......................................................................................... $16,675 Stockholders’ equity: Capital stock (10,000 shares outstanding).................................... $25,000 Retained earnings ............................................................................ 28,025 Total stockholders’ equity ....................................................................... 53,025 Total liabilities and stockholders’ equity................................................ $69,700 SMC, Inc. Income Statement For the Year Ended December31,2019 Sales revenue .......................................................................................... $110,000 Rent revenue ........................................................................................... 1,000 Total revenues......................................................................................... $111,000 Less cost of goods sold........................................................................... 60,000 Gross profit ........................................................................................... $ 51,000 Less operating expenses: Supplies expense ............................................................................. $ 400 Salaries expense .............................................................................. 22,000 Miscellaneous expense................................................................... 4,100 26,500 Income beforetaxes................................................................................ $ 24,500 Less income taxes................................................................................... 3,675 Net income............................................................................................... $ 20,825 Earnings per share ( $20,825 / 10,000shares) $ 2.08 SMC, Inc. Post-Closing Trial Balance December 31, 2019 Debits Credits Cash ......................................................................................................... $34,500 Accounts Receivable............................................................................... 25,000 Inventory .................................................................................................. 10,000 Supplies ................................................................................................... 200 Accounts Payable.................................................................................... $12,000 Salaries Payable ...................................................................................... 1,000 Income TaxesPayable............................................................................. 3,675 Common Stock............................................................................................ 25,000 Retained Earnings ................................................................................... 28,025 Totals........................................................................................................ $69,700 $69,700 You are also given the following information that summarizes the business activity for the current year,2020 a. Issued 10,000 additional shares of common stock for $60,000 cash on January 1st. b. Borrowed $25,000 onMarch 1,2020,from Downtown Bank as a long-term loan. The interest rate on the loan is 4%and Interest for the year is payable on January 1, 2021. c. Paid $12,000 cash on April1 to lease a building for one year. d. Received $6,000 on May 1 from a tenant for one year’s rent. e. Paid $4,200 on June 1 for a one-year insurance policy. f. Purchased $3,500 of supplies for cash on June 15th. g. Purchased inventory for $125,000 on account on July 1. h. August 1, sold inventory for $185,000 on account; cost ofthe merchandise sold was $120,000. i. Collected $145,000 cash from customers’ accounts receivable onAugust 20th. j. September 1,Paid $95,000 cash for inventories purchased earlier during the year. k. September 20th paid $34,000 for sales reps’ salaries, including $1,000 owed atthe beginning of2020. l. Dividends for $9,500 were paid onOctober 20th. m. The income taxes payable for the year of 2019 were paid on November 15th. n. For adjusting entries, all prepaid expenses are initially recorded asassets, andall unearned revenues are initially recorded as liabilities (this is just informational). o. At year-end, $1,050 worth of supplies are on hand. p. At year-end, an additional $9,500 of sales salaries are owed, but have not yet been paid. q. Prepare an adjusting entry to recognize the taxes owed for 2020. The corporate tax rate is 21% of the income before income taxes. You are asked to do the following on an excel spreadsheet: 1. Journalize the transactions for the current year, 2020, using the chart of accounts listed on the excel spreadsheet provided for the project. 2. Set up T-accounts and enter the beginning balances from the December 31, 2019, post-closing trial balance for SMC. Post all current year journal entries to the T-accounts. 3. Journalize and post any necessary adjusting entries at the end of 2020. (Hint: Items b, c, d, e, o, p, and q require adjustment.) 4. After the adjusting entries are posted, prepare an adjusted trial balance, an income statement, statement ofretained earnings and a balance sheet for 2020. The format of your statements should mirror those prepared by the company in 2019. 5. Journalize and post-closing entries for 2020 and prepare a post-closing trial balance. 6. Compute the Current Ratio and Debt to Total Equity Ratio for 2019 and 2020 7. Interpretive Question: What is your overall assessmen |
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Assignment Summary
On the excel spreadsheet attached, perform the following tasks using the information from SMC, Inc. provided above:
In: Accounting
Exercise 22-14 (b) (indirect method)
Indigo Inc., a greeting card company that follows ASPE, had the following statements prepared as at December 31, 2020:
| INDIGO INC. Comparative Statement of Financial Position December 31 |
|||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
|
Cash |
$52,795 | $25,120 | |||||
|
Accounts receivable |
58,040 | 51,090 | |||||
|
Inventory |
39,980 | 60,020 | |||||
|
Prepaid rent |
5,270 | 4,170 | |||||
|
Equipment |
157,450 | 130,110 | |||||
|
Accumulated depreciation–equipment |
(35,270 | ) | (25,170 | ) | |||
|
Goodwill |
20,000 | 60,000 | |||||
|
Total assets |
$298,265 | $305,340 | |||||
|
Accounts payable |
$46,250 | $40,110 | |||||
|
Income tax payable |
3,980 | 6,020 | |||||
|
Salaries and wages payable |
8,120 | 4,120 | |||||
|
Short–term loans payable |
8,040 | 10,090 | |||||
|
Long–term loans payable |
60,000 | 79,000 | |||||
|
Common shares |
130,000 | 130,000 | |||||
|
Retained earnings |
41,875 | 36,000 | |||||
|
Total liabilities and shareholders’ equity |
$298,265 | 305,340 | |||||
| INDIGO INC. Income Statement Year Ending December 31, 2020 |
|||||
|---|---|---|---|---|---|
|
Sales revenue |
$348,085 | ||||
|
Cost of goods sold |
165,000 | ||||
|
Gross margin |
183,085 | ||||
|
Operating expenses |
120,000 | ||||
|
Operating income |
63,085 | ||||
|
Interest expense |
$11,600 | ||||
|
Impairment loss–goodwill |
40,000 | ||||
|
Gain on disposal of equipment |
(2,300 | ) | 49,300 | ||
|
Income before income tax |
13,785 | ||||
|
Income tax expense |
4,110 | ||||
|
Net income |
$9,675 | ||||
Additional information:
| 1. | Dividends on common shares in the amount of $3,800 were declared and paid during 2020. | |
| 2. | Depreciation expense is included in operating expenses, as is salaries and wages expense of $72,000. | |
| 3. | Equipment with a cost of $34,000 that was 70% depreciated was sold during 2020. |
Prepare a statement of cash flows 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).)
In: Accounting
Emanuel Products produces coat racks in Toronto, Canada. The accountant has presented you the following budgeted data for the third quarter of 2020. Sales are forecasted to be 70,000 units at a price per unit of $35. The budgeted beginning and ending finished goods inventories are 6,000 and 12,000 units respectively. It is estimated that each rack requires five kilograms of metal at a budgeted price of $3 per kg. The beginning raw materials inventory is estimated as 3,500 kilograms. George Products wants to keep ending raw materials inventory of 5,500 due to fluctuations in demand. Each rack requires 1.4 hours of direct labour and the standard hourly pay rate is $18.
Required: (please show all steps of your computation in proper format)
1. Prepare a sales budget for the third quarter of 2020.
2. Prepare a production budget for the third quarter of 2020. (1.5 marks)
3. Prepare a direct materials purchases budget for the third quarter of 2020. (1.5 marks)
4. Prepare a direct labour budget for the third quarter of 2020. (1 mark)
5. Mr Peter started a business by acquiring a medium sized manufacturing firm. He hired you to work in the accounting department. You are in charge of providing management accounting reports to aid him in the planning and control of operations and make sure that everything the company does is consistent to the plan. He advised you not to implement a standard costing system as he does not see any purpose in doing that. What is your reaction to his advice? If you don’t agree on his idea, how do you convince him to accept the importance of standard costing? (1 mark)
(Total 6 Marks)
In: Accounting
Bridgeport Inc., a greeting card company that follows ASPE, had the following statements prepared as at December 31, 2020:
| BRIDGEPORT
INC. Comparative Statement of Financial Position December 31 |
|||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
|
Cash |
$47,670 | $25,040 | |||||
|
Accounts receivable |
57,990 | 51,030 | |||||
|
Inventory |
40,030 | 60,090 | |||||
|
Prepaid rent |
5,160 | 4,010 | |||||
|
Equipment |
163,130 | 130,080 | |||||
|
Accumulated depreciation–equipment |
(35,160 | ) | (25,010 | ) | |||
|
Goodwill |
24,000 | 64,000 | |||||
|
Total assets |
$302,820 | $309,240 | |||||
|
Accounts payable |
$46,130 | $40,080 | |||||
|
Income tax payable |
4,030 | 6,090 | |||||
|
Salaries and wages payable |
8,040 | 4,040 | |||||
|
Short–term loans payable |
7,990 | 10,030 | |||||
|
Long–term loans payable |
64,000 | 83,000 | |||||
|
Common shares |
130,000 | 130,000 | |||||
|
Retained earnings |
42,630 | 36,000 | |||||
|
Total liabilities and shareholders’ equity |
$302,820 | 309,240 | |||||
| BRIDGEPORT
INC. Income Statement Year Ending December 31, 2020 |
|||||
|---|---|---|---|---|---|
|
Sales revenue |
$348,425 | ||||
|
Cost of goods sold |
165,000 | ||||
|
Gross margin |
183,425 | ||||
|
Operating expenses |
120,000 | ||||
|
Operating income |
63,425 | ||||
|
Interest expense |
$12,100 | ||||
|
Impairment loss–goodwill |
40,000 | ||||
|
Gain on disposal of equipment |
(2,500 | ) | 49,600 | ||
|
Income before income tax |
13,825 | ||||
|
Income tax expense |
4,195 | ||||
|
Net income |
$9,630 | ||||
Additional information:
| 1. | Dividends on common shares in the amount of $3,000 were declared and paid during 2020. | |
| 2. | Depreciation expense is included in operating expenses, as is salaries and wages expense of $75,000. | |
| 3. | Equipment with a cost of $28,000 that was 70% depreciated was sold during 2020. |
Prepare a statement of cash flows FOR YEAR END DECEMBER
31,2020 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).)
In: Accounting
Martinez Inc., a greeting card company that follows ASPE, had
the following statements prepared as at December 31,
2020:
| MARTINEZ
INC. Comparative Statement of Financial Position December 31 |
|||||||
|---|---|---|---|---|---|---|---|
| 2020 | 2019 | ||||||
|
Cash |
$45,745 | $25,080 | |||||
|
Accounts receivable |
58,150 | 51,170 | |||||
|
Inventory |
39,950 | 60,100 | |||||
|
Prepaid rent |
5,030 | 4,020 | |||||
|
Equipment |
164,730 | 130,100 | |||||
|
Accumulated depreciation–equipment |
(35,030 | ) | (25,020 | ) | |||
|
Goodwill |
34,000 | 70,000 | |||||
|
Total assets |
$312,575 | $315,450 | |||||
|
Accounts payable |
$46,130 | $40,100 | |||||
|
Income tax payable |
3,950 | 6,100 | |||||
|
Salaries and wages payable |
8,080 | 4,080 | |||||
|
Short–term loans payable |
8,150 | 10,170 | |||||
|
Long–term loans payable |
74,000 | 89,000 | |||||
|
Common shares |
130,000 | 130,000 | |||||
|
Retained earnings |
42,265 | 36,000 | |||||
|
Total liabilities and shareholders’ equity |
$312,575 | 315,450 | |||||
| MARTINEZ
INC. Income Statement Year Ending December 31, 2020 |
|||||
|---|---|---|---|---|---|
|
Sales revenue |
$343,365 | ||||
|
Cost of goods sold |
165,000 | ||||
|
Gross margin |
178,365 | ||||
|
Operating expenses |
120,000 | ||||
|
Operating income |
58,365 | ||||
|
Interest expense |
$11,600 | ||||
|
Impairment loss–goodwill |
36,000 | ||||
|
Gain on disposal of equipment |
(3,000 | ) | 44,600 | ||
|
Income before income tax |
13,765 | ||||
|
Income tax expense |
4,100 | ||||
|
Net income |
$9,665 | ||||
Additional information:
| 1. | Dividends on common shares in the amount of $3,400 were declared and paid during 2020. | |
| 2. | Depreciation expense is included in operating expenses, as is salaries and wages expense of $72,500. | |
| 3. | Equipment with a cost of $38,000 that was 70% depreciated was sold during 2020. |
Prepare a statement of cash flows using the DIRECT
method. (Show amounts that decrease cash flow with
either a - sign e.g. -10,000 or in parenthesis e.g.
(10,000).)
In: Accounting