Existence of a contract (LO 3-2)

The time frame in each of these scenarios is after the effective date of the new revenue recognition rules in ASC Topic 606.

Required:

For each of the following independent situations, determine the point at which a contract exists and is subject to application of the 5-step revenue recognition model by Amiel Corporation.

1. A regular customer of Amiel’s always places an order on the last day of the month, but did not do so in December. Amiel is certain it is because the customer’s purchasing manager was ill and that the order will be received when she returns. In fact, the order is received by fax in early January, with an apology from the customer’s purchasing manager and a note requesting that Amiel “expedite shipment of this December order.”
2. One of Amiel’s customers calls and gives Amiel a list of goods it intends to buy, but with the caveat that the order is subject to the approval of the purchasing manager, who will not be in for several days. In fact, the order is received by fax several days later when the purchasing manager returns.
3. One of Amiel’s customers calls and gives Amiel an order. Amiel typically receives orders by fax and asks the customer to confirm the order by fax, which it does several days later.
4. Amiel and one of its customers agree that Amiel will sell it certain goods, but that the price will depend on the price of oil two weeks later. Amiel and the customer have agreed on a formula that will determine the price of the goods based on the price of oil. Amiel makes this arrangement because oil is a key component of the goods Amiel sells.

Problem 10-1A

On January 1, 2017, the ledger of Ivanhoe Company contained these liability accounts.

During January, the following selected transactions occurred.

During January, the company’s employees earned wages of $71,200. Withholdings related to these wages were $5,447 for Social Security (FICA), $5,086 for federal income tax, and $1,526 for state income tax. The company owed no money related to these earnings for federal or state unemployment tax. Assume that wages earned during January will be paid during February. No entry had been recorded for wages or payroll tax expense as of January 31.

a) Journalize the January transactions

b) Journalize the adjusting entries at January 31 for the outstanding note payable and for salaries and wages expense and payroll tax expense.

c) Prepare the current liabilities section of the balance sheet at January 31. 207. Assume no change in Accounts payable.

Problem 10-1A

On January 1, 2017, the ledger of Sheridan Company contained these liability accounts.

During January, the following selected transactions occurred.

During January, the company’s employees earned wages of $78,800. Withholdings related to these wages were $6,028 for Social Security (FICA), $5,629 for federal income tax, and $1,689 for state income tax. The company owed no money related to these earnings for federal or state unemployment tax. Assume that wages earned during January will be paid during February. No entry had been recorded for wages or payroll tax expense as of January 31.

a)Journalize the January transactions.

b)Journalize the adjusting entries at January 31 for the outstanding note payable and for salaries and wages expense and payroll tax expense

c)Prepare the current liabilities section of the balance sheet at January 31, 2017. Assume no change in Accounts Payable.

On January 1, 2018, the following information was drawn from the accounting records of Carter Company: cash of $225; land of $1,875; notes payable of $525; and common stock of $945. Required a. Determine the amount of retained earnings as of January 1, 2018. b. After looking at the amount of retained earnings, the chief executive officer (CEO) wants to pay a $325 cash dividend to the stockholders. Can the company pay this dividend? c. As of January 1, 2018, what percentage of the assets were acquired from creditors? d. As of January 1, 2018, what percentage of the assets were acquired from investors? e. As of January 1, 2018, what percentage of the assets were acquired from retained earnings? f. Create an accounting equation using percentages instead of dollar amounts on the right side of the equation. g. During 2018, Carter Company earned cash revenue of $520, paid cash expenses of $310, and paid a cash dividend of $51. (Hint: It is helpful to record these events under an accounting equation before preparing the statements.) g-1. Prepare an income statement dated December 31, 2018. g-2. Prepare a statement of changes in stockholders’ equity dated December 31, 2018. g-3. Prepare a balance sheet dated December 31, 2018. g-4. Prepare a statement of cash flows dated December 31, 2018. j. What is the balance in the Revenue account on January 1, 2019?

Malco Enterprises issued $14,000 of common stock when the company was started. In addition, Malco borrowed $44,000 from a local bank on July 1, 2018. The note had a 6 percent annual interest rate and a one-year term to maturity. Malco Enterprises recognized $76,500 of revenue on account in 2018 and $90,000 of revenue on account in 2019. Cash collections of accounts receivable were $62,900 in 2018 and $73,100 in 2019. Malco paid $43,000 of other operating expenses in 2018 and $49,000 of other operating expenses in 2019. Malco repaid the loan and interest at the maturity date. Required a. Organize the information in accounts under an accounting equation. b. What amount of net cash flow from operating activities would be reported on the 2018 cash flow statement? c. What amount of interest expense would be reported on the 2018 income statement? d. What amount of total liabilities would be reported on the December 31, 2018, balance sheet? e. What amount of retained earnings would be reported on the December 31, 2018, balance sheet? f. What amount of cash flow from financing activities would be reported on the 2018 statement of cash flows? g. What amount of interest expense would be reported on the 2019 income statement? h. What amount of cash flows from operating activities would be reported on the 2019 cash flow statement? i. What amount of assets would be reported on the December 31, 2019, balance sheet?

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. For the large plant, the company expects $90 million in revenue if demand is high and $40 million if demand is low. For the small plant, the company expects $55 million in revenue if demand is high and $20 million if demand is low. The cost of the large plant is $5 million. The small plant cost is $1 million.

The company believes that there is a 72% chance that demand for their products will be high and a 28% chance that it will be low.

Construct a payoff and regret matrix based on the given information.

What is the decision according to the EMV criterion? Be sure to support your answer.

Is your decision sensitive to the demand assumptions given for this problem? You may answer generally, such as “very sensitive” or “not very sensitive” as long as you support your answer.

The company can pay a market research firm to survey consumer attitudes towards the company's products. The market research firm cost is $100,000. The market research firm has provided the following cross tabulation showing recent results.

Construct a decision tree for this problem showing when the survey is conducted but the plant has not been built. Include all relevant probabilities on the tree and all EMVs needed.

What is the expected value of the market research survey data?

Should the market research firm be hired at a cost of $100,000? Be sure to support your answer.

Predatory Lending Inc. sells financial services (high interest micro loans) through independent agents. Good agents generate $2,000 in net revenue in the first year, a figure that grows at 5% annually. Poor agents, on the other hand, produce $1,000 in year one and 20% less revenue each successive year. There is no way to tell in advance whether an agent will be good or bad. In the past, about 40% of new agents have turned out to be good and 60% poor. Of the good agents, 50% are loyal, they tend to like the work and remain with the company with a 90% probability year to year, and 50% are not loyal, they leave Predatory Lending and go to work for a competitor after the first year. Similarly, 80% of the poor agents are loyal (i.e., the competition wouldn’t hire them) and have a 90% probability of staying with the firm year to year and 20% drop out after the first year and go back to school. (For simplicity, assume that revenues from agents that drop out in year one are not discounted.)

Given that recruiting and training costs are $5,000 per new agent:

a) What is the CLV of each of the 4 possible types of agents (good loyal/ non-loyal and bad loyal / non-loyal? (Assume a 10% discount rate)

b) Can Predatory Lending Inc. remain in business given it current operating situation?

CLV formula: Gross margin * (Retention rate / [1+ Rate of discount – (Retention rate * (1 + Growth Rate))] – Costs

CLV= m{r/[1 + i-r(1+ g)]}-C

There are two ice cream shops, A and B, in a touristic town. Each shop needs to individually choose the price it charges for a scoop of ice cream, which can be either $2, $4 or $5. Each firm wants to maximize their total revenue from customers via an appropriate choice of price. It is expected that

− 8,000 scoops of ice cream are purchased by tourists, who are split evenly between the two shops regardless of the prices charged by these shops.

− Locals also purchase scoops of ice cream: Assume that locals purchase 800 scoops in total.

− Being more knowledgeable of market conditions, locals purchase their ice cream from the shop with the lowest price. If both shops charge the same price, then the locals are split evenly between the two shops.

(a) Now, write the normal form game between the two ice cream shops where payoffs in each cell of the table represents the total revenue of each shop. Make sure to write your calculated payoff pairs for each cell of the normal form game.

(b) Explain the underlying logic behind your calculated payoffs in the normal form game of part (a) by showing your full workings of payoffs for a sample case where both shops charge the same price. Do the same also for a sample case where firms charge different prices.

(c) Reproduce the normal form game from part (a) and use it to determine the outcome of this game by applying iterated elimination of strictly dominated strategies. Explain your workings.