ABC Inc.

Statement of Income

For the period October 1, 2018 to September 30, 2019

Revenue                                                                                                                       $15,800,000

Operating Expenses:

Rent                                                                                                      1,350,000

Advertising expense                                                                       1,105,000

Bad Debts                                                                                             179,000

Salaries and wages                                                                         3,800,000           

Interest                                                                                                3,150,000

Accounting and legal                                                                         195,000

Meals and entertainment                                                            1,300,000

Amortization                                                                                         750,000

Repairs and maintenance                                                                500,000

Automotive                                                                                        2,120,000        

Net Income from Operations                                                                             1,351,000                                                   

Gain on disposal of asset                                                                                         350,000

Net income before taxes                                                                                      1,701,000  

Income Taxes                                                                                                               635,000

Net Income                                                                                                            $1,066,000

Additional Information relating to the preparation of the statement of income for the period:

1. Legal fees of $120,000 were accrued at September 30, 2019 to reflect an estimate of potential legal fees for a threatened lawsuit against the company.
2. The company paid XYZ Advertising Inc. a total of $600,000 for advertising services for the period. It was decided that $243,000 be expensed in the current period and the remaining amount be capitalized as the company will benefit from this outlay in the following year.
3. Included in salaries and wages is a bonus accrual to the shareholder in the amount of $1,250,000. This amount was paid to the shareholder with appropriate source deductions (Income tax, CPP) on March 30, 2020.
4. Included in interest expense is $23,500 of interest paid to CCRA for late tax installments.
5. Included in repairs and maintenance is an accrual of $185,000 that represents potential warranty work for defective items sold.
6. Automotive expenses consists of company owned and or leased vehicles provided to employees of the company to perform their employment duties.
7. During the period the company sold its land and building and moved into rental space. The company received $1,900,000 for the sale of the land and building. The land and building had an original cost of $350,000 and $950,000, respectively. The undepreciated capital cost (UCC) of the building at October 1, 2018 was $949,000.
8. For the period, the company is eligible to claim CCA of $340,000 on assets in various classes.

Problem 2 - Use of Ratios to Make Other Calculations You have a company that currently has a market capitalization of $4.6 billion It has a market to book ratio of 3 and a book debt to equity ratio of 6. If cash is $1.1 billion, what is the company's enterprise value?

Solution:

Discussion of the Dupont Formula

The Dupont Formula is a way of disaggregating the components of ROE

ROE = Net Margin X Asset Turnover X Equity Multiplier

We know by definition, ROE = Net Income / Book Equity

Dupont shows us:

We also know by definition, ROA = Net Income / Assets

Dupont shows us:

multiple choice

Suppose the company E-bikes R US has an isocost line that crosses the isoquant twice.
To cost minimize, E-bikes R US will
A) use a different isocost line to select the bundle of inputs.
B) use the input bundle associated with the intersection on the higher point of the isoquant.
C) use the input bundle associated with the intersection on the lower point of the isoquant.
D) Both B and C.

Suppose Bob consumes e-bikes and scooters. If Bob’s income and prices of both goods
increase by the same percentage,
A) Bob will buy more of both goods.
B) Bob will buy more of both goods if they are both normal goods.
C) Bob will buy less of both goods if they are both inferior goods.
D) Bob’s utility maximizing bundle stays the same.

K Co. is a publicly listed company involved in the production of highly technical and sophisticated electronic components for complex machinery. It has a number of diverse and popular products, an active research and development department, significant cash reserves and a highly talented management who are very good in getting products to market quickly.

A new industry that K Co. is looking to venture into is biotechnology, which has been expanding rapidly and there are strong indications that this recent growth is set to continue. However, K Co. has limited experience in this industry. Therefore, it believes that the best and quickest way to expand would be through acquiring a company already operating in this industry sector.

Discussions taken place about the possibility of acquiring Tee Co. being acquired by K Co. Price of Tee company in stock market during last one year are as follows.

Price at the end of month

1. Calculate average return for both stock and market
2. Calculate Standard deviation for both
3. Calculate coefficient of variation for both
4. Calculate Beta of stock
5. Suggest what you understand from Beta

K Co. is a publicly listed company involved in the production of highly technical and sophisticated electronic components for complex machinery. It has a number of diverse and popular products, an active research and development department, significant cash reserves and a highly talented management who are very good in getting products to market quickly.

A new industry that K Co. is looking to venture into is biotechnology, which has been expanding rapidly and there are strong indications that this recent growth is set to continue. However, K Co. has limited experience in this industry. Therefore, it believes that the best and quickest way to expand would be through acquiring a company already operating in this industry sector.

Discussions taken place about the possibility of acquiring Tee Co. being acquired by K Co. Price of Tee company in stock market during last one year are as follows.

Price at the end of month

1. Calculate average return for both stock and market
2. Calculate Standard deviation for both
3. Calculate coefficient of variation for both
4. Calculate Beta of stock
5. Suggest what you understand from Beta

D’Jais Corporation, a U.S. company, owns 100% of Bar A Corporation, a New Zealand company. Bar A's equipment was acquired on the following dates (amounts are stated in New Zealand dollars):

Jan. 1, 2017 purchased equipment for 40,000 NZ dollars

Jul. 1, 2017 purchased equipment for 80,000 NZ dollars

Jan. 1, 2018 purchased equipment for 50,000 NZ dollars

Jul. 1, 2018 sold equipment purchased on Jan. 1, 2017 for 35,000 NZ dollars

Exchange rates for the NZ dollar on various dates are:

Jan. 1, 2017           $.500                           Jan. 1, 2018           $.530

Jul. 1, 2017           $.520                           Jul. 1, 2018           $.505

Dec. 31, 2017       $.530                           Dec. 31, 2018        $.490

2017 avg. rate       $.515                           2018 avg. rate       $.510

Bar A's equipment has an estimated 5-year life with no salvage value and is depreciated using the straight-line method, calculating depreciation expense on a monthly basis. Bar A's functional currency is the U.S. dollar, but the company uses the NZ dollar for recordkeeping.

Required:

1. Determine the value of Bar A's equipment account on December 31, 2018 in U.S. dollars.

2. Determine Bar A's depreciation expense for 2018 in U.S. dollars.

3. Determine the gain or loss from the sale of equipment on July 1, 2018 in U.S. dollars.

The records for Botox Company show this data for 2010 and 2011:

- For 2010, Botox recorded a probable and estimable contingent liability due to a lawsuit. The range for the loss is $700,000 to $1,000,000. In 2011, the lawsuit is settled and Botox pays the actual loss of $850,000.

- Gross profit on a two-year construction contract begun in 2010 was recorded at $350,000 for 2010 and $600,000 for 2011. Cash received was $50,000 in 2010 and $500,000 in 2011.

- An officer of Botox Company passed away during 2011. Life insurance proceeds from a key officer life insurance policy was $200,000.

- Botox earns $600 per month on a municipal bond investment throughout 2010 and 2011.

- Machinery was acquired in January 2010 for $300,000. Straight-line depreciation over a five-year life (no salvage value) is used. For tax purposes, Tuesday may deduct 30% of the cost in 2010 and 25% of the cost in 2011, with the remainder of the cost being depreciated at 15% per year for the three years 2012-2014.

- Pretax financial income is $1,350,000 in 2010 and $1,500,000 in 2011. The tax rate is 25% for all years.

- Botox Company has no beginning balances of deferred tax assets or liabilities.

(a) Prepare a schedule for 2010 and 2011 starting with pretax financial income and compute taxable income.

(b) Prepare the journal entry to record income taxes for 2011.

You are an Audit Senior currently planning the 30 June 20X9 audit of Technology Limited, an Australian-owned company that produces and exports computer chips to China. At a recent planning meeting with Technology Limited’s senior staff, you obtained the following overview of this year’s operations:

Tight checks by Australian custom officials have delayed several shipments of computer chips. These delays have angered Chinese customers who are threatening to deduct 20% from the amounts owing as compensation for lost production time.

One of Technology Limited’s customers, Blue Chip Limited, is claiming that the latest batch of computer chips it received was found to be faulty. Blue Chip Limited is refusing to pay its account, which is allegedly seven months overdue. Technology Limited has claimed to have launched an investigation into the allegations, but as yet not been able to substantiate them. Technology Limited has suffered significant cash flow problems because another major customer, Creative Limited (Creative), is experiencing financial difficulties. As a result, Creative is taking well over 120 days to pay outstanding amounts, despite Creative’s terms of trade being payment within 30 days. Creative makes up 40 per cent of Technology Limited’s sales and the board has been reluctant to take any action that might adversely affect those sales. Consequently, Technology Limited has had to increase its dependency on its line of credit, and this has caused it to temporarily breach the debt to equity ratio required in its loan covenant with Big Bank Limited.

One of Technology Limited’s major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Peter James, the husband of the finance director, Natalie James, provided electronic components used in the production of computer chips to Technology Limited through his private company Norton Limited. Norton Limited demands payment in $US prior to the electronic components being supplied. There is no formal agreement in place with Peter James, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Peter James’ company is supplying, because his products are new to the market and you have heard some of Technology Limited’s staff complaining that they are of poor quality.

Due to increased competitive pressure, Technology Limited has recently moved the manufacture of some of its computer chips to Bangladesh. Technology Limited saves around 25 per cent in costs compared to the equivalent Australian made items. However, the manufacturing process takes longer and on a few occasions late delivery from Bangladesh has resulted in lost sales.

Last month, a protester suffered a broken leg, allegedly because he was hit by a company truck. The protester is now suing Technology Limited for damages, claiming the contractor was in fact an employee of Technology Limited at the time of the accident, and was acting on Technology Limited’s instructions. Technology Limited is fighting the case and appears to have a reasonable chance of winning; however, the adverse publicity being generated is making the company nervous about its sales in the future.

During the period, the Australian dollar has remained steady against the Chinese Yuan, although it fell by about 3% against the US dollar. Debtors are invoiced in $US at the time of shipment, and payment is received in $US one month after the shipment is delivered. It takes around six weeks for the charter vessels to travel from Technology Limited’s shipyard at Bigmantle Bay to China. A recent downturn in the Chinese economy is affecting forward orders, which have fallen by 15%.

Prepare a memorandum to the audit manager, outlining your risk assessment relating to Technology Limited. When making your risk assessment:

(a) Identify two (2) balance sheet accounts from the information provided that are subjected to an increase in audit risk. Briefly explain what factors increase the audit risk associated with the two (2) account balances identified. In your explanation, please mention the key assertion(s) at risk of material misstatement and the components of the audit risk model affected for each account balance identified.

(b) Identify how the audit plan will be affected and recommend specific audit procedures to address the risks associated with each account balance identified.

You are an Audit Senior currently planning the 30 June 20X9 audit of Technology Limited, an Australian-owned company that produces and exports computer chips to China. At a recent planning meeting with Technology Limited’s senior staff, you obtained the following overview of this year’s operations: Tight checks by Australian custom officials have delayed several shipments of computer chips. These delays have angered Chinese customers who are threatening to deduct 20% from the amounts owing as compensation for lost production time. One of Technology Limited’s customers, Blue Chip Limited, is claiming that the latest batch of computer chips it received was found to be faulty. Blue Chip Limited is refusing to pay its account, which is allegedly seven months overdue. Technology Limited has claimed to have launched an investigation into the allegations, but as yet not been able to substantiate them. Technology Limited has suffered significant cash flow problems because another major customer, Creative Limited (Creative), is experiencing financial difficulties. As a result, Creative is taking well over 120 days to pay outstanding amounts, despite Creative’s terms of trade being payment within 30 days. Creative makes up 40 per cent of Technology Limited’s sales and the board has been reluctant to take any action that might adversely affect those sales. Consequently, Technology Limited has had to increase its dependency on its line of credit, and this has caused it to temporarily breach the debt to equity ratio required in its loan covenant with Big Bank Limited. One of Technology Limited’s major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Peter James, the husband of the finance director, Natalie James, provided electronic components used in the production of computer chips to Technology Limited through his private company Norton Limited. Norton Limited demands payment in $US prior to the electronic components being supplied. There is no formal agreement in place with Peter James, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Peter James’ company is supplying, because his products are new to the market and you have heard some of Technology Limited’s staff complaining that they are of poor quality. Due to increased competitive pressure, Technology Limited has recently moved the manufacture of some of its computer chips to Bangladesh. Technology Limited saves around 25 per cent in costs compared to the equivalent Australian made items. However, the manufacturing process takes longer and on a few occasions late delivery from Bangladesh has resulted in lost sales. Last month, a protester suffered a broken leg, allegedly because he was hit by a company truck. The protester is now suing Technology Limited for damages, claiming the contractor was in fact an employee of Technology Limited at the time of the accident, and was acting on Technology Limited’s instructions. Technology Limited is fighting the case and appears to have a reasonable chance of winning; however, the adverse publicity being generated is making the company nervous about its sales in the future. During the period, the Australian dollar has remained steady against the Chinese Yuan, although it fell by about 3% against the US dollar. Debtors are invoiced in $US at the time of shipment, and payment is received in $US one month after the shipment is delivered. It takes around six weeks for the charter vessels to travel from Technology Limited’s shipyard at Bigmantle Bay to China. A recent downturn in the Chinese economy is affecting forward orders, which have fallen by 15%. Required: Prepare a memorandum to the audit manager, outlining your risk assessment relating to Technology Limited. When making your risk assessment: (a) Identify two (2) balance sheet accounts from the information provided that are subjected to an increase in audit risk. Briefly explain what factors increase the audit risk associated with the two (2) account balances identified. In your explanation, please mention the key assertion(s) at risk of material misstatement and the components of the audit risk model affected for each account balance identified. (b) Identify how the audit plan will be affected and recommend specific audit procedures to address the risks associated with each account balance identified.

A is the CEO of B Ltd. He is quite unhappy as he figured that the profits for the last three years were declining despite increasing sales. He approached you to seek advice on the cost accounting numbers and income statement prepared by his accountant. He supplies you the following information: Particulars 2017 2018 2019 Sales (at $20 per unit) $1,000,000 1,100,000 $1,200,000 Less: Cost of goods sold Opening stock 50,000 200,000 250,000 Add: Cost of production Variable 260,000 240,000 160,000 Fixed (allocated) 390,000 360,000 240,000 Less: Closing stock 200,000 250,000 50,000 Cost of goods sold (before adjusting for production volume variance) 500,000 550,000 600,000 Adjustment for production volume variance (30,000) 0 120,000 Actual Cost of goods sold (after adjustment for production volume variance) 470,000 550,000 720,000 Gross profit 530,000 550,000 480,000 Less: Selling expenses (semi-variable) 490,000 530,000 570,000 Operating profit / (loss) 40,000 20,000 (90,000) Actual production for the last three years was as follows. 2017: 65,000 units, 2018: 60,000 units, and 2019: 40,000 units. The opening stock as of 1st January 2017 was 5,000 units. Fixed manufacturing overheads were allocated to production based on budgeted activity of 60,000 units every year. Actual fixed overheads for each of the three years was $360,000 (per annum). Required: (a) Prepare a marginal costing income statement which would help you understand the performance of Victoria Ltd. (b) Calculate and advise A of the breakeven point for B Ltd. (c) Prepare a numerical reconciliation of the profit numbers that you calculated in requirement (a) and the profit numbers calculated by B Ltd’s accountant. (d) In order to help A better understand the financial affairs of this business, explain the reasons in two brief points about the differences in profit numbers obtained from your marginal costing calculations and the profit numbers calculated by B Ltd’s accountant.