1. Define the accounts receivable turnover and the days sales outstanding ratios. What do these ratios tell us about a company’s accounts receivable?

2. What effect, if any, does a strengthening of the dollar have on reported sales and net income for companies operating outside the United States, when those foreign operations are translated to U.S. dollars for consolidation purposes?

3. How do companies test assets for impairment? If an asset is impaired, how do companies write them down?

4. What determines the effective cost of debt?

5. Define bond default. What are some potential ramifications if a company defaults on its debt?

Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2.7 million in year 1, €3.1 million in year 2, and €2.8 million in year 3. The current spot exchange rate is $1.3/€. The current risk-free rate in the United States is 5 percent, compared to that in Europe of 3.5 percent. The appropriate discount rate for the project is estimated to be 18 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €6.5 million. What is the NPV of the project?

Accounting

Read the case ‘April Company’ and answer the questions below:

April Company (‘April’) is a well-known diversified corporation with many different businesses in Hong Kong.

In order to meet the long term growth and diversification strategy under the direction of the new Chairman; the company has purchased assets and constructed a new building as its new head office in Hong Kong as follows:

i 1 Jan 2017: truck and equipment: These assets were purchased as a lump sum for $150,000 cash. The following information was gathered.

ii 1 Feb 2017: A new piece of machinery was acquired by trading in a used piece of machinery. (The exchange was with commercial substance.) Facts concerning the trade-in are as follows.

iii 1 Jan 2017: A building was constructed as the new head office of the company. Construction began on 1 January 2017 and would be completed in 15 months. The payments to the contractor in the first year (2017) were as follows.

On 1 January 2017, April Company secured a specific construction loan ($400,000) with an 8% interest rate to finance the construction of the new building. The building expenditures are qualifying assets of the construction in capitalization of interest costs and the capitalized interest costs should be included in the building. April drew down on the construction loan and other outstanding debt (if required) to meet the payment schedule shown above.

The other outstanding debt in the company during 2017:

* $1,000,000 bonds (due in year 2025), with 6% effective annual interest rate

* $500,000 long term note (due in 2030), with 7.5% interest rate per annum.

The company, according to the accounting standards in Hong Kong, will capitalize the maximum allowable interest costs for this construction.

The CFO of April estimated that the truck and the new machinery would be used for ten years, with an estimated residual value of $20,000 and $40,000 respectively. He also estimated that the equipment would have a useful life of five years and a residual value of $5,000. April’s depreciation policy specifies the 200% double-declining balance method for equipment and the straight-line method for the truck and machinery. (The building was not yet ready for use in 2017.)

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Required:

a     For each of the above assets purchased, traded or constructed, determine the amount of each of them clearly and record the transactions by journal entries in the books of April Company for the year ended 31 December 2017. Interest expense for the year has been recorded.

b     For each of the assets above (except the building), calculate April Company’s 2017 depreciation expense, for book purposes. Assume monthly depreciation had not been provided before the end of the year.

c     Discuss the arguments for and against the capitalization of interest costs.

1. Salmone Company reported the following purchases and sales of its only product. Salmone uses a periodic inventory system. Determine the cost assigned to the ending inventory using FIFO. Date Activities Units Acquired at Cost Units Sold at Retail May 1 Beginning Inventory 160 units @ $11 5 Purchase 225 units @ $13 10 Sales 145 units @ $21 15 Purchase 105 units @ $14 24 Sales 95 units @ $22 Multiple Choice $3,215 $3,355 $6,155 $2,940 $2,800

2.

Salmone Company reported the following purchases and sales of its only product. Salmone uses a periodic inventory system. Determine the cost assigned to cost of goods sold using FIFO.

• $5,460

• $6,025

• $5,940

• $5,825

• $5,260

3.

A company has beginning inventory of 30 units at a cost of $13.00 each on October 1. On October 5, it purchases 21 units at $14.00 per unit. On October 12 it purchases 31 units at $15.00 per unit. On October 15, it sells 63 units. Using the FIFO periodic inventory method, what is the value of the inventory at October 15 after the sale?

• $532.00

• $247.00

• $285.00

• $315.00

• $600.00

4.

On December 31 of the current year, Plunkett Company reported an ending inventory balance of $211,500. The following additional information is also available:

• Plunkett sold and shipped goods costing $37,300 to Savannah Enterprises on December 28 with shipping terms of FOB shipping point. The goods were not included in the ending inventory amount of $211,500.
• Plunkett purchased goods costing $43,300 on December 29. The goods were shipped FOB destination and were received by Plunkett on January 2 of the following year. The shipment was a rush order that was supposed to arrive by December 31. These goods were included in the ending inventory balance of $211,500.
• Plunkett's ending inventory balance of $211,500 included $14,300 of goods being held on consignment from Carole Company. (Plunkett Company is the consignee.)
• Plunkett's ending inventory balance of $211,500 did not include goods costing $94,300 that were shipped to Plunkett on December 27 with shipping terms of FOB destination and were still in transit at year-end.

Based on the above information, the amount that Plunkett should report in ending inventory on December 31 is:

• $205,500

• $168,200

• $191,200

• $153,900

• $197,200

5.

A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts:

All sales are made on credit. Based on past experience, the company estimates that 0.5% of net credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?

• $1,378

• $4,700

• $3,890

• $2,018

• $5,170

The following payroll liability accounts are included in the ledger of Harmon Company on January 1, 2017. FICA Taxes Payable $760 Federal Income Taxes Payable 1,210 State Income Taxes Payable 105 Federal Unemployment Taxes Payable 285 State Unemployment Taxes Payable 1,930 Union Dues Payable 855 U.S. Savings Bonds Payable 360 In January, the following transactions occurred. Jan. 10 Sent check for $855 to union treasurer for union dues. 12 Remitted check for $1,970.00 to the Federal Reserve bank for FICA taxes and federal income taxes withheld. 15 Purchased U.S. Savings Bonds for employees by writing check for $360. 17 Paid state income taxes withheld from employees. 20 Paid federal and state unemployment taxes. 31 Completed monthly payroll register, which shows salaries and wages $54,000, FICA taxes withheld $4,131, federal income taxes payable $2,135, state income taxes payable $490, union dues payable $405, United Fund contributions payable $1,960, and net pay $44,879. 31 Prepared payroll checks for the net pay and distributed checks to employees. At January 31, the company also makes the following accrued adjustments pertaining to employee compensation. 1. Employer payroll taxes: FICA taxes 7.65%, federal unemployment taxes 0.8%, and state unemployment taxes 5.4%. 2. Vacation pay: 6% of gross earnings.

Journalize the January transactions. (Round answers to 2 decimal places, e.g. 15.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Fraud investigators found that 70 percent of the nearly $160 million in sales booked by an Asian subsidiary of a European company between September 2006 and June 2007 were fictitious. In an effort to earn rich bonuses tied to sales targets, the Asian subsidiary’s managers used highly sophisticated schemes to fool auditors. One especially egregious method involved funneling bank loans through third parties to make it look as though customers had paid, when in fact they hadn’t.

In a lawsuit filed by the company’s auditors, it was alleged that former executives “deliberately” provided “false or incomplete information” to the auditors and conspired to obstruct the firm’s audits. To fool the auditors, the subsidiary used two types of schemes. The first involved factoring unpaid receivables to banks to obtain cash up front. Side letters that were concealed from the auditors gave the banks the right to take the money back if they couldn’t collect from the company’s customers. Hence, the factoring agreements amounted to little more than loans.

The second, more creative, scheme was used after the auditors questioned why the company wasn’t collecting more of its overdue bills from customers. It turns out that the subsidiary told many customers to transfer their contracts to third parties. The third parties then took out bank loans, for which the company provided collateral, and then “paid” the overdue bills to the company using the borrowed money. The result was that the company was paying itself. When the contracts were later canceled, the company paid “penalties” to the customers and the third parties to compensate them “for the inconvenience of dealing with the auditors.”

The investigators also found that the bulk of the company’s sales came from contracts signed at the end of quarters, so managers could meet ambitious quarterly sales targets and receive multimillion-dollar bonuses. For example, 90 percent of the revenue recorded by the subsidiary in the second quarter of 2007 was booked in several deals signed in the final nine days of the quarter. But the company was forced to subsequently cancel 70 percent of those contracts because the customers—most of them tiny startups—didn’t have the means to pay.

List revenue-related fraud symptoms and schemes used in this case. Briefly discuss how actively searching and understanding revenue-related fraud symptoms could have led to discovering the fraud by the company’s auditors.

Negative Announcements on Routine Matters: You can certainly sympathize with employees when they complain about having their email and instant messages monitored, but you are implementing a company policy that all employees agree to abide by when they join the company. Your firm, Webcor Builders of San Mateo, California, is one of the estimated 60 percent of U.S. companies with such monitoring systems in place. More and more companies use these systems (which typically operate by scanning messages for keywords that suggest confidential, illegal, or otherwise inappropriate content) in an attempt to avoid instances of sexual harassment and other problems.

As the chief information office, the manager in charge of computer systems in the company, you’re often the target when employees complain about being monitored. Consequently, you know you’re really going to hear it when employees learn that the monitoring program will be expanded to personal blogs as well.

Your task: Write a memo to be distributed to the entire workforce, explaining that the automated monitoring program is about to be expanded to include employees’ personal blogs. Explain that, while you sympathize with employee concerns regarding privacy and freedom of speech, it is the management team’s responsibility to protect the company’s intellectual property and the value of the company name. Therefore, employees’ personal blogs will be added to the monitoring system to ensure that employees don’t intentionally or accidentally expose company secrets or criticize management in a way that could harm the company.

Question 1

Mr. Chai sells various types of toys throughout Malaysia. Three of the accounts in the ledger of Mr. Chai indicated the following;

Balances at 1 January 2020:

(i)        Insurance paid in advance RM562

(ii)       Wages outstanding RM306

(iii)      Rent receivable, received in advance RM36

During 2020, Mr. Chai:

(i)           Paid for insurance RM1,019, by bank standing order

(ii)       Paid RM15,000 wages, in cash

(iii)      Received RM2,600 rent, by cheque, from the tenant

At 31 December 2020:

(i)           Insurance prepaid was RM345

(ii)       Wages accrued amounted to RM419

(iii)      Rent receivable in arrears was RM105

Required;

(a)       Prepare the prepaid insurance, accrued wages and rent receivable accounts for the year ended 31 December 2020.

(b)       Prepare the income statement extract showing clearly the amounts of insurance expense, wages expense and rent revenue for the year ended 31 December 2020.

(c)        Explain the effects on the financial statements of accounting for:

               (i)           the expenses accrued at year-end

               (ii)       the income received in advance at year end

(d)       Explain the purposes of accounting for:

              (i)           the expenses accrued at year end

              (ii)       the income received in advance at year end

(Total: 20 marks)

A comparative statement of financial position for Nathalina Industries Inc. follows:
NATHALINA INDUSTRIES INC.
Statement of Financial Position
December 31, 2020
    December 31

Assets 2020 2019
Cash $ 21,000  $ 34,000 
Accounts receivable   114,000  54,000 
Inventory 220,000  189,000 
Land 71,000  110,000 
Equipment 240,000  200,000 
Accumulated depreciation—equipment   (69,000) (42,000)
Total $597,000     $545,000 
Liabilities and Shareholders' Equity        
Accounts payable. 52,000. 59,000

Long term liabilities 25,000 0

Bonds payable 125,000  200,000 
Common shares    204,000  164,000 
Retained earnings   191,000  122,000 
Total $597,000  $545,000 

Additional information:
1. Net income for the fiscal year ending December 31, 2020, was $129,000.
2. Cash dividends were declared and paid in the year.
3. Bonds payable amounting to $75,000 were paid off.
4. Additional issuance of common shares for cash occurred in the year.
5. Land was sold for cash at a gain of $5,000. This gain on sale of the land is listed on the income statement.
6. Equipment was purchased during the year. It was purchased with $25,000 Long term liabilities and the remaining was paid with cash.
7. Depreciation Expense during 2020 was $27,000.

Required: Prepare a statement of cash flows for 2020 using the indirect method.

On May 1, 2018, Delta Airlines buys 100 SkyFlight Food Service, Inc. bonds for $1,015 each. Delta classifies this investment as available for sale. This is the first available for sale investment Delta has recorded and the only item that affects comprehensive income during this time period. During 2018, SkyFlight pays all bondholders $42 interest per bond. At the end of 2018, the bonds of Skyflight are trading for $1,020 each. During 2019, Skyflight pays all bondholders interest of $75 per bond. At the end of 2019, the bonds of Skyflight are trading for $1,014 per bond. On May 1, 2020, Delta Airlines sells all of its Skyflight bonds for $1,010 per bond. No interest was paid by Skyflight in 2020. Net income before anything to do with Skyflight (even the interest is not included) for Delta was $20 million in 2018, $16 million in 2019 and $18 million in 2020 after taxes. The tax rate is 20% for all years.

Requirements:

a. Show all the needed journal entries for the Skyflight stock from purchase to sale.

b. Show the statement of comprehensive income for 2018, 2019 and 2020.

c. If accumulated other comprehensive income is $500,000 at the beginning of 2018, what is the accumulated other comprehensive income at the end of 2018, 2019 and 2020