Joe’s Supply Company manufactures and sells elbow joints from its only location in New York. The elbow joints are sold throughout the United States and go into homes, houses, apartments, office buildings, hospitals and other buildings. On January 1, 2007 Joe, CEO of Joe’s Supply Company, finds a new supplier for resin to make his elbow joints at a much lower cost. This will make his business competitive with other manufacturers who already have Chinese suppliers. Joe’s R&D director does some preliminary tests on the resin and ultimately, the resin seems satisfactory. On February 1, 2007, Joe’s Supply begins manufacturing his elbow joints with the new resin and selling the newly formulated product over the internet, by mail and with walk-in customers. The elbow joints come with a 2 year limited warranty and a disclaimer about consequential damages.

In June 2008, Joe started to get reports from contractor customers that his elbow joints were leaking and damage to property was occurring. Joe did nothing to investigate these claims. He simply sent the customers a letter with the final results on the resin and told them, they must have installed the elbow joints incorrectly.

Can Joe be sued for the damage caused by the elbow joints? If so, describe the steps that Joe’s customer would have to take to sue Joe.

Can Joe’s customer sue the Chinese Company that made the resin?

If Joe did not want to be sued what other dispute resolution procedures are available to him and what do you think he should do?

If the government brought a criminal case against Joe’s Supply, can the corporation refuse to testify against itself under the 5^th Amendment? Can Joe refuse to testify? Can Joe refuse to hand over internal corporate papers such as the test results? Why?

Question 1: Partial year’s depreciation; alternative methods; exchange/disposal of PPE

Videotron Ltee completed the following transactions involving printing equipment.

Machine 6690 was purchased for cash on May 1, 2020, at an installed cost of $72,900. Its useful life was estimated to be four years with an $8,100 trade-in value. Straight-line depreciation was recorded for the machine at the ends of 2020 and 2021.

On August 5, 2020, it was traded for Machine 6691, which had an installed cash price of $54,000. A trade-in allowance of $40,500 was received and the balance was paid in cash. The new machine’s life was estimated at five years with a $9,450 trade-in value. The fair values of Machines 6690 and 6691 were not reliably determined at the time of the exchange. Double-declining-balance depreciation was recorded on each December 31 of Machine 6691’s life. On February 1, 2025, it was sold for $13,500.

Machine 6711 was purchased on February 1, 2025, at an installed cash price of $79,650. It was estimated that the new machine would produce 75,000 units during its useful life, after which it would have an $8,100 trade-in value. Units-of-production depreciation was recorded on the machine for 2025, a period in which it produced 7,500 units of product. Between January 1 and October 3, 2026, the machine produced 11,250 more units. On October 3, 2026, it was sold for $54,000

Required

Prepare journal entries to record:

1. The depreciation expense recorded to the nearest whole month on the first December 31 of each machine’s life. (for units-of-production, round the rate per unit to three decimal places).
2. The purchase/exchange/disposal of each machine.

Question 2: Intangible assets

On February 3, 2020, Secure Software Group purchased the patent for a new software for cash of $220,800. The company expects the software to be sold over the next five years and uses the straight-line method to amortize intangibles.

Required

1. Prepare entries to record the:

1. Purchase of the software patent.
2. Straight-line amortization for the year ended December 31, 2020, calculated to the nearest whole month. Round to the nearest dollar.

2. On December 31, 2020, the company’s adjusted trial balance showed the additional asset accounts shown below. Prepare the asset section of the balance sheet at December 31, 2020, including the patent purchased on February 3, 2020.

Accounts receivable………………………………$285,600

Accumulated depreciation, equipment……………$259,200

Accumulated depreciation, building………………$189,000

Allowance for doubtful accounts……………………$8,400

Cash………………………………………………. $103,200

Equipment…………………………………………$477,600

Building………………………………………… $595,200

Land………………………………………………. $ 110,400

Merchandise inventory…………………………… $ 135,600

2. Cost-Volume-Profit (CVP)                                                                                                               40 points

a. Assignment Question on Cost Volume Profit (CVP)

MMC Nutri Company is a small family fast food restaurant that opened in 2015, serving tropical cuisine to its mainly Afro-American, Asian and African customers. Because of its hot ingredients, few others patronize the food.

This business serves its popular dish Jollof rice, fish or meat stew, and rice flour porridge, as a meal for $9 a serving. Its variable cost per serving is $4.10 and its monthly fixed cost is $4,600 a month. On average, the business sells 60 servings a day, opened every day except Sunday. The highly religious owner takes Sunday off, as a rest day.

During this 2020 year of COVID-19 pandemic, average sales has dropped significantly. In June of this year, the federal government gave a lump sum financial assistance of $10,000 to the business, during a six weeks lockdown. Since then, current sales has dropped by 60% of its pre-COVID level, despite the introduction of take-away opportunity. The business optimistically estimates that sales will slowly increase to a maximum of 80% of pre-COVID level, for the rest of this year.

The owner is considering closing the business, due to uncertainty and depletion of personal savings to finance its operations, and has commissioned you to give advice, based on your knowledge of accounting.

The business is also exploring an available option of a $6,000 investment in machinery that will be used for 5 years and will reduce variable cost by $0.30 a unit. Sales price/unit will not change.

What will be your overall advice to this owner? Justify each option with analysis based on CVP.            

(Points will be awarded for trend of thought and the application of CVP principles. There is no one answer.) 30 points

b. Assignment on Plant-wide Overhead Absorption

Basic Construction Company won a bid to build a gym between January and March 2020. The actual manufacturing overhead for the completed construction was $128,610. On December, 2019, before the start of the construction, the company decided to set an annual overhead rate of $875,000 for all jobs during 2020, to be absorbed by direct labor hours. The actual direct labor hours used for this job was 49,000, and the direct machine hours used was 12,700. The annual direct labor hours estimated for 2020 by the company was 350,000 DLH. Provided there is over or under absorbed overhead, considered not significant, prepare the journal entry to close the manufacturing overhead account, at the end of the contract.                                                                                                                                             10 points

Question 4: Suppose the current exchange rate for the Japanese Yen against the dollar is $1 = 120 yen. Answer the following questions using the long run model of the exchange rate developed in class.

a.           If you expect Japanese monetary growth to be a total of 25% larger than the US monetary growth rate over the next ten years, what is your best guess as to the exchange rate ten years from now? Be as precise as possible. What theory underlies your prediction given you have no other information?

b.           In addition to the higher money growth rate in Japan mentioned above, you are now told that output growth will be higher in Japan as compared to the US by 30% over the next ten years. What is your best guess as to the exchange rate ten years from now?

c.           Given the information in a. and b. where do expect inflation to be higher, the US or Japan?   Where do you expect interest rates to be higher? Where do you expect real interest rates to be higher? Be as precise as possible and explain the assumptions that you make at each step.

Use the following information for questions 11-20: The average cholesterol level in the general US population is 189 mg/dL. A researcher wants to see if the average cholesterol for men in the US is different from 189 mg/dL. She takes a sample of 81 American males and finds a sample mean of 194 mg/dL and a sample standard deviation of 10.4. Create a 99.8% confidence interval for the true average cholesterol level of the general US male population.

11.What is the 99.8% confidence interval?

12.What is the correct interpretation of the confidence interval from question 11?

13.Are the assumptions met? Explain. Conduct a hypothesis test at the 0.01 significance level to test the researcher’s question.

14.What are the hypotheses?

15.What is the significance level? A. 0.01 B. 0.04 C. 0.05 D. 0.10

16.What is the value of the test statistic?

17.What is the p-value?

18.What is the correct decision? A. Reject the Null Hypothesis B. Fail to Reject the Null Hypothesis C. Accept the Null Hypothesis D. Accept the Alternative Hypothesis

19.What is the appropriate conclusion/interpretation?

20.Are the assumptions met? Explain.

1. A fixed exchange rate regime

A. forces a country to give up free international flows of capital.

B. forces a country to abandon independent monetary policy

C. can eliminate exchange rate uncertainty

D. is the model used by the U.S. Federal Reserve.

2. An asset management firm generated the following annual returns in their U.S. large cap equity portfolio:

The 2012 return needed to achieve a trailing five year geometric mean annualized return of

5.0% when calculated at the end of 2012 is closest to:

A. 17.9%

B. 27.6%

C. 35.2%

3. If the exchange rate between the Australian dollar and the US dollar is expressed in direct quotation from an Australian perspective, then a rise in the exchange rate implies

A. appreciation of the US dollar.

B. depreciation of the US dollar.

C. appreciation of the Australian dollar.

D. B. and C.

4. If the AUD/USD exchange rate declines from 1.2500 to 1.2430, then the fall is equal to

A. 70 points.

B. 7000 pips.

C. 700 points.

D. 70 pips

Legendary Entertainment: Film Making in the Age of Analytics Written by Alva H. Taylor, Faculty Director, Center for Digital Strategies, Associate Professor of Business Administration On the red eye flight back from Los Angeles to Boston, Matt Marolda T’02, reflected on his new role as Chief Analytics Officer for Legendary Pictures. Marolda had been recruited by Legendary CEO Thomas Tull to bring analytics to his film company. Tull was worried that the film company was becoming overconfident with their past successes such as the Hangover Trilogy, Pacific Rim, and The Dark Knight Rises. Marolda, who arrived at Legendary in 2013, has seen the reliance and confidence of Tull in using analytic information to make strategic decisions. During the interview process however, Marolda was clear to stress that analytics would not give Legendary the answers, but it would help the company base their decisions on facts rather than assumptions and increase the probability of success. While makinkg strategic decisions in uncertain environments is always a gamble, using analytics takes the gamble from playing a random play slot machine to playing black jack and being able to count cards. While Marolda felt the opportunity was clear, the thoughts of how much he had to learn about applying analytics to the film industry was preventing him from falling asleep on the flight. A Start in Sports Marolda founded the analytics company StratBridge in 1999. The initial successful product of StratBridge was StratTix. StratTix was an analysis tool that used data on potential customers and shifts in demand to make pricing and ticket promotion decisions. The analysis is similar to what airlines use to update and change pricing over the time period for a flight. After initial successful use by the Boston Red Sox, the dynamic pricing and revenue software was licensed by all of the National Basketball Association teams. It also began to be used by non-sports organizations such as music concert promoters. StratBridge also developed StratEdge, a talent evaluation system for use by sports teams. Using player stats, video data, and scouting reports StratEdge assists sports organizations to evaluate and value players by generating player analytics. Often called ‘moneyball’ analysis (a term popularized by the book Moneyball: The Art of Winning an Unfair Game by Michael Lewis) the software system takes performance data and calculates statistics on player contributions, forecasts future success, and assigns monetary value. The software enables sports organizations to integrate video and player analysis so that coaches and front office personnel can now evaluate players more thoroughly. Capabilities include: player profile “snapshots,” player comparisons, a proprietary “plays like” feature, and a player board for ranking players for drafts and free agency. Teams can build customized scouting reports with more than 100,000 pieces of information to track players, teams, leagues and agents. CASE: 2017LEG - Center for Digital Strategies, Tuck at Dartmouth – Legendary Entertainment 2 Use of analytics such as that by StratBridge, is not without its critics. One criticism to this approach is that the approach is driven by a set of non-athletic ‘nerds’ who know little about playing the game, and are treating real teams as if they are playing fantasy sports. However, Marolda insists that his products are not trying to turn organizations into fantasy sports teams, but the analytics are inputs to the overall decision making. “It’s true you can’t ignore the quantitative information but you also can’t ignore the stuff you see with your eyes,” he says. Looking for New Opportunities In 2012 Marolda sold the player analytics portion of the business to XOS Digital (for more info see: http://sportsvideo.org/main/blog/2012/07/20/xos-digital-acquiresstratedge-sports-analytics-service/ - sthash.lBPEYncW.dpuf). One of the reasons Marolda sold StratEdge to XOS Digital was that the player analytics space was getting crowded with competitors, and many teams were bringing much of the analytic work in-house. Given that there are only a finite number of teams in each sport, the prospects for long-term growth were limited. Marolda began to look around for other industries where analytics was underused but could provide significant competitive advantage. After considering several industries, Marolda settled on the film industry and joined Legendary Entertainment (Legendary) in 2013. A year later, Legendary also acquired the yield pricing software platform StratTix, that had continued to be owned and operated by StratBridge. The Film Industry For background on movie development, read pages 7-13 of the case Warner Bros. Entertainment (9-610-036). The Philosophy of Analytics Companies have always used data to help inform decisions, but the access to large amounts of information – often termed “big data”, coupled with increased computer and statistical processing power has created the opportunity to analyze data in new ways. Analytics uses huge quantities of data, social media information, location data, real-time response data, and much more to affect business performance. Organizations are starting to utilize such this information and analysis to generate solutions in new ways. The outcomes of the analytic process can provide a more comprehensive understanding of markets, customers, products, regulations, competitors, suppliers, and employees and more. Early Success Thomas Tull, CEO of Legendary, welcomed Marolda to Legendary with open arms. Tull had identified analytics as one way that Legendary could differentiate itself from typical film studios. As a smaller filmmaker, the company had to build a strategy to make smarter bets on its movies. Legendary’s focus was on increasing the hit rate on movies, and getting CASE: 2017LEG - Center for Digital Strategies, Tuck at Dartmouth – Legendary Entertainment 3 bigger returns for each of its successes. Tull charged Marolda with building an Applied Analytics Group at Legendary. Marolda spent 18 months recruiting top minds from the world of analytics, dynamic pricing and the sports industry. The recruits included a Harvard astrophysicist who did his Ph.D. on very complex systems, and experts who designed dynamic pricing for the airline industry. The group eventually grew to be composed of 8 full-time people, with direct access to top management and film developers in the company. Tull felt it was time for film companies for to be smarter in making decisions. “There’s more information available today than has ever been available in terms of people putting their preferences and all kinds of information freely up online,” said Tull. “We want to take advantage of that and be much more efficient about the way we run our business.” Tull sought inspiration from the sports business and its use of applied analytics. “I’ve had a front row seat to a number of things, and I was frankly frustrated in the way in which we deploy capital for advertising films.”1 Tull said the goal was to take people that were used to taking very large data sets and apply that knowledge to have a real yield to real world problems. Future in Film Marolda was thinking about his advice on the first big decisions that Legendary had to make concerning upcoming films. He was determining what information he should be providing, and at what stage of the process should his group be most involved. He also marveled at how different his discussions with Tull are from the discussions most film companies have. Long-term, what should be the role of the group, what standard information should be provided for all films, and where would analytics provide the most value? These were all questions he was considering, when the phone rang and it was Tull. He had one question for Marolda, should we fund the $100 million new film or not? Marolda had the sense that his answer would have a huge impact on whether the film was funded, and it was an early test of the value of analytics for Legendary

Based on the attachment, answer the following questions that Marolda faced:

1. In the short term, what information should he provide to Tull?

2. What data is required to provide such information?

3. At which stage of the film making process should his group be most involved?

4. In the long term, what information should he provide for all film?

5. Where would analytics provide the most value in Legendary's business?

1. On 1 January 2013, Grove Limited acquired and installed a machinery for use in its manufacturing business. When acquired, the machinery cost £1,200,000, had an estimated useful life of 10 years and an expected residual value of £200,000. Grove depreciates machinery on a straight-line basis over its useful life. The company follows a calendar year reporting period.

At 31 December 2014, the annual review of all machinery found that this particular item of machinery had incurred significant damage. As a result, the engineering department estimated the fair value less costs to sell the machinery at this date was £710,000. As the machinery can operate in a limited capacity, it could be expected to provide annual net cash flows of £105,000 for the next 8 years, while the expected residual value will remain unchanged. The relevant discount rate is 8%.

1. Which IFRS standard would you consult to account for the event that occurred on 31 Dec. 2014? (0.5 point)
2. What is the difference between such an event and the depreciation of machinery? (1.5 points)
3. Show the relevant steps to test for the accounting impact of this event, and provide the appropriate journal entry, if necessary. (4 points)

The consolidated financial statements of FMCG Ltd and RG Ltd were presented to the Board. The Board is alarmed that the economic entity’s balance sheet (consolidated balance sheet) shows a deferred tax balance, when the accounts for FMCG Ltd had no deferred tax asset or deferred tax liability.

FMCG management is also planning to acquire another entity ABC Investments Ltd in the near future. Management pointed out to the Board that on acquisition, the financial results of this new subsidiary (ABC Investments Ltd) will also be consolidated in the economic entity financial statements.

One of the Board members noted that the new business to be acquired by FMCG Ltd is an investment company. Its financial statements should not be consolidated because it is involved in investments industry, whereas all of the other companies in the economic entity are involved in retail industry.

Required:

As the financial accountant you are requested to prepare a response to the following questions:

(a) Why does the economic entity have a deferred tax balance? (2.5 marks)

(b) Should the financial statements of proposed acquired business, ABC Investments Ltd, be consolidated into the economic entity and why? (2.5 marks)