Problem 1:

Dodge Industries incurs the following costs during the 2019:

The company sells one product for $10. During 2019, total sales revenue was $800,000. Dodge determined that only the direct production costs and factory supplies are to be classified as variable costs; all other costs are classified as fixed costs.

Required:  

Using Excel, prepare a spreadsheet that addresses the following:

1. Determine the unit contribution margin.

2. Determine the contribution margin ratio.

3. The company is considering an expansion that will increase sales volume by 20%. The following changes would occur of the plan is implemented:

• An additional machine would add $5,000 of annual depreciation.  

• Rent and insurance would each increase by 25%, as additional factory space would be needed.

• Due to bulk purchasing and economies of scale, the per unit cost of direct materials would decline by 20%.

Nothing else would change.

Prepare a contribution margin income statement, with two columns that compare the current situation without expansion and the situation if the expansion plan is implemented.  

4. The CEO is hoping this plan will increase pretax income by 20% so she can increase her own salary.

Clearly state at the end of it whether the CEO’s expectations will be achieved if the company expands. Will pretax income increase by 20%? Show the calculation.

Dewin Auer Best (DAB) CPAs has an audit and tax client named Meyers, Inc. Meyers is a closely held C corporation whose majority shareholder, Alicia Meyers, is also its CEO. Alicia also is a tax client of DAB. During the latest year, Meyers, Inc. allowed Alicia to use a company credit card to make numerous personal purchases, but she did not reimburse the company for any of these expenditures. She also has a company car that she uses for all her transportation needs, business and personal. You are a first-year professional and have been asked by your partner, Sarah Best, to prepare Form 1120 for Meyers, Inc. and Form 1040 for Alicia Meyers. When you start to prepare the Form 1120, you notice that Meyers, Inc. has reported these charges and the total amount of operating costs for the automobile as deductible items. When reviewing Alicia’s personal tax information, you note that on her W-2, box 1, the amount listed as salary is exactly the contracted amount reported in the board of directors minutes and does not include any additional amounts for the unreimbursed expenses or automobile usage. In addition, box 14 is blank and does not contain any reported fringe benefits. Consult Circular 230, the SSTSs, and the AICPA Code of Professional Conduct. What issues must be resolved before you can recommend that Sarah Best should sign this tax return? Ignore the standards that a return preparer must satisfy under the Internal Revenue Code.

QUESTION 1

Ernest and his partner Mary run a second-hand bookshop. The business is incorporated under the name of Ketchum Ltd, and they are the only shareholders.

As the business is small they do not employ a full-time accountant, but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare             a first draft of the accounts for Ketchum Ltd for the year ending 31^st December 2019.

A list of closing balances reported in Ketchum Ltd’s statement of financial position as at 31^st December 2018 is set out below:

Further information:

1. The shop premises were acquired under a 50-year lease on 1^st January 2016 and are being depreciated to a zero residual value.
2. The fixtures and fittings were also bought on 1^st January 2016 and are being depreciated over 10 years to a zero residual value.
3. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings.
4. The business pays its insurance premium annually on 1^st July to cover the following twelve month period. This is the only prepayment as at 31^st December 2018.
5. The accrued expenses relate to the accountant’s fees for preparing last year’s accountants, paid in March 2019. This is the only accrual as at 31^st December 2018.
6. All profits earned are subject to a 20% corporate income tax paid on 31^st December of the year in which they are earned.

During the year to 31^st December 2019, the following transactions and events took place:

1. The business made cash sales of £107,375. It also made credit sales to internet retailers of £76,787.50.
2. Inventory costing £94,725 was bought during the year. All items were bought on credit. Suppliers were paid £96,437.50 over the course of the year.
3. The inventory of books as at 31^st December 2019 cost £34,375.
4. During the year some fixtures that had cost £2,500 when purchased were sold for £1,375. New fixtures were acquired for cash at a cost of £3,750 and are also being depreciated over 10 years to a zero residual value. No depreciation is charged in the year of disposal but a full year’s depreciation is charged in the year of acquisition.
5. The part-time shop assistant was paid wages of £13,625 over the year.
6. Receipts from credit customers totalled £68,162.50.
7. Electricity bills totalling £2,287.50 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2019 the bill for the quarter ended on 31^st January 2020 had not yet been received, but was estimated to be £862.50.
8. You have been told that the fees charged for preparing the accounts will be the same as last year. The bill will be sent out in March 2020.
9. The insurance premium of £1,125 for the year to 30^th June 2020 was paid during July 2019.
10. In December 2019 £10,000 was paid off the bank loan, and interest of £1,000 was paid on 31^st December 2019. Overdraft interest of £118.75 was charged and paid.
11. Administrative expenses of £1,581.25 were paid as they arose.
12. Ernest and Mary received directors’ wages of £1,250 per month each.

Required:

1. Using the information provided by Ernest and Mary, and Ketchum Ltd’s statement of financial position as at 31^st December 2018, prepare the following:
   1. A table summarising the effects of all transactions and events listed above on assets, liabilities, equity, revenue, and expenses of Ketchum Ltd.

2. A statement of profit or loss for 2019.

3. A statement of cash flows for 2019.

4. A statement of financial position as at 31^st December 2019.

Show your workings.

2. Ernest and Mary meet you to discuss the draft accounts. They say they had hoped to be able to pay a dividend of around 15 pence per share, but they fear that they might not have enough cash to do this. They query whether this is the case, since they are making reasonable profits.
   1. Calculate the amount of the proposed dividend payment.

(1 mark)

2. Advise Ernest and Mary if their company can pay out such dividend based on the figures reported in the financial statements you prepared.

(1 mark)

3. Provide a brief explanation of the difference between cash flow and profit.

3. The owners of the business also want to find out more about the financial health of their firm and are particularly interested in its liquidity and long-term solvency.
   1. They would like you to calculate the current ratio, quick (acid test) ratio, gearing ratio and working capital figures for 2018 using the figures reported in previous year’s statement of financial position, and for 2019 using the statement of financial position you prepared. Show your workings.

2. Comment on whether the position of the business improved over the last year.

3. Briefly outline the key limitations of ratio analysis.

Ernest and his partner Mary run a second-hand bookshop. The business is incorporated under the name of Ketchum Ltd, and they are the only shareholders.

As the business is small they do not employ a full-time accountant, but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare             a first draft of the accounts for Ketchum Ltd for the year ending 31^st December 2019.

A list of closing balances reported in Ketchum Ltd’s statement of financial position as at 31^st December 2018 is set out below:

Further information:

1. The shop premises were acquired under a 50-year lease on 1^st January 2016 and are being depreciated to a zero residual value.
2. The fixtures and fittings were also bought on 1^st January 2016 and are being depreciated over 10 years to a zero residual value.
3. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings.
4. The business pays its insurance premium annually on 1^st July to cover the following twelve month period. This is the only prepayment as at 31^st December 2018.
5. The accrued expenses relate to the accountant’s fees for preparing last year’s accountants, paid in March 2019. This is the only accrual as at 31^st December 2018.
6. All profits earned are subject to a 20% corporate income tax paid on 31^st December of the year in which they are earned.

During the year to 31^st December 2019, the following transactions and events took place:

1. The business made cash sales of £107,375. It also made credit sales to internet retailers of £76,787.50.
2. Inventory costing £94,725 was bought during the year. All items were bought on credit. Suppliers were paid £96,437.50 over the course of the year.
3. The inventory of books as at 31^st December 2019 cost £34,375.
4. During the year some fixtures that had cost £2,500 when purchased were sold for £1,375. New fixtures were acquired for cash at a cost of £3,750 and are also being depreciated over 10 years to a zero residual value. No depreciation is charged in the year of disposal but a full year’s depreciation is charged in the year of acquisition.
5. The part-time shop assistant was paid wages of £13,625 over the year.
6. Receipts from credit customers totalled £68,162.50.
7. Electricity bills totalling £2,287.50 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2019 the bill for the quarter ended on 31^st January 2020 had not yet been received, but was estimated to be £862.50.
8. You have been told that the fees charged for preparing the accounts will be the same as last year. The bill will be sent out in March 2020.
9. The insurance premium of £1,125 for the year to 30^th June 2020 was paid during July 2019.
10. In December 2019 £10,000 was paid off the bank loan, and interest of £1,000 was paid on 31^st December 2019. Overdraft interest of £118.75 was charged and paid.
11. Administrative expenses of £1,581.25 were paid as they arose.
12. Ernest and Mary received directors’ wages of £1,250 per month each.

Required:

1. Using the information provided by Ernest and Mary, and Ketchum Ltd’s statement of financial position as at 31^st December 2018, prepare the following:
   1. A table summarising the effects of all transactions and events listed above on assets, liabilities, equity, revenue, and expenses of Ketchum Ltd.

2. A statement of profit or loss for 2019.

3. A statement of cash flows for 2019.

4. A statement of financial position as at 31^st December 2019.

Show your workings.

2. Ernest and Mary meet you to discuss the draft accounts. They say they had hoped to be able to pay a dividend of around 15 pence per share, but they fear that they might not have enough cash to do this. They query whether this is the case, since they are making reasonable profits.
   1. Calculate the amount of the proposed dividend payment.

(1 mark)

2. Advise Ernest and Mary if their company can pay out such dividend based on the figures reported in the financial statements you prepared.

(1 mark)

3. Provide a brief explanation of the difference between cash flow and profit.

3. The owners of the business also want to find out more about the financial health of their firm and are particularly interested in its liquidity and long-term solvency.
   1. They would like you to calculate the current ratio, quick (acid test) ratio, gearing ratio and working capital figures for 2018 using the figures reported in previous year’s statement of financial position, and for 2019 using the statement of financial position you prepared. Show your workings.

2. Comment on whether the position of the business improved over the last year.

3. Briefly outline the key limitations of ratio analysis.

1. Based on MFRS 140, discuss the recognition of investment property should the company provides ancillary services to the occupants of a property.

(4 marks) **In Malaysia**

2. On 1 January 2019, Wisteria Bhd purchased a factory for investment purposes. The cost of factory was RM 300 million and is expected to have useful life of 50 years with no salvage value. As at 31 Dec 2019, the market value of building was RM330 million, but as at 31 Dec 2020, it dropped to only RM 290 million.

Based on Fair Value Model, prepare the journal entries to record:

1. the initial recognition of the factory
2. fair value gain for the year
3. fair value loss for the year

At the beginning of 2018, Quentin and Kopps (Q&K) adopted the dollar-value LIFO (DVL) inventory method. On that date the value of its one inventory pool was $81,000. The company uses an internally generated cost index to convert ending inventory to base year.

Required:
Determine the missing amounts in the inventory data for 2018 through 2021.

On January 2, 2017, Chair King Co. purchased a new van for $45,000. The van had an expected useful life of six years, and an expected salvage value of $15,000. The company expected that in those six years, the van would be driven for 150,000 miles based on the following schedule:

2017 – 13,000 miles

2018 – 21,000 miles

2019 – 28,000 miles

2020 – 29,000 miles

2021 – 37,000 miles

2022 – 22,000 miles

Required:

Assuming a December 31 year-end, prepare a depreciation schedule for the life of the van using:

Straight-line depreciation

Units-of-production depreciation

Double-declining-balance depreciation

The following is a random list showing the account balances of various assets, liabilities, revenues and expenses for Jones Painting Company at December 31, 2020, the end of its first year of operations.

Accounts receivable 7,100

Acounts payable 2,500

salary expense 3,200

repair expense 700

truck 8,300

equipment 6,700

unearned revenue 3,000

cash 6,100

supplies expense 1,600

service revenue 15,800

Gasoline Expense 3,000

Salary payable 2,100

3. the Statement of owners equity would show an ending balance of

A. 21,800

B. 18,800

C. 20,600

D. 25,300

E. 26, 500