indicate the statement presentation of the financing charges and the credit card ser 617244

Aug 29, 2021 | Uncategorized

Colaw Stores accepts both its own and national credit cards. During the year, the following selected summary transactions occurred.

Instructions

(a)Journalize the transactions for Colaw Stores.

(b)Indicate the statement presentation of the financing charges and the credit card service charge expense for Colaw Stores.

prepare journal entries to record the transactions vandiver prepares adjusting entri 617247

Aug 29, 2021 | Uncategorized

Vandiver Company had the following select transactions.

Instructions

Prepare journal entries to record the transactions. Vandiver prepares adjusting entries once a year on December 31.

compute the accounts receivable turnover for 2014 assuming the expected bad debt inf 617250

Aug 29, 2021 | Uncategorized

At December 31, 2013, House Co. reported the following information on its balance sheet.

During 2014, the company had the following transactions related to receivables.

Instructions

(a)Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.

(b)Enter the January 1, 2014, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T-accounts), and determine the balances.

(c)Prepare the journal entry to record bad debt expense for 2014, assuming that an aging of accounts receivable indicates that expected bad debts are $115,000.

(d)Compute the accounts receivable turnover for 2014 assuming the expected bad debt information provided in (c).

what is the weakness of the direct write off method of reporting bad debt expense 617251

Aug 29, 2021 | Uncategorized

Information related to Mingenback Company for 2014 is summarized below.

Instructions

(a)What amount of bad debt expense will Mingenback Company report if it uses the direct write-off method of accounting for bad debts?

(b)Assume that Mingenback Company estimates its bad debt expense to be 2% of credit sales. What amount of bad debt expense will Mingenback record if it has an Allowance for Doubtful Accounts credit balance of $4,000?

(c)Assume that Mingenback Company estimates its bad debt expense based on 6% of accounts receivable. What amount of bad debt expense will Mingenback record if it has an Allowance for Doubtful Accounts credit balance of $3,000?

(d)Assume the same facts as in (c), except that there is a $3,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debt expense will Mingenback record?

(e)What is the weakness of the direct write-off method of reporting bad debt expense?

on may 31 a check for 1 000 is received from the customer whose account was written 617252

Aug 29, 2021 | Uncategorized

At December 31, 2014, the unadjusted balance in Allowance for Doubtful Accounts is a credit of $12,000.

Instructions

(a)Journalize and post the adjusting entry for bad debts at December 31, 2014.

(b)Journalize and post to the allowance account the following events and transactions in the year 2015.

(1)On March 31, a $1,000 customer balance originating in 2014 is judged uncollectible.

(2)On May 31, a check for $1,000 is received from the customer whose account was written off as uncollectible on March 31.

(c)Journalize the adjusting entry for bad debts on December 31, 2015, assuming that the unadjusted balance in Allowance for Doubtful Accounts is a debit of $800 and the aging schedule indicates that total estimated bad debts will be $31,600.

of the above accounts 5 000 is determined to be specifically uncollectible prepare t 617253

Aug 29, 2021 | Uncategorized

Rigney Inc. uses the allowance method to estimate uncollectible accounts receivable. The company produced the following aging of the accounts receivable at year-end.

(a)Calculate the total estimated bad debts based on the above information.

(b)Prepare the year-end adjusting journal entry to record the bad debts using the aged uncollectible accounts receivable determined in (a). Assume the current balance in Allowance for Doubtful Accounts is a $8,000 debit.

(c)Of the above accounts, $5,000 is determined to be specifically uncollectible. Prepare the journal entry to write off the uncollectible account.

(d)The company collects $5,000 subsequently on a specific account that had previously been determined to be uncollectible in (c). Prepare the journal entry necessary to restore the account and record the cash collection.

(e)Comment on how your answers to (a)–(d) would change if Rigney Inc. used 4% oftotalaccounts receivable rather than aging the accounts receivable. What are the advantages to the company of aging the accounts receivable rather than applying a percentage to total accounts receivable?

what type of account is allowance for doubtful accounts how does it affect how accou 617254

Aug 29, 2021 | Uncategorized

At December 31, 2014, the trial balance of Darby Company contained the following amounts before adjustment.

Instructions

(a)Based on the information given, which method of accounting for bad debts is Darby Company using—the direct write-off method or the allowance method? How can you tell?

(b)Prepare the adjusting entry at December 31, 2014, for bad debt expense under each of the following independent assumptions.

(1)An aging schedule indicates that $11,750 of accounts receivable will be uncollectible.

(2)The company estimates that 1% of sales will be uncollectible.

(c)Repeat part (b) assuming that instead of a credit balance there is an $1,000 debit balance in Allowance for Doubtful Accounts.

(d)During the next month, January 2015, a $3,000 account receivable is written off as uncollectible. Prepare the journal entry to record the write-off.

(e)Repeat part (d) assuming that Darby uses the direct write-off method instead of the allowance method in accounting for uncollectible accounts receivable.

(f)What type of account is Allowance for Doubtful Accounts? How does it affect how accounts receivable is reported on the balance sheet at the end of the accounting period?

journalize the october transactions and the october 31 adjusting entry for accrued i 617255

Aug 29, 2021 | Uncategorized

Farwell Company closes its books monthly. On September 30, selected ledger account balances are:

Notes Receivable include the following.

Interest is computed using a 360-day year. During October, the following transactions were completed.

Instructions

(a)Journalize the October transactions and the October 31 adjusting entry for accrued interest receivable.

(b)Enter the balances at October 1 in the receivable accounts. Post the entries to all of the receivable accounts.

(c)Show the balance sheet presentation of the receivable accounts at October 31.

on january 1 2014 harter company had accounts receivable 139 000 notes receivable 25 617256

Aug 29, 2021 | Uncategorized

On January 1, 2014, Harter Company had Accounts Receivable $139,000, Notes Receivable $25,000, and Allowance for Doubtful Accounts $13,200. The note receivable is from Willingham Company. It is a 4-month, 9% note dated December 31, 2013. Harter Company prepares financial statements annually at December 31. During the year, the following selected transactions occurred.

Instructions

Journalize the transactions.

compute the accounts receivable turnover for the year 2014 617257

Aug 29, 2021 | Uncategorized

At December 31, 2013, Obermeyer Imports reported the following information on its balance sheet.

During 2014, the company had the following transactions related to receivables.

Instructions

(a)Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.

(b)Enter the January 1, 2014, balances in Accounts Receivable and Allowance for Doubtful Accounts. Post the entries to the two accounts (use T-accounts), and determine the balances.

(c)Prepare the journal entry to record bad debt expense for 2014, assuming that an aging of accounts receivable indicates that estimated bad debts are $22,000.

(d)Compute the accounts receivable turnover for the year 2014.

what is the weakness of the direct write off method of reporting bad debt expense fo 617258

Aug 29, 2021 | Uncategorized

Information related to Miracle Company for 2014 is summarized below.

Instructions

(a)What amount of bad debt expense will Miracle Company report if it uses the direct write-off method of accounting for bad debts?

(b)Assume that Miracle Company decides to estimate its bad debt expense to be 2% of credit sales. What amount of bad debt expense will Miracle record if Allowance for Doubtful Accounts has a credit balance of $3,000?

(c)Assume that Miracle Company decides to estimate its bad debt expense based on 5% of accounts receivable. What amount of bad debt expense will Miracle Company record if Allowance for Doubtful Accounts has a credit balance of $4,000?

(d)Assume the same facts as in (c), except that there is a $2,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debt expense will Miracle record?

(e)What is the weakness of the direct write-off method of reporting bad debt expense?

that doubt has been removed in 2002 what is mead rsquo s reporting responsibility if 602326

Aug 29, 2021 | Uncategorized

Mead, CPA, had substantial doubt about Tech Co.’s ability to continue as a going concern when reporting on Tech’s audited financial statements for the year ended June 30, 2001. That doubt has been removed in 2002. What is Mead’s reporting responsibility if Tech is presenting its financial statements for the year ended June 30, 2002, on a comparative basis with those of 2002?

1. The explanatory paragraph included in the 2002 auditor’s report should not be repeated.
2. The explanatory paragraph included in the 2002 auditor’s report should be repeated in its entirety.
3. A different explanatory paragraph describing Mead’s reasons for the removal of doubt should be included.
4. A different explanatory paragraph describing Tech’s plans for financial recovery should be included.

when an auditor concludes there is substantial doubt about a continuing audit client 602327

Aug 29, 2021 | Uncategorized

When an auditor concludes there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to

1. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.
2. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.
3. Report to the client’s audit committee that management’s accounting estimates may need to be adjusted.
4. Reissue the prior year’s auditor’s report and add an explanatory paragraph that specifically refers to “substantial doubt” and “going concern.”

green cpa concludes that there is substantial doubt about jkl co rsquo s ability to 602328

Aug 29, 2021 | Uncategorized

Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s financial statements adequately disclose its financial difficulties, Green’s auditor’s report should

in which of the following circumstances would an auditor most likely add an explanat 602329

Aug 29, 2021 | Uncategorized

In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor’s unqualified opinion?

1. The auditor is asked to report on the balance sheet, but not on the other basic financial statements.
2. There is substantial doubt about the entity’s ability to continue as a going concern.
3. Management’s estimates of the effects of future events are unreasonable.
4. Certain transactions cannot be tested because of management’s records retention policy.

an auditor would express an unqualified opinion with an explanatory paragraph added 602332

Aug 29, 2021 | Uncategorized

An auditor would express an unqualified opinion with an explanatory paragraph added to the auditor’s report for

when management does not provide reasonable justification that a change in accountin 602336

Aug 29, 2021 | Uncategorized

When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion

1. Only in the year of the accounting principle change.
2. Each year that the financial statements initially reflecting the change are presented.
3. Each year until management changes back to the accounting principle formerly used.
4. Only if the change is to an accounting principle that is not generally accepted.

when an entity changes its method of accounting for income taxes which has a materia 602337

Aug 29, 2021 | Uncategorized

When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the auditor’s report. This paragraph should identify the nature of the change and

1. Explain why the change is justified under generally accepted accounting principles.
2. Describe the cumulative effect of the change on the audited financial statements.
3. State the auditor’s explicit concurrence with or opposition to the change.
4. Refer to the financial statement note that discusses the change in detail.

when reporting on comparative financial statements an auditor ordinarily should chan 602339

Aug 29, 2021 | Uncategorized

When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year’s financial statements if the

1. Prior year’s financial statements are restated to conform with generally accepted accounting principles.
2. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued report.
3. Prior year’s opinion was unqualified and the opinion on the current year’s financial statements is modified due to a lack of consistency.
4. Prior year’s financial statements are restated following a pooling of interests in the current year.

before reissuing the prior year rsquo s auditor rsquo s report on the financial stat 602341

Aug 29, 2021 | Uncategorized

Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representations from the

when single year financial statements are presented an auditor ordinarily would expr 602342

Aug 29, 2021 | Uncategorized

When single-year financial statements are presented, an auditor ordinarily would express an unqualified opinion in an unmodified report if the

1. Auditor is unable to obtain audited financial statements supporting the entity’s investment in a foreign affiliate.
2. Entity declines to present a statement of cash flows with its balance sheet and related statements of income and retained earnings.
3. Auditor wishes to emphasize an accounting matter affecting the comparability of the financial statements with those of the prior year.
4. Prior year’s financial statements were audited by another CPA whose report, which expressed an unqualified opinion, is not presented.

unaudited financial statements for the prior year presented in comparative form with 602345

Aug 29, 2021 | Uncategorized

Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and

1. I. The report on the prior period should be reissued to accompany the current period report.
2. II. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the prior period’s financial statements.
   1. a. I only.
   2. b. II only.
   3. c. Both I and II.
   4. d. Either I or II.

if information accompanying the basic financial statements in an auditor submitted d 602349

Aug 29, 2021 | Uncategorized

If information accompanying the basic financial statements in an auditor-submitted document has been subjected to auditing procedures, the auditor may include in the auditor’s report on the financial statements an opinion that the accompanying information is fairly stated in

1. Accordance with US generally accepted auditing standards.
2. Conformity with US generally accepted accounting principles.
3. All material respects in relation to the basic financial statements taken as a whole.
4. Accordance with attestation standards expressing a conclusion about management’s assertions.

which of the following phrases should be included in the opinion paragraph when an a 602310

Aug 29, 2021 | Uncategorized

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualified opinion?

how does an auditor make the following representations when issuing the standard aud 602311

Aug 29, 2021 | Uncategorized

How does an auditor make the following representations when issuing the standard auditor’s report on comparative financial statements?

the fourth standard of reporting requires the auditor rsquo s report to contain eith 602312

Aug 29, 2021 | Uncategorized

The fourth standard of reporting requires the auditor’s report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent

1. An auditor from expressing different opinions on each of the basic financial statements.
2. Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain evidence.
3. Misinterpretations regarding the degree of responsibility the auditor is assuming.
4. An auditor from reporting on one basic financial statement and not the others.

which of the following is not correct concerning information included in an audit re 602318

Aug 29, 2021 | Uncategorized

Which of the following is not correct concerning information included in an audit report of financial statements issued under the requirements of the Public Company Accounting Oversight Board?

1. The report should include the title “Report of Independent Registered Public Accounting Firm.”
2. The report should refer to the standards of the PCAOB.
3. The report should include a paragraph referring to the auditor’s report on compliance with laws and regulations.
4. The report should contain the city and state or country of the office that issued the report.

a principal auditor decides not to refer to the audit of another cpa who audited a s 602319

Aug 29, 2021 | Uncategorized

A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the principal auditor’s client. After making inquiries about the other CPA’s professional reputation and independence, the principal auditor most likely would

1. Add an explanatory paragraph to the auditor’s report indicating that the subsidiary’s financial statements are not material to the consolidated financial statements.
2. Document in the engagement letter that the principal auditor assumes no responsibility for the other CPA’s work and opinion.
3. Obtain written permission from the other CPA to omit the reference in the principal auditor’s report.
4. Contact the other CPA and review the audit programs and working papers pertaining to the subsidiary.

we did not audit the financial statements of ez inc a wholly owned subsidiary which 602320

Aug 29, 2021 | Uncategorized

The introductory paragraph of an auditor’s report contains the following sentences:

We did not audit the financial statements of EZ Inc., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors.

These sentences

1. Indicate a division of responsibility.
2. Assume responsibility for the other auditor.
3. Require a departure from an unqualified opinion.
4. Are an improper form of reporting.

the principal auditor could justify this decision if among other requirements the pr 602323

Aug 29, 2021 | Uncategorized

In the auditor’s report, the principal auditor decides not to make reference to another CPA who audited a client’s subsidiary. The principal auditor could justify this decision if, among other requirements, the principal auditor

1. Issues an unqualified opinion on the consolidated financial statements.
2. Learns that the other CPA issued an unqualified opinion on the subsidiary’s financial statements.
3. Is unable to review the audit programs and working papers of the other CPA.
4. Is satisfied as to the independence and professional reputation of the other CPA.

an auditor concludes that there is substantial doubt about an entity rsquo s ability 602325

Aug 29, 2021 | Uncategorized

An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s financial statements adequately disclose its financial difficulties, the auditor’s report is required to include an explanatory paragraph that specifically uses the phrase(s)

is an important technique used for determining the worker rsquo s wages on the basis 617216

Aug 29, 2021 | Uncategorized

_____ is the document used for recording the time spent by various workers on each job _____.
When workers perform work in their own premises with their own tools are called _____.
For outworkers raw materials are provided by the _____
Work study involves motion study, _____ and _____.
_____ is the study of body motions used in performing an operation.
_____ involves a proper appraisal of all jobs in an organization.
_____ is a technique that equitably measures the relative worth of a job in a firm.
_____ is an important technique used for determining the worker’s wages on the basis of performance.

prepare journal entries for the transactions above 617236

Aug 29, 2021 | Uncategorized

Presented below are selected transactions of Molina Company. Molina sells in large quantities to other companies and also sells its product in a small retail outlet.

Instructions

Prepare journal entries for the transactions above.

prepare the entries on paltrow co s books related to the transactions that occurred 617237

Aug 29, 2021 | Uncategorized

Presented below are two independent situations.

(a)On January 6, Brumbaugh Co. sells merchandise on account to Pryor Inc. for $7,000, terms 2/10, n/30. On January 16, Pryor Inc. pays the amount due. Prepare the entries on Brumbaugh”s books to record the sale and related collection.

(b)On January 10, Andrew Farley uses his Paltrow Co. credit card to purchase merchandise from Paltrow Co. for $9,000. On February 10, Farley is billed for the amount due of $9,000. On February 12, Farley pays $5,000 on the balance due. On March 10, Farley is billed for the amount due, including interest at 1% per month on the unpaid balance as of February 12. Prepare the entries on Paltrow Co.”s books related to the transactions that occurred on January 10, February 12, and March 10.

if allowance for doubtful accounts has a debit balance of 200 in the trial balance j 617238

Aug 29, 2021 | Uncategorized

The ledger of Costello Company at the end of the current year shows Accounts Receivable $110,000, Sales Revenue $840,000, and Sales Returns and Allowances $20,000.

Instructions

(a)If Costello uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry at December 31, assuming Costello determines that L. Dole”s $1,400 balance is uncollectible.

(b)If Allowance for Doubtful Accounts has a credit balance of $2,100 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable.

(c)If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.

determine the total estimated un collectibles 617239

Aug 29, 2021 | Uncategorized

Menge Company has accounts receivable of $93,100 at March 31. An analysis of the accounts shows the following information.

Credit terms are 2/10, n/30. At March 31, Allowance for Doubtful Accounts has a credit balance of $1,200 prior to adjustment. The company uses the percentage-of-receivables basis for estimating uncollectible accounts. The company”s estimate of bad debts is shown below.

Instructions

(a)Determine the total estimated un collectibles.

(b)Prepare the adjusting entry at March 31 to record bad debt expense.

prepare the entry on kitselman appliances rsquo books to record the sale of the rece 617242

Aug 29, 2021 | Uncategorized

Presented below are two independent situations.

(a)On March 3, Kitselman Appliances sells $650,000 of its receivables to Ervay Factors Inc. Ervay Factors assesses a finance charge of 3% of the amount of receivables sold. Prepare the entry on Kitselman Appliances’ books to record the sale of the receivables.

(b)On May 10, Fillmore Company sold merchandise for $3,000 and accepted the customer”s America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Fillmore Company”s books to record the sale of merchandise.

lisowski laptops is examining the possibility of manufacturing and selling a noteboo 602046

Aug 29, 2021 | Uncategorized

Lisowski Laptops is examining the possibility of manufacturing and selling a notebook computer that is compatible with both PCs and Macintosh systems and that can receive television signals. Its estimated selling price is $2,500. Variable costs (supplies and labor) will equal $1,500 per unit, and fixed costs per year would approximate $200,000. Up-front investments in plant and equipment will total $270,000, which will be straight-line depreciated over three years. The initial working capital investment will be $100,000 and will rise proportionately with sales. Bill, the CEO, forecasts sales of the laptop will be 50,000 units the first year, 60,000 units the second, and 45,000 units the third year, at which time product life cycles would require closing down production of the model. At that time, the market value of the project”s assets will be about $70,000. LL”s tax rate is 40 percent and its required return on projects such as this one is 17 percent. Should Lisowski Laptops offer the new computer?

bart and morticia owners of the prestigious gomez addams office towers are concerned 602048

Aug 29, 2021 | Uncategorized

Bart and Morticia, owners of the prestigious Gomez-Addams Office Towers, are concerned about high heating and cooling costs and client complaints of temperature variation within the building. They commissioned an engineering study by Frasco-Prew Associates to identify the cause of the problems and suggest corrective action. Frasco-Prew”s basic recommendation is that a new HVAC (heating, ventilation, and air conditioning) system, featuring electronic climate control, be installed in the Towers. Over the next four years, the engineers estimate a new system will reduce heating and cooling costs by $125,000 a year. Cost of the new system will be $500,000 and can be depreciated over four years. Using a 25 percent tax rate and a 14 percent required return, should Bart and Morticia change the HVAC system? Use a four-year time horizon.

if the company repurchases 1 million shares at the prevailing market price the resul 602191

Aug 29, 2021 | Uncategorized

An analyst gathered the following information about a company:

If the company repurchases 1 million shares at the prevailing market price, the resulting book value per share will be closest to:

A. $26.

B. $27.

C. $29.

match the phrases in column a with the corresponding dividend theory in column b not 602195

Aug 29, 2021 | Uncategorized

Match the phrases in Column A with the corresponding dividend theory in Column B. Note that you may use the answers in Column B more than once.

in investors rsquo minds wilson rsquo s share buyback could be a signal that the com 602206

Aug 29, 2021 | Uncategorized

Janet Wu is treasurer of Wilson Paper Company, a manufacturer of paper products for the office and school markets. Wilson Paper is selling one of its divisions for $70 million cash. Wu is considering whether to recommend a special dividend of $70 million or a repurchase of 2 million shares of Wilson common stock in the open market. She is reviewing some possible effects of the buyback with the company’s financial analyst. Wilson has a long-term record of gradually increasing earnings and dividends. Wilson’s board has also approved capital spending of $15 million to be entirely funded out of this year’s earnings.

In investors’ minds, Wilson’s share buyback could be a signal that the company:

A. is decreasing its financial leverage.

B. views its shares as undervalued in the marketplace.

C. has more investment opportunities than it could fund internally.

assume that wilson paper funds its capital spending out of its estimated full year e 602207

Aug 29, 2021 | Uncategorized

Janet Wu is treasurer of Wilson Paper Company, a manufacturer of paper products for the office and school markets. Wilson Paper is selling one of its divisions for $70 million cash. Wu is considering whether to recommend a special dividend of $70 million or a repurchase of 2 million shares of Wilson common stock in the open market. She is reviewing some possible effects of the buyback with the company’s financial analyst. Wilson has a long-term record of gradually increasing earnings and dividends. Wilson’s board has also approved capital spending of $15 million to be entirely funded out of this year’s earnings.

Assume that Wilson Paper funds its capital spending out of its estimated full year earnings. If Wilson uses a residual dividend policy, determine Wilson’s implied dividend payout ratio.

A. 36%.

B. 40%.

C. 60%.

the most likelytax environment in which wilson paper rsquo s shareholders would pref 602208

Aug 29, 2021 | Uncategorized

Janet Wu is treasurer of Wilson Paper Company, a manufacturer of paper products for the office and school markets. Wilson Paper is selling one of its divisions for $70 million cash. Wu is considering whether to recommend a special dividend of $70 million or a repurchase of 2 million shares of Wilson common stock in the open market. She is reviewing some possible effects of the buyback with the company’s financial analyst. Wilson has a long-term record of gradually increasing earnings and dividends. Wilson’s board has also approved capital spending of $15 million to be entirely funded out of this year’s earnings.

The most likelytax environment in which Wilson Paper’s shareholders would prefer that Wilson repurchase its shares (share buybacks) instead of paying dividends is one in which:

A. the tax rate on capital gains and dividends is the same.

B. capital gains tax rates are higher than dividend income tax rates.

C. capital gains tax rates are lower than dividend income tax rates.

may an accountant accept an engagement to compile or review the financial statements 602287

Aug 29, 2021 | Uncategorized

May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial statements?

align=”left”>

one of the conditions required for an accountant to submit a written personal financ 602289

Aug 29, 2021 | Uncategorized

One of the conditions required for an accountant to submit a written personal financial plan containing unaudited financial statements to a client without complying with the requirements of SSARS 1, Compilation and Review of Financial Statements, is that the

1. Client agrees that the financial statements will not be used to obtain credit.
2. Accountant compiled or reviewed the client’s financial statements for the immediate prior year.
3. Engagement letter acknowledges that the financial statements will contain departures from generally accepted accounting principles.
4. Accountant expresses limited assurance that the financial statements are free of any material misstatements.

when providing limited assurance that the financial statements of a nonpublic entity 602290

Aug 29, 2021 | Uncategorized

When providing limited assurance that the financial statements of a nonpublic entity require no material modifications to be in accordance with generally accepted accounting principles, the accountant should

1. Assess the risk that a material misstatement could occur in a financial statement assertion.
2. Confirm with the entity’s lawyer that material loss contingencies are disclosed.
3. Understand the accounting principles of the industry in which the entity operates.
4. Develop audit programs to determine whether the entity’s financial statements are fairly presented.

smith cpa has been asked to issue a review report on the balance sheet of cone compa 602293

Aug 29, 2021 | Uncategorized

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonpublic entity, and not on the other related financial statements. Smith may do so only if

1. Smith compiles and reports on the related statements of income, retained earnings, and cash flows.
2. Smith is not aware of any material modifications needed for the balance sheet to conform with GAAP.
3. The scope of Smith’s inquiry and analytical procedures is not restricted.
4. Cone is a new client and Smith accepts the engagement after the end of Cone’s fiscal year.

an accountant should perform analytical procedures during an engagement to 602294

Aug 29, 2021 | Uncategorized

An accountant should perform analytical procedures during an engagement to

align=”left”>

the existence of audit risk is recognized by the statement in the auditor rsquo s st 602301

Aug 29, 2021 | Uncategorized

The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor

1. Obtains reasonable assurance about whether the financial statements are free of material misstatement.
2. Assesses the accounting principles used and also evaluates the overall financial statement presentation.
3. Realizes some matters, either individually or in the aggregate, are important while other matters are not important.
4. Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

which of the following statements is correct concerning an auditor rsquo s responsib 602304

Aug 29, 2021 | Uncategorized

Which of the following statements is correct concerning an auditor’s responsibility for controlling the distribution by the client of a restricted-use report?

1. An auditor must inform the client that a restricted-use report is not intended for distribution to non-specified parties.
2. When an auditor is aware that a client has distributed a restricted-use report to inappropriate third parties, the auditor should immediately inform the client to cease and desist.
3. An auditor controls distribution through insisting that the client not duplicate the restricted-use report for any purposes.
4. An auditor is not responsible for controlling the distribution of such reports.

calculate the cost of materials under 1 fifo 2 lifo and 3 weighted average method of 617176

Aug 29, 2021 | Uncategorized

You are presented with the following information relating to the first week of a month. The transactions in connection with the materials are as follows:

Calculate the cost of materials under (1) FIFO (2) LIFO and (3) Weighted average method of issue of material and the value of closing stock under the aforesaid materials

what stock rate would you adopt for pricing issues assuming a provision of 5 towards 617177

Aug 29, 2021 | Uncategorized

A consignment consisted of two chemicals A and B. The invoices gave the following data:

Chemical A – 4,000 kg @ Rs. 2.50 per kg Rs. 10,000

Chemical B – 3,200 kg @ Rs. 3.25 per kg Rs. 10,400

A shortage of 200 kg in A and 128 kg in B was noticed due to breakage. What stock rate would you adopt for pricing issues assuming a provision of 5% towards further deterioration?

house rent to be recovered from 50 employees at rs 100 per month employer also contr 617181

Aug 29, 2021 | Uncategorized

Model: Cash needed for wage payment

From the following particulars, find the amount required for cash payment of wages in a factory for a particular month:

House rent to be recovered from 50 employees at Rs.100 per month. Employer also contributes an equal amount towards PF and ESIC.

up to 48 hours in a week at single rate and over 48 hours at double rate whichever i 617182

Aug 29, 2021 | Uncategorized

Model: Computation of normal and overtime wages

Calculate the normal wages and overtime wages payable to a workman from the following data:

Normal working hours: 8 hours per day.

On Saturday: 4 hours per day.

Normal rate: Rs. 2 per hour.

Overtime rate: Up to 9 hours in a day at single rate and over 9 hours a day at double rate

(or)

Up to 48 hours in a week at single rate and over 48 hours at double rate whichever is more beneficial to the workers.

the time unaccounted for is due to a power failure you are required to show rajeev r 617183

Aug 29, 2021 | Uncategorized

Model: Allocation of wages

Rajeev, a worker in a manufacturing unit, is paid at the rate of Rs. 20 per hour. His working hours constitute 48 hours over 6 days a week. Time allowed per day as approved absence for personal needs and so on is 20 minutes.

Rajeev’s card for the week ended in a particular month shows that his time during the week is chargeable as follows:

Job No. X: 25 hours

Job No. Y: 15 hours

Job No. Z: 3 hours

The time unaccounted for is due to a power failure. You are required to show Rajeev’s wages for the week and how they would be dealt with in Cost Accounts?

overtime is paid at double the normal rate of wages plus da employer rsquo s contrib 617184

Aug 29, 2021 | Uncategorized

Model: Worker’s earnings – Labour cost and its allocation to jobs

Calculate the earnings of worker P and Q for a month and allocate the earnings of each to job X, Y and Z.

The normal working hours for the month are 200 hrs. Overtime is paid at double the normal rate of wages plus DA. Employer’s contribution to ESIC and PF are at equal rate with an employee’s contribution.

you are required to calculate earning of workers as follows 617186

Aug 29, 2021 | Uncategorized

Three workers A, B and C work in a factory. The following particulars apply to them:

In a 40-hour week, the production of workers is as follows:

A: 100 units

B: 160 units

C: 240 units

You are required to calculate earning of workers as follows:

1. Taylor’s differential piece-rate system
2. Merrick’s differential piece-rate system.

`

you are required to compute the earnings of workers under emerson rsquo s plan 617189

Aug 29, 2021 | Uncategorized

ABC Ltd is engaged in the manufacture of a particular product. The guaranteed daily wage rate is Rs. 12. The standard output fixed for the month is 600 units which represents 100% efficiency. Workers whose efficiency is belowwill not be paid any bonus. Bonus is payable in a graded scale after this level of efficiency as follows:

There are two workers X and Y who have worked for 25 days in a month, and their output is 360 units and 600 units, respectively. You are required to compute the earnings of workers under Emerson’s plan.

from the following data relating to a firm you are required to calculate a labour tu 617196

Aug 29, 2021 | Uncategorized

From the following data relating to a firm, you are required to calculate (a) labour-turnover ratio and (b) profit foregone due to labour turnover:

The direct labour hours worked during the period were 3,500. This included 1,500 hours for newly recruited workers, who were undergoing training and whose productive time was only66 2/3% There was some delay in finding new employees to replace the workers who had left and the time lost was 500 hours. Costs incurred to replace the leavers were as follows:

calculate the gross weekly earning of each workman taking into consideration that ea 617199

Aug 29, 2021 | Uncategorized

Model: Group-Piece Rate

In an assembly shop of a factory, 4 workers P, Q, R and S work together as a team and are paid on group-piece rate. They also work individually on day-rate jobs. In a 48-hour week, the following hours have been spent by them om group-piece work:

P – 40 hours

Q – 25 hours

R – 20 hours

S – 15 hours

The balance of the time has been booked by each worker on day-work jobs. Their hourly rates are:

P – Re. 0.50

Q – Re. 0.80

R – Rs. 1.50

S – Rs. 2.00

The group-piece rate is Rs. 2 per unit and the team has produced 100 units. Calculate the gross-weekly earning of each workman taking into consideration that each one is entitled to a DA of Rs. 35 per week.

calculate the amount of wages payable to mr alex for each of the two days of week un 617200

Aug 29, 2021 | Uncategorized

Model: Balance of debt system

From the following data, calculate the amount of wages payable to Mr Alex for each of the two days of week under “Balance of Debt system”.

Mr. Alex produces 5 pieces on the first and 6 pieces on the second day.

you are required to calculate the labour turnover rate and the equal annual rate und 617204

Aug 29, 2021 | Uncategorized

Model: Labour-turnover rate

The following information relates to the personnel department of a factory for the month of June 2009:

You are required to calculate the labour-turnover rate and the equal annual rate under the different methods.

assuming that the potential production lost due to labour turnover could have been s 617205

Aug 29, 2021 | Uncategorized

Model: Profit foregone due to labour turnover

The management of a company wants to have an idea of the profit lost/foregone as a result of labour turnover last year.

Last year, the sales accounted to Rs. 3,30,000 and theProfit/VolumeRatio was 20%. The total number of actual hours worked by the direct labour was 17,250. As a result of the delays by the personnel department in filling the vacancies due to labour turnover, 3,750 potential productive hours were lost. The actual direct labour hours included were 1,500 hours attributable to training new recruits, out of which half of the hours were productive. The costs incurred consequent upon labour turnover revealed on analysis the following:

Assuming that the potential production lost due to labour turnover could have been sold at the prevailing prices, ascertain the profit foregone last year on account of labour turnover.

up to 48 hours at single rate and over 48 hours at double rate whichever is more ben 617206

Aug 29, 2021 | Uncategorized

Model: Overtime wages

You are required to calculate the normal and overtime wages payable to a workman from the following data

you are required to show the weekly wage summary for the financial books and the dep 617207

Aug 29, 2021 | Uncategorized

Model: Wages for financial books and department labour-hour cost

A factory department has 90 workers who are paid on an average of Rs. 35 per week (48 hours), DA per month (208 hours) of Rs. 260, PF deduction is @ 8% on gross, of whichis for family pension fund and half the number of workers with ESI being at Rs. 2.50 each. The employer contributes an equivalent amount. The company gives only the minimum bonus ofand allows a statutory leave of 2 weeks per year with pay. You are required to show the weekly-wage summary for the financial books and the department labour hour costs for job costing.

pass your comments on the basis of rate fixation in the circumstances 617208

Aug 29, 2021 | Uncategorized

Model: Cost of conversion and Computation of saving

A factory undertakes production to customer’s satisfaction. Worker A was entrusted with the production of 200 units of product AA’ in 100 hours and worker B was asked to produce 100 units of product BB’ in 200 hours. The ruling rate of wages is Rs. 5 per hour which is guaranteed irrespective of the standard of efficiency. If the work given is finished within the time allotted, the worker gets Rs. 6 per hour for the time taken. Time saved is rewarded by an incentive bonus of 50% of wages earned per hour. A completes the job in 80 hours and B in 120 hours.

Assuming that the prevailing overhead rate is Rs. 10 per labour hour, indicate the impact of the system of wages coupled with the incentive scheme on the profits of the company when compared to a straight piece rate at Rs. 6 per hour. The fixation of hourly rates is understood to provide for a saving of 20% of the time fixed when the work is carried out by an efficient worker under normal conditions.

Pass your comments on the basis of rate fixation in the circumstances.

the amount of piece work premium and the share of each worker when the piece work pr 617209

Aug 29, 2021 | Uncategorized

Model: Piece-work premium and Selling price

2 fitters, one labourer and one boy undertake a job on piece for a rate of Rs.1,890. The time spent by each of them is 110 ordinary working hours. The rates of pay on time-rate basis are Rs. 3.00 per hour for each of the two fitters, Rs. 2 per hour for the labourer and Re 1.00 per hour for the boy.

You are required to calculate as follows:

1. The amount of piece-work premium and the share of each worker when the piece-work premium is divided proportionately to the wages paid.
2. The selling price of the above job on the basis of the following additional data:

Cost of direct materials = Rs. 3,110.

Work overhead at 20% of prime cost.

Selling overhead at 10% of works cost.

Profit at 20% on the cost of sales

the time allowed under an incentive allowance of 25 of the standard time 617210

Aug 29, 2021 | Uncategorized

Model: Computation of standard time and Computation of time allowed

The time taken for the operator “A” in the process of a manufacturing concern on three different counts was 23, 21 and 25 minutes while that of the operator “B” was 20, 24 and 22 minutes. It has been ascertained that the rating of A is 65/60and that of B is 50/60 Allowance for fatigue and personal needs are assumed at 12%. Calculate on the basis of the above information as a base:

1. The standard time
2. The time allowed under an incentive allowance of 25% of the standard time.

you are required to calculate the total earnings of each of the workers 617211

Aug 29, 2021 | Uncategorized

Model: Incentive bonus + Total earnings

A company employs its workers for a single shift of 8 hours for 25 days in a week. The company has recently fixed the standard output for a mass production item and introduced an incentive scheme to boost the output. The details of wages payable to the workers are as follows:

1. Basic wages/piece-work wages @ Rs. 2 per unit subject to a guaranteed minimum wages of Rs. 50 per day.
2. DA at Rs. 50 per day.
3. Incentive bonus:

Standard output per day per worker = 40 units.

Incentive bonus up to 80% efficiency = Nil.

Incentive bonus for efficiency above 80% = Rs. 80 for every 1% increase above 80%.

The details of performance of four workers for the month of June 2009 are as follows:

You are required to calculate the total earnings of each of the workers.

you are required to show the net saving in the production costs which would be requi 617212

Aug 29, 2021 | Uncategorized

Model: Net saving in the production cost to offset losses from labour turnover

A manufacturer introduces new machinery into his factory with the result that the production per worker is increased. The workers are paid by results, and it is agreed that for every 2% increase in the average individual output, an increase of 1% on the rate of wages will be paid. At the time the machinery is installed, the selling price of the products falls by.

You are required to show the net saving in the production costs which would be required to offset the losses expected form the reduced turnover and bonus paid to workers.

Additional data:

adopt base stock method with fifo base stock is 500 units out of opening stock 617144

Aug 29, 2021 | Uncategorized

From the following particulars, write up the stores ledger card:

Adopt base stock method with FIFO. Base stock is 500 units out of opening stock.

adopt base stock method with lifo base stock is 200 units of january 1 purchase 617145

Aug 29, 2021 | Uncategorized

From the following particulars write up the stores ledger card:

Adopt base stock method with LIFO. Base stock is 200 units of January 1 purchase.

from the following transactions prepare stores ledger account using simple average p 617146

Aug 29, 2021 | Uncategorized

From the following transactions, prepare stores ledger account using simple average price method:

the stock verifier found a shortage of 10 kg on 16 december and another shortage of 617147

Aug 29, 2021 | Uncategorized

From the following details, write up stores ledger account using simple average method:

The stock verifier found a shortage of 10 kg on 16 December and another shortage of 10 kg on 26 December.

prepare the stores ledger account based on the weighted average method of pricing is 617148

Aug 29, 2021 | Uncategorized

Prepare the stores ledger account based on the weighted average method of pricing issues:

prepare a stores ledger account by adopting the weighted average method of pricing 617149

Aug 29, 2021 | Uncategorized

Prepare a stores ledger account by adopting the weighted average method of pricing:

the following receipts and issues were made of material during the month of may prep 617150

Aug 29, 2021 | Uncategorized

The following receipts and issues were made of material during the month of May. Prepare stores ledger account on the basis of

1. simple average method and
2. weighted average method

prepare stores ledger account using a lifo and b weighted average method 617151

Aug 29, 2021 | Uncategorized

The following particulars relate to the receipts and issues of a material during the month of March:

Prepare stores ledger account using (a) LIFO and (b) weighted average method.

complete the receipts and issues by adopting the 1 fifo 2 lifo and 3 weighted averag 617152

Aug 29, 2021 | Uncategorized

The following information is extracted from the stores ledger:

Complete the receipts and issues by adopting the (1) FIFO (2) LIFO and (3) weighted average methods.

from the following information calculate maximum minimum and average stock levels 617154

Aug 29, 2021 | Uncategorized

From the following information, calculate maximum, minimum and average stock levels.

calculate the material turnover ratio for year 2009 from the following details 617158

Aug 29, 2021 | Uncategorized

Calculate the material turnover ratio for year 2009 from the following details:

Calculate:

1. Material turnover ratio
2. Fast-moving materials

material turnover period in days and also months 617159

Aug 29, 2021 | Uncategorized

From the following information, calculate

1. Material turnover ratio
2. Material turnover period in days and also months
3. Faster moving material

how many orders the company place each year 617161

Aug 29, 2021 | Uncategorized

The following relates to inventory costs for ABC Ltd

1. Orders must be placed in multiples of 200 units.
2. Requirements for the year are 4,00,000 units.
3. The purchase price per unit is Rs. 4.
4. The carrying cost is 20% of the purchase price of goods.
5. Cost per order placed is Rs. 25.
6. Desired safety stock is 20,000 units. This quantity is on hand initially.
7. Three days are required for delivery.

Calculate:

1. EOQ
2. How many orders the company place each year?
3. At what inventory level should an order be placed?

the annual demand for the material is 4 000 tonne stock holding costs are 20 of mate 617163

Aug 29, 2021 | Uncategorized

A firm is able to obtain quantity discount on its order of material as follows:

The annual demand for the material is 4,000 tonne. Stock holding costs are 20% of material cost per annum. The delivery cost per order is Rs. 6. You are required to calculate the best quantity to order.

the purchase quantity orders to be considered are 400 500 1 000 2 000 and 3 000 tonn 617165

Aug 29, 2021 | Uncategorized

The purchase department of your organization has received an offer of quantity discounts on its order of materials as under:

The annual requirement of the material is 5,000 tonne. The delivery cost per order is Rs. 1,200 and the annual stock holding cost is estimated at 20% of the average inventory.

The purchase department wants you to consider the following purchase options and advise which among them will be the most economical ordering quantity, presenting the relevant information in a tabular form.

The purchase quantity orders to be considered are 400, 500, 1,000, 2,000 and 3,000 tonne.

what would be the optimum run size for bearing manufacture 617166

Aug 29, 2021 | Uncategorized

X Ltd is committed to supply 24,000 bearings per annum to Y Ltd on a steady basis. It is estimated that it costs 10 paise as inventory–holding cost per bearing per month and that the setup cost per run of bearing manufacture is Rs. 324.

1. What would be the optimum run size for bearing manufacture
2. Assuming that the company has a policy of manufacturing 6,000 bearings per run, how much extra costs the company would be incurring as compared to the optimum run suggested in (a) above?
3. What is the minimum inventory holding cost?

for the eoq compute the number of deliveries per year for super grow and natives own 617168

Aug 29, 2021 | Uncategorized

The complete Gardener is deciding on the economic order quantity for two brands of lawn fertilizer: “Super–Grow” and “Natives Own”. The following information is collected:

Required:

1. EOQ for Super Grow and Natives Own.
2. For the EOQ, what is the sum of the total annual relevant ordering costs and the annual relevant carrying costs for Super Grow and Natives Own?
3. For the EOQ compute the number of deliveries per year for Super Grow and Natives Own.

average monthly market demand 617173

Aug 29, 2021 | Uncategorized

M/S Tubes Ltd is the manufactures of picture tubes for T.V. The following are the details of their operations:

Compute from the above

1. EOQ. If the supplier is willing to supply quarterly 1,500 units at a discount of 5% is it worth accepting?
2. Maximum level of stock
3. Minimum level of stock
4. Reorder level

cost of placing a purchase order is rs 20 617174

Aug 29, 2021 | Uncategorized

From the details given below, calculate:

1. Reordering level
2. Maximum level
3. Minimum level
4. Danger level

Reordering quantity is to be calculated based on following information:

Cost of placing a purchase order is Rs. 20.

Number of units to be purchased during the year is 5,000.

Purchase price per unit inclusive of transportation cost is Rs. 50.

Annual cost of storage per unit is Rs. 5.

the following information is available in respect of component 20 617175

Aug 29, 2021 | Uncategorized

The following information is available in respect of component 20:

You are required to calculate:

(a) Re–order level (b) Reorder quantity

many companies are closing down their defined benefit plans and replacing them with 600815

Aug 29, 2021 | Uncategorized

Deferred tax assets and the valuation allowance: the case of Ford Motor Company

Describe the differences between defined benefit and defined contribution plans.

Many companies are closing down their defined benefit plans and replacing them with defined contribution plans. Why?

Interest rates have sharply declined in most economies over the past 10 years. What effects would you expect this trend to have had on pension liabilities and pension expenses?

As a prospective employee, which type of plan (defined benefit or defined contribution) do you prefer, and why?

Define “underfunded” and “overfunded.”

What is the difference between “service cost” and “interest cost?”

Describe the effects on pension expense of changing expected returns on pension plan investments. What happens if we increase the expected returns? What happens if we decrease them? provides the income statements and balance sheets from Ford’s 2011 Annual Report. Excerpts from the note on deferred income taxes are provided in The statements of cash flow for Ford reveal cash flows provided by operations of $9.784 billion, $11.477 billion, and $15.477 billion in 2011, 2010, and 2009, respectively. In 2011, Ford reported its highest net income ever (over $20 billion), an improvement of nearly $14 billion from the previous year. But did Ford’s profitability really improve that much?

Ford Motor Company and subsidiaries income statements for the years ended December 31, 2011, 2010, and 2009 (in millions, except per share amounts)

deferred tax assets and liabilities are recognized based on the future tax consequen 600816

Aug 29, 2021 | Uncategorized

Ford Motor Company and Subsidiaries Excerpts from Note 22 2011 Annual Report

Valuation of deferred tax assets and liabilities

Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.

Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized in our financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.

At the end of 2011, our US operations had returned to a position of cumulative profits for the most recent three-year period. We concluded that this record of cumulative profitability in recent years, our 10 consecutive quarters of pretax operating profits, our successful completion of labor negotiations with the UAW, and our business plan showing continued profitability, provide assurance that our future tax benefits more likely than not will be realized. Accordingly, at year-end 2011, we released almost all of our valuation allowance against net deferred tax assets for entities in the United States, Canada, and Spain.

At December 31, 2011, we have retained a valuation allowance against approximately $500 million in North America related to various state and local operating loss carryforwards that are subject to restrictive rules for future utilization, and a valuation allowance totaling $1 billion primarily against deferred tax assets for our South American operations.

Components of deferred tax assets and liabilities

The components of deferred tax assets and liabilities at 31 December were as follows (in millions):

Operating loss carryforwards for tax purposes were $8.5 billion at 31 December 2011, resulting in a deferred tax asset of $3.2 billion. A substantial portion of these losses begin to expire in 2029; the remaining losses will begin to expire in 2018. Tax credits available to offset future tax liabilities are $4.5 billion. A substantial portion of these credits have a remaining carryforward period of 10 years or more. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.

Required

(a) What are “net operating loss carry forwards,” and why did they give rise to deferred tax assets? Answer the same question for “tax credit carry forwards.”

(b) Why do depreciation and amortization give rise to deferred tax liabilities?

(c) What are the “valuation allowances” referred to in the financial statements and the notes?

(d) What happened to the valuation allowances in 2011? Give the appropriate summary journal entry. What was the effect on earnings for the year?

(e) What would Ford have reported as net income for 2011 if there had been no change in the valuation allowance?

(f) Describe, in detail, what happened in 2011 to allow Ford Motor Company to sharply reduce the allowance account.

based on the above note what do you think must have happened to disney rsquo s share 600821

Aug 29, 2021 | Uncategorized

Share buybacks

The following note comes from the 2007 annual report for The Walt Disney Company:

As of the filing date of this report, the Board of Directors had not yet declared a dividend related to fiscal 2007. The Company paid a $637 million dividend ($0.31 per share) during the second quarter of fiscal 2007 related to fiscal 2006.

During fiscal 2007, the Company repurchased 202 million shares of Disney common stock for $6.9 billion. During fiscal 2006, the Company repurchased 243 million shares of Disney common stock for $6.9 billion. On May 1, 2007, the Board of Directors of the Company increased the share repurchase authorization to a total of 400 million shares. As of September 29, 2007, the Company had remaining authorization in place to repurchase approximately 323 million additional shares. The repurchase program does not have an expiration date.

The par value of the Company’s outstanding common stock totaled approximately $26 million.

Required

(a) What reasons can you give for why Disney bought back so many of its shares (a total of nearly $14 billion in 2006 and 2007 combined)?

(b) Disney’s normal policy regarding buybacks is to retain the shares in treasury (instead of cancelling them). Why is treasury stock a contra-equity account and not an asset?

(c) Based on the above note, what do you think must have happened to Disney’s share price from 2006 to 2007? Did it go up, go down, or stay the same?

how would the 335 million repurchase of disney common stock affect each of the three 600822

Aug 29, 2021 | Uncategorized

The financial statement effects of dividend payments and buybacks

The following note is taken from The Walt Disney Company’s 2004 Annual Report:

The Company declared an annual dividend of $0.24 per share on December 1, 2004 related to fiscal 2004. The dividend is payable on January 6, 2005 to shareholders of record on December 10, 2004. The Company paid a $430 million dividend ($0.21 per share) during the first quarter of fiscal 2004.

During the fourth quarter of fiscal 2004, the Company repurchased 14.9 million shares of Disney common stock for approximately $335 million. As of September 30, 2004, the Company had authorization in place to repurchase approximately 315 million additional shares.

Based on the above note, answer the following:

(a) Explain what would be recorded on each of the dates relating to the $0.24/share dividend (i.e., provide the necessary journal entries).

(b) How would the $430 million dividend payment affect each of the three principal financial statements?

(c) How would the $335 million repurchase of Disney common stock affect each of the three principal financial statements?

what rsquo s the difference between a stock dividend and a stock split why do compan 600824

Aug 29, 2021 | Uncategorized

Stock options, stock dividends, and stock splits

Diodes Inc. is a manufacturer and supplier of semiconductor products, primarily to the communications, computing, industrial, consumer electronics, and automotive markets. The company is headquartered in southern California, but most of its production facilities are in Asia (China, Taiwan, and Hong Kong). Revenues and net income in 2004 were $185.7 million and $25.6 million, respectively.

In 2004, employees exercised stock options on 1 135 982 shares, with a par value of 66²/₃ cents per share. The average exercise price was $5. In addition, Diodes received a tax benefit from the exercise of the stock options of $8 514 000. The tax benefit resulted from a US tax law that gives companies a tax deduction equal to the difference between the market price of their stock and the exercise price of the stock options on the date the options are exercised. The tax benefit reflects this difference, multiplied by the company’s marginal tax rate. Diodes’ accounting policy, in accordance with US GAAP, is to lump together the tax benefit and the cash proceeds received from the employees who exercise their options.

In November 2005, Diodes declared a 50% stock dividend, payable on 30 November 2005, to stockholders of record on 18 November 2005. Under the terms of the stock dividend, Diodes’ stockholders received one additional share for every two shares held on the record date. The company expected the number of outstanding shares of common stock after the dividend to increase from 16.8 million to 25.2 million shares. The par value of the company’s stock was not affected by the dividend and remained at 66²/₃ cents per share. At the end of November 2005, Diodes’ share price was $38.40.

Required

(a) Why do companies issue stock options to employees? What are the potential drawbacks? Why not just issue shares of stock instead of stock options?

(b) Why is the average exercise price of the stock options so low relative to the current share price?

(c) Give the summary journal entry to record the exercise of stock options in 2004.

(d) What’s the difference between a stock dividend and a stock split? Why do companies issue stock dividends? What motive might they have for a stock split?

(e) Given the journal entry to record Diodes’ stock dividends, how would the accounting change if the transaction was considered a stock split?

why does danone keep some of the repurchased shares in corporate treasury and not ca 600825

Aug 29, 2021 | Uncategorized

Share buybacks: economic rationale and financial reporting effects

Groupe Danone is the world’s #1 producer of fresh dairy products. The company is also among the world leaders in bottled water and several other food and beverage categories. Based in France, its net revenues in 2004 were €13.7 billion.

In 2004, the following transactions affecting shareholders equity took place:

• Dividends of €308 million were declared and paid.
• 2.6 million shares of common stock were bought back at an average price of €60.40. The shares were cancelled immediately after purchase.
• 750 000 shares of common stock (par value = €0.50) were reissued from corporate treasury at an average price of €51. The average price paid by Danone for the reissued shares was €74.67.

Required

1. Why do companies buy back their own shares?

2. Why does Danone keep some of the repurchased shares in corporate treasury, and not cancel them?

3. Give the summary journal entries to record all of the above events.

why would milacron use a ldquo hybrid rdquo instrument like convertible bonds instea 600826

Aug 29, 2021 | Uncategorized

The accounting for convertible bonds

Milacron Inc. is a leading supplier of plastics-processing technologies and industrial fluids. Headquartered in Cincinnati, Ohio, the company employs 3500 people and operates major manufacturing facilities in North America, Europe, and Asia. Milacron’s financial performance has been poor in recent years, including net losses of $191.1 million in 2003 (on sales of $740 million).

In March 2004, Milacron announced the issuance of bonds to Glencore Finance AG and Mizuho International. The proceeds were used to repay outstanding notes that were about to come due. Glencore and Mizuho purchased $100 million of debt in total, $30 million of which would be convertible into Milacron common stock (par value = $1) at the option of the holders.

Required

1. Why would Milacron use a “hybrid” instrument like convertible bonds, instead of issuing debt and equity securities separately?

2. Milacron raised $30 million from the issuance of the convertible bonds. Assume that a similar straight bond (a nonconvertible bond with the same coupon payments and maturity value) would have raised $26 million. Prepare the journal entry to record the issuance of the convertible bonds in accordance with IFRS.

3. Assume that early in 2005, Glencore and Mizuho exercised their option and converted the bonds into 9 million shares of Milacron common stock. The stock price on the date of the conversion was $3.75, and the net book value of bonds payable was $24 million. Prepare the journal entry to record the conversion of Milacron bonds into common stock, assuming that no gain or loss is recognized on the transaction.

following is the information relating to a type of material 617127

Aug 29, 2021 | Uncategorized

Following is the information relating to a type of material:

Calculate EOQ and total annual inventory cost

issues are to be priced on the principle of fifo write the stores ledger account 617128

Aug 29, 2021 | Uncategorized

The following information is extracted from the stores ledger of Anu Ltd:

Issue of materials:

Issues are to be priced on the principle of FIFO. Write the stores ledger account.

prepare a stores ledger account based on fifo method 617129

Aug 29, 2021 | Uncategorized

The following is the record of receipts and issues of a certain material for the month of December:

Prepare a stores ledger account based on FIFO Method.

issue are to be priced on the principle of fifo method write up the stores ledger ac 617130

Aug 29, 2021 | Uncategorized

The following information is extracted from the stores ledger:

Issue of materials were as follows:

Issue are to be priced on the principle of FIFO method. Write up the stores ledger account.

prepare a stores ledger account from the following information adopting fifo method 617131

Aug 29, 2021 | Uncategorized

Prepare a stores ledger account from the following information adopting FIFO method of pricing of issues of materials:

while verifying stock a shortage of 2 tonne on 23 december was noticed and left a no 617132

Aug 29, 2021 | Uncategorized

The records of receipts and issues of carbon chemicals of Hexa factory during December 2008 are as follows:

December 4. Opening balance 100 tonne @ Rs. 200

8. Issued 50 tonne

14. Received from supplier 40 tonne @ Rs. 190

17. Issued 36 tonne

21. Received from supplier 48 tonne @ Rs. 180

24. Issued 60 tonne

25. Returned to suppliers 10 tonne out of goods received on 21 December.

26. Received from supplier 64 tonne @ Rs. 190

29. Issued 40 tonne

30. Returned from department 6 tonne @ Rs. 190

While verifying stock, a shortage of 2 tonne on 23 December was noticed and left a note accordingly. Prepare stores ledger account under FIFO Method.

the hindustan heavy electrical closes its account at the end of each month the follo 617133

Aug 29, 2021 | Uncategorized

The Hindustan Heavy Electrical closes its account at the end of each month. The following information is available for the month of April:

Inventory (1 April) :

100 tonne at Rs. 1,000 per tonne 1,00,000

Purchases:

10 April 200 tonne at Rs. 900 per tonne : 1,80,000

20 April 200 tonne at Rs. 800 per tonne : 1,60,000

Inventory (30 April): 100 tonne

Compute the following under FIFO method.

1. Inventory valuation on 30 April
2. Cost of goods sold for April
3. Profit/loss for April

on 15 june stock verification received a shortage of 8kg the maximum level is 1 400 617135

Aug 29, 2021 | Uncategorized

From the following information, show the stores ledger account on LIFO method:

June 1. Opening stock 800 kg @ Rs. 10 each

4. Purchased 250 kg @ Rs. 9 each

12. Purchased 400 kg @ Rs. 10 each

16. Purchased 600 kg @ Rs. 10.50 each

23. Purchased 300 kg @ Rs. 11. each

Issued to manufacturing department as follows:

On 15 June stock verification received a shortage of 8kg. The maximum level is 1,400 kg. Minimum level is 650 kg. At the end of the month, stock verification revealed that there is a surplus of 2 kg.

prepare the stores ledger account under fifo method and lifo method 617137

Aug 29, 2021 | Uncategorized

X company has purchased and issued materials as follows:

Prepare the stores ledger account under FIFO method and LIFO method.

enter the following transactions in the stores ledger of y material using i fifo and 617139

Aug 29, 2021 | Uncategorized

Enter the following transactions in the stores ledger of Y material using (i) FIFO and (ii) LIFO methods:

from the following transactions prepare separately the stores ledger account using 1 617140

Aug 29, 2021 | Uncategorized

From the following transactions, prepare separately the stores ledger account using (1) FIFO and (2) LIFO.

Stock verification on 15 March revealed a shortage of 10 units.

from the following information prepare a stores ledger account under specific pricin 617141

Aug 29, 2021 | Uncategorized

From the following information, prepare a stores ledger account under specific pricing with FIFO:

ascertain the value of closing stock under hifo method of pricing issues 617143

Aug 29, 2021 | Uncategorized

Lords Co. Ltd has purchased and issued material Z as follows:

Ascertain the value of closing stock under HIFO method of pricing issues.

interest date is 31 march 2011 for own debentures as well as for investments ignore 617084

Aug 29, 2021 | Uncategorized

Model: Redemption by cancellation X Ltd. had 6% Rs.10,00,000 debentures outstanding in its books. On 1 April 2010 it had Rs.4,00,000 balance in sinking fund A/c exactly represented by 8% investment (nominal values) (Rs. 5,00,000). On 31 December .2010, it sold Rs.1,00,000, 9% investments at Rs.90,000 and with the amount on the same date purchased Rs.1,00,000 own debentures for immediate cancellation. On 31 March 2011, it sold Rs.50,000 8% investments for Rs.38,000 and with that amount purchased Rs.40,000 own debentures and cancelled them immediately. Interest date is 31 March 2011 for own debentures as well as for investments. Ignore tax. Annual appropriation entries for 31 March 2011 need not be passed. Prepare the necessary ledger accounts.

a fixed deposit receipt may also be treated as a debenture 2 interest on debenture i 617085

Aug 29, 2021 | Uncategorized

false or true

1.A fixed deposit receipt may also be treated as a debenture.
2.Interest on debenture is paid only when the company earns profit.
3.Debentures carry no voting rights.
4.Debentures lying idle in the company known as debentures stock.
5.Fully convertible debentures (FCD) have highly favourable debt equity ratio.
6.DRR must be created in respect of fully convertible debentures.
7.Dividend is a charge against profit.
8.There is no restriction on the purchase of is own debentures by a company.
9.A floating charge is a mortgage of property.
10.In case a trust deed is executed, then there will be no direct relationship between the shareholder and the company.
11.Technically, debentures A/c is different from that of debentures capital A/c.
12.Discount allowed on issue of debentures A/c is to be shown on the assets side of the balance sheet.
13.Convertible debentures can be issued as a discount.
14.In case of debentures redeemed as premium, then it should be treated as capital profit.
15.TDS, until it is actually paid to the government, should be treated as a liability and shown in the balance sheet of the company.
16.A company can redeem debentures and re-issue then with a different redemption date.
17.When a sinking fund A/c is created, then there is no need for creation of DRR.
18.The annual instalment for sinking fund the redeem of debentures is an appropriation of profit.
19.When a company retains its own debentures as an investment, then interest on them need not be calculated.
20.Profit on conversion of debentures is generally transferred to P&L A/c.

where no sinking fund exists an amount equal to the nominal value of debentures rede 617086

Aug 29, 2021 | Uncategorized

Fill in the blanks

1. A debenture means a document which creates a _____.

2._____ rate of interest will be paid on debentures periodically.

3.Interest is a charge on profit whereas dividend is _____ of profit.

4.A fixed charge is created on _____.

5.Debentures of a series with Pari Passu clause have to be paid _____.

6.A trust deed is a contract between a company and the _____ for the debenture holders.

7.In accordance with the SEBI Guidelines, a trust deed is to be executed by the issuing company within _____ of the closure of the issue.

8.Securities premium A/c will be shown under the head “ _____ ” in the balance sheet.

9.Discount allowed on issue of debentures is to be treated as _____.

10.Where the value of debentures issued is more than the value of the assets acquired, the difference is to be debited to _____ A/c.

11.As a company cannot issue debentures in fraction, any fractional payment has to be made in _____ .

12.Premium or redemption is to be shown under the head “ _____ ”.

13.Interest on debentures is always calculated on the _____ value of debentures.

14.In case the debentures are tax free, interest payable on debentures has to be _____.

15.Net effective rate of interest is based on the _____ received on debentures and not on the nominal value.

16.DRR is created out of the _____ of the company.

17.A company should create DRR equivalent to _____ of the amount of debenture issue before redemption.

18.No DRR is required for issue of debentures with a maturity period of _____ or less.

19.The terms sinking fund, _____ , debentures sinking fund or debenture redemption sinking fund are synonymous.

20.Where no sinking fund exists, an amount equal to the nominal value of debentures redeemed should be transferred out of divisible profits to _____.

however no insurance claim could be made find the issue rate per unit of each materi 617109

Aug 29, 2021 | Uncategorized

One parcel containing two vital components was received by a factory and the invoice relating to the same discloses the following:

Transit loss of 10 units of material I and 6 units of material II was noted. However, no insurance claim could be made. Find the issue rate per unit of each material. If a provision for obsolescence of 10% is to be made, find the revised issue rates.

a manufacturer buys certain equipment from outside suppliers at rs 30 per unit total 617113

Aug 29, 2021 | Uncategorized

A manufacturer buys certain equipment from outside suppliers at Rs. 30 per unit. Total annual needs are 80,000 units. The following further data are available:

find out the eoq and order schedule for raw materials and packing materials units us 617123

Aug 29, 2021 | Uncategorized

Find out the EOQ and order schedule for raw materials and packing materials units using the following data given to you:

what is meant by receivables ldquo sold but not derecognized rdquo what entry is mad 600781

Aug 29, 2021 | Uncategorized

The financial reporting effects of selling receivables

The following note appears in Daimler’s 2011 Annual Report:

Based on market conditions and liquidity needs, Daimler may sell portfolios of retail and wholesale receivables to third parties. At the time of the sale, Daimler determines whether the legally transferred receivables meet the criteria for derecognition in conformity with the appropriate provisions. If the criteria are not met, the receivables continue to be recognized in the Group’s statement of financial position.

As of 31 December 2011, the carrying amount of receivables from financial services sold but not derecognized for accounting purposes amounted to €3496 million (2010: €1254 million). The associated risk and rewards are similar to those with respect to receivables from financial services that have not been transferred.

Required

(a) Why does Daimler sell receivables from its financial services arm?

(b) What does Daimler mean by “derecognition” from the sale of receivables? What entry does the company make to record the sale of receivables when the sales are derecognized?

(c) What is meant by receivables “sold but not derecognized”? What entry is made in this case?

what effect will capitalization of the operating leases have on cash flow from opera 600782

Aug 29, 2021 | Uncategorized

Lease accounting at Metro AG

Metro AG is one of the world’s largest discount retailers. Headquartered in Germany, its activities are segmented as follows:

• Cash and carry (47%): Food and nonfood products at wholesale prices, primarily to business customers, under the Metro and Makro store brands.
• Hypermarkets and supermarkets (21%): Food products under the Extra store brand and, in hypermarkets, food and nonfood products under the Real store brand.
• Specialty stores (25%): Two chains in this group, Media Markt and Saturn, offer electronic products, and the other, Praktiker, specializes in the home improvement market.
• Department stores (7%): A variety of household and clothing products in more upscale shopping environments under the Kauflof store brand.

Metro generates about 53% of its sales within Germany, 45% from the rest of Europe, and 2% from elsewhere. Revenues were €53.5 billion in 2004.

Most of its nearly 4000 stores worldwide are leased. Some of these leases are capitalized (i.e., the present value of future lease payments appear on the balance sheet), but most are not.

Metro’s 2004 annual report reveals the following information:

• Capital leases at the end of 2004 had a present value of €2090 million. Minimum payments required in 2005 are €280 million. The weighted-average interest rate for these leases was 6.1%.
• As of the end of 2004, minimum payments required under operating leases were €1182 million for 2005, €4234 million in total payments over the next four years (2006–2009), and €5548 million in total payments for 2010 and beyond.
• shareholders equity at the end of 2004 was €4739 million, debt was €9506 million, and invested capital was €14 245 million.

Metro reported the following results in 2005:

• Revenues were €55.7 billion.
• Net operating profit after tax (NOPAT) was €1368 million, based on a tax rate of 30%.
• Net income was €649 million.
• Cash flow from operations was €2.2 billion in 2005, down from €2.9 billion in 2004 and €3.1 billion in 2003.

Required

Note: Round all euro amounts to the nearest million.

(a) What reasons can you give for why Metro relies so extensively on leasing?

(b) Prepare the journal entry to record cash payments under capital leases for 2005.

(c) Prepare the journal entry to record cash payments under operating leases for 2005.

(d) Using the year-end 2004 figure for invested capital, estimate ROIC for 2005.

(e) Calculate the present value of Metro’s operating leases as of the end of 2004. For your calculations, assume that (1) the lease payments are made at the end of each year, (2) the implicit weighted-average interest rate for the leases is 6%, (3) payments for 2006 through 2009 are made evenly throughout the period (i.e., lease payments are the same in each year), and (4) payments in 2010 and beyond are made evenly over the next 10 years.

(f) Give the journal entries to convert the operating leases into capital leases as of the end of 2004, and account for them as capital leases in 2005. Assume an amortization period of 15 years.

(g) Reestimate NOPAT for 2005 after accounting for the operating leases as capital leases.

(h) Reestimate ROIC, after accounting for the operating leases as capital leases.

(i) What effect will capitalization of the operating leases have on cash flow from operations?

how does sony treat the extended warranty program at a time of sale and b in subsequ 600796

Aug 29, 2021 | Uncategorized

Accounting for warranties

The following note comes from a recent annual report for Sony Corporation:

Sony provides for the estimated cost of product warranties at the time revenue is recognized by either product category group or individual product. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.

Certain subsidiaries in the Electronics business offer extended warranty programs. The consideration received through extended warranty service is deferred and amortized on a straight-line basis over the term of the extended warranty.

Required

Based on this note, answer the following:

(a) How does Sony account for the product warranties? What would be the impact of the estimated cost of product warranties on each of the three principal financial statements?

(b) If Sony underestimates product warranties expense, how would it correct the error?

(c) How does Sony treat the extended warranty program at (a) time of sale, and (b) in subsequent periods? How would the accounting affect each of the three principal financial statements?

what might cardinal health rsquo s senior managers say in their own defense how migh 600798

Aug 29, 2021 | Uncategorized

Accounting for contingent assets: the case of Cardinal Health

In a complaint dated 26 July 2007, and after a four-year investigation, the US Securities and Exchange Commission (SEC) accused Cardinal Health, the world’s second largest distributor of pharmaceutical products, of violating generally accepted accounting principles (GAAP) by prematurely recognizing gains from a provisional settlement of a lawsuit filed against several vitamin manufacturers. Weeks earlier, the company agreed to pay $600 million to settle a lawsuit filed by shareholders who bought stock between 2000 and 2004, accusing Cardinal of accounting irregularities and inflated earnings.The recovery from the vitamin companies should have been an unqualified positive for Cardinal Health. What happened?

Background

The story begins in 1999 when Cardinal Health joined a class action to recover overcharges from vitamin manufacturers. The vitamin makers had just pled guilty to charges of price-fixing from 1988 to 1998. In March 2000, the defendants in that action reached a provisional settlement with the plaintiffs under which Cardinal could have received $22 million. But Cardinal opted out of the settlement, choosing instead to file its own claims in the hopes of getting a bigger payout.

The accounting troubles started in October 2000 when senior managers at Cardinal began to consider recording a portion of the expected proceeds from a future settlement as a litigation gain. The purpose was to close a gap in Cardinal’s budgeted earnings for the second quarter of FY 2001, which ended 31 December 2000. According to the SEC, in a November 2000 e-mail a senior executive at Cardinal Health explained why Cardinal should use the vitamin gain, rather than other earnings initiatives, to report the desired level of earnings: “We do not need much to get over the hump, although the preference would be the vitamin case so that we do not steal from Q3.”

On 31 December 2000, the last day of the second quarter of FY 2001, Cardinal recorded a $10 million contingent vitamin litigation gain as a reduction to cost of sales. In its complaint, the SEC alleged that Cardinal’s classification of the gain as a reduction to cost of sales violated GAAP. It is worth noting that had the gain not been recognized, Cardinal would have missed analysts’ average consensus EPS estimate for the quarter by $.02.

Later in FY 2001, Cardinal considered recording a similar gain, but its auditor at the time, PricewaterhouseCoopers (hereafter PwC), was opposed to the idea. Accordingly, no litigation gains were recorded in the third or fourth quarters of FY 2001. Moreover, PwC advised Cardinal that the $10 million recognized in the second quarter of FY 2001 as a reduction to cost of sales should be reclassified “below the line” as nonoperating income. Cardinal management ignored the auditor’s advice, and the $10 million gain was not reclassified.

The urge to report an additional gain resurfaced during the first quarter of FY 2002, and for the same reason as in the prior year: to cover an expected shortfall in earnings. On 30 September 2001, the last day of the first quarter of FY 2002, Cardinal recorded a $12 million gain, bringing the total gains from litigation to $22 million. As in the previous year, Cardinal classified the gain as a reduction to cost of sales, allowing the company to boost operating earnings. However, PwC disagreed with Cardinal’s classification. The auditor advised Cardinal that the amount should have been recorded as nonoperating income on the grounds that the estimated vitamin recovery arose from litigation, was nonrecurring, and stemmed from claims against third parties that originated nearly 13 years earlier.

By May 2002, PwC had been replaced as Cardinal’s auditor by Arthur Andersen. Andersen was responsible for auditing Cardinal’s financial statements for the whole of FY 2002, ended 30 June 2002, and thus, it reviewed Cardinal’s classification of the $12 million vitamin gain. The Andersen auditors agreed with PwC that Cardinal had misclassified the gain. After Cardinal’s persistent refusal to reclassify the gains, Andersen advised the company that it disagreed but would treat the $12 million as a “passed adjustment” and include the issue in its Summary of Audit Differences.

In spring 2002 Cardinal Health reached a $35.3 million settlement with several vitamin manufacturers. The $13.3 million not yet recognized was recorded as a gain in the final quarter of FY 2002. But while management thought its accounting policies had been vindicated by the settlement, the issue wouldn’t go away.

On 2 April 2003, an article in the “Heard on the Street” column in The Wall Street Journal sharply criticized Cardinal Health for its handling of the litigation gains.It’s a CARDINAL rule of accounting:” the article begins, pun intended. “Don’t count your chickens before they hatch. Yet new disclosures in Cardinal Health Inc.’s latest annual report suggests that is what the drug wholesaler has done not just once, but twice.” Nevertheless, management continued to defend its accounting practices, partly on the grounds that the amounts later received from the vitamin companies exceeded the amount of the contingent gains recognized in FY 2001 and FY 2002. Moreover, after the initial settlement, Cardinal Health received an additional $92.8 million in vitamin-related litigation settlements, bringing the total proceeds to over $128 million.

The outcome

Cardinal management finally succumbed to reality in the following year, and in the Form 10-K (annual report) filed with the SEC for FY 2004, Cardinal restated its financial results to reverse both gains, restating operating income from the two affected quarters. But the damage had already been done. The article in The Wall Street Journal triggered the SEC investigation alluded to earlier. A broad range of issues, going far beyond the treatment of the litigation gains, were brought under the agency’s scrutiny, culminating in the SEC complaint. Two weeks after the complaint was filed, Cardinal Health settled with the SEC, agreeing to pay a $35 million fine.

Required

(a) What justification could be given for deducting the expected litigation gain from cost of goods sold? Why did Cardinal Health choose this alternative instead of reporting it as a nonoperating item?

(b) What did the senior Cardinal executive mean when he said, “We do not need much to get over the hump, although the preference would be the vitamin case so that we do not steal from Q3”? And more specifically, what is meant by the phrase, “not steal from Q3”?

(c) What specifically did Cardinal Health do wrong that got it into trouble with the SEC?

(d) What might Cardinal Health’s senior managers say in their own defense? How might they justify the timing of the $10 million and the $12 million gains?

(e) Cardinal Health ended up receiving a lot more than $22 million from the litigation settlement. Were their actions so wrong as to justify the actions of the SEC? On a scale of 1 to 10, with 1 being “relatively harmless” and 10 being “downright fraudulent,” where would you classify Cardinal’s behavior, and why?

Cardinal Health Settles shareholders Suit,” The Associated Press, 1 June 2007.

Arthur Andersen ceased operating months later in the aftermath of the Enron scandal. The Cardinal Health audit was then taken over by Ernst & Young.

A Summary of Audit Differences is a nonpublic document that lists the errors and adjustments identified by the auditor. It serves as the basis for the audit opinion. If the net effect of the errors exceeds the materiality threshold established for the client, the auditor will require an adjustment to the financial statements. “Passed adjustment” means that the error in question was waived; that is, no adjustment was demanded by the auditor.

explain why the company has provided for potential losses on the tire recall but not 600799

Aug 29, 2021 | Uncategorized

Firestone Tire and Rubber Company (A)

Throughout most of the twentieth century, Firestone Tire and Rubber Company was one of the world’s leading manufacturers of tires for passenger cars and trucks. In 1978 the company was forced to recall some of its radial tires for alleged defects. The following pages provide excerpts from Firestone’s 1979 annual report, detailing the provisions and contingencies involved in the tire recall and related issues. The report of the company’s auditors is also provided.

Required

(a) Reconstruct summary journal entries for all of the activity in the “accrued liability for tire recall” account since it was established in 1978 (see Note 15). Assume that settlements with customers take the form of both cash refunds and tire replacements. Ignore tax effects.

(b) Explain why the company has provided for potential losses on the tire recall, but not for the lawsuits relating to the defective tires.

(c) What key messages are the auditors trying to convey with the auditors’ report?

in october 1978 a provision for tire recall of 234 0 million 147 4 million after inc 600800

Aug 29, 2021 | Uncategorized

Provision for tire recall and related costs

In October 1978, a provision for tire recall of $234.0 million ($147.4 million after income taxes) was charged against income. The provision represented management’s estimate of the cost of fulfilling the company’s obligations under the agreement with the National Highway Traffic Safety Administration and the Company’s program of cash refunds to those customers who had received an adjustment on tires that would otherwise have been subject to recall and free replacement.

In October 1979, based on experience to date and anticipated future charges, the 1978 provision was reduced. Management also determined that the provision should be broadened to include $30.8 million of other related costs which were not considered for inclusion in the original provision. The net effect of the above was to reduce the provision by $46.9 million, for which no provision for income taxes was required because of the use of 1978 foreign tax credits of $20.8 million.

It should be recognized that the number of tires still to be returned and the other costs yet to be incurred may vary from management’s estimates. Any additional adjustments required by such variance will be reflected in income in the future.

The activity in the accrued liability for tire recall and related costs for 1979 and 1978 follows:

we have examined the balance sheets of the firestone tire amp rubber company and con 600801

Aug 29, 2021 | Uncategorized

Contingent liabilities

Twelve purported consumer commercial class actions (one of which consolidates five previous actions) are presently pending against the Company in various state and federal courts. . . In the purported class actions, the named plaintiffs are requesting. . . various forms of monetary relief, including punitive damages, as a result of the Company’s having manufactured and sold allegedly defective Steel Belted Radial 500 and other steel belted radial passenger tires.

. . . In addition to the class actions, there are several thousand individual claims pending against the Company for damages allegedly connected with steel belted radial passenger tires. . .

. . . The Company is a defendant in a purported class action which seeks, among other things, recovery for losses by stockholders who purchased the Company’s common stock between December 1975 and July 1978 by reason of the decline in market price for such stock alleged to result from the Company’s alleged failure to make proper disclosure of, among other things, the steel belted radial passenger tire situation.

In March 1979, the United States brought an action seeking recovery against the Company in the amount of approximately $62 million by reason of alleged illegal gold trading activity in Switzerland.

Following a federal grand jury investigation into the Company’s incomes taxes, the Company entered into a plea agreement in July 1979 under which the Company pleaded guilty to two counts charging the inclusion in its taxable income for 1972 and 1973 amounts that had been generated in prior years: the courts imposed a total fine of ten thousand dollars on the Company by reason of its plea. A civil tax audit by the Internal Revenue Service is currently in progress covering some of the same matters investigated by the grand jury as well as other matters. The government may assess substantial tax, interest and penalties in connection with the matters under investigation.

The Securities and Exchange Commission is conducting an investigation of the adequacy of the Company’s disclosures in earlier years concerning the Steel Belted Radial 500 tire. . .

. . . The Company has various other contingent liabilities, some of which are for substantial amounts, arising out of suits, investigations and claims related to other aspects of the conduct of its business. . .

. . . Increased uncertainties have developed during the past year with regard to some of the contingencies identified in this note. Because of the existing uncertainties, the eventual outcome of these contingencies cannot be predicted, and the ultimate liability with respect to them cannot be reasonably estimated. Since the minimum potential liability for a substantial portion of the claims and suits described in this note cannot be reasonably estimated, no liability for them has been recorded in the financial statements. Management believes, however, that the disposition of these contingencies could well be very costly. Although the Company’s management, including its General Counsel, believes it is unlikely that the ultimate outcome of these contingencies will have a material adverse effect on the Company’s consolidated financial position, such a consequence is possible if substantial punitive or other damages are awarded in one or more of the cases involved.

Report of independent certified public accountants

To the Stockholders and Board of Directors,

The Firestone Tire & Rubber Company:

We have examined the balance sheets of The Firestone Tire & Rubber Company and consolidated subsidiaries at October 31, 1979 and 1978, and the related statements of income, stockholders’ equity, and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As set forth in Note 16 to the financial statements, the Company is a party to various legal and other actions. These actions claim substantial amounts as a result of alleged tire defects and other matters. The ultimate liability resulting from these matters cannot be reasonably estimated. In our report dated December 18, 1978, our opinion on the financial statements for the year ended October 31, 1978, was unqualified. However, due to the increased uncertainties that developed during the year ended October 31, 1979, with respect to these matters, our present opinion on the financial statements for the year ended October 31, 1978, as presented herein, is different from that expressed in our previous report.

In our opinion, subject to the effects on the financial statements of adjustments that might have been required had the outcome of the matters referred to in the preceding paragraph been known, the financial statements referred to above present fairly the financial position of The Firestone Tire & Rubber Company and consolidated subsidiaries at October 31, 1979 and 1978, and the results of their operations and the changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

did bridgestone create hidden reserves when they established the provisions for vol 600802

Aug 29, 2021 | Uncategorized

Firestone Tire and Rubber Company (B)

Late in 1979, to save the company from pending collapse, Firestone brought in John Nevin as CEO. He closed several of the company’s manufacturing plants, and spun off nontire-related businesses, including the famous Firestone Country Club. In 1988, after the company had been restored to some measure of profitability, Nevin negotiated the sale of Firestone to the Japanese company Bridgestone. The North American division, headquartered in Nashville, became known as Bridgestone-Firestone (BFS).

It’s déjà vu all over again

But just as memories were fading of the tire recall from the late 1970s, rumours began to circulate regarding new quality concerns at BFS. The trouble started in 1996 as customers began to allege that Firestone tires on their Ford Explorers were faulty. As the complaints grew louder, BFS decided to conduct an internal investigation. The conclusion: the tires had either been misused or underinflated.

But the problem wouldn’t go away. The tires were linked to several road deaths in Venezuela, and a nasty argument ensued between BFS and Ford, with each blaming the other for the fiasco.

In May 2000, the National Highway Traffic Safety Administration in the US began an investigation of several brands of tires produced by BFS. In August 2000, BFS responded by announcing a “voluntary” recall of the Firestone Radial ATX, ATX II, and Wilderness AT tires produced at their factory in Decatur, Illinois. The recall was substantially complete by August of the following year. Meanwhile, BFS became the target of many lawsuits.

Financial statement effects

The financial statement consequences of the recall were documented in the notes to Bridgestone’s financial statements. According to Bridgestone’s 2001 Annual Report,

For the fiscal years 2001 and 2000, BFS has recorded $661 million and $754 million provisions, respectively, presented as loss on voluntary tire recall in the. . . statements of income, for the direct costs of voluntary tire recall and for product liability suits and claims. . ., net of anticipated proceeds from product liability insurance recoveries, and BFS has paid $479 million and $406 million, respectively.

From the 2002 Annual Report,

In fiscal years 2002 and 2001, [Bridgestone] has paid $245 million and $479 million, respectively, for the direct costs of voluntary tire recall and for product liability suits and claims. . . As a result of the payments, as of December 31, 2002 and 2001, [Bridgestone] has recorded liabilities for matters related to the voluntary tire recall and resulting litigation amounting to $285 million and $530 million, respectively.

And from the 2003 Annual Report,

In fiscal years 2003 and 2002, [Bridgestone] has paid $96 million and $245 million, respectively, for the direct cost of voluntary tire recall and for product liability suits and claims, class actions. . . As a result of the payments, as of December 31, 2003 and 2002, [Bridgestone] has recorded liabilities for matters related to the voluntary tires recall and resulting litigation amounting to $140 million and $285 million, respectively.

Bridgestone reported net income of $132 million in 2001, $378 million in 2002, and $828 million in 2003.

Required

(a) Based on the notes from the 2001, 2002, and 2003 annual reports, make whatever summary journals are needed to reconcile the ending balances in the liability account ($530 million in 2001, $285 million in 2002, and $140 million in 2003).

(b) Did Bridgestone create hidden reserves when they established the provisions for voluntary tire recall? How would you know?

headquartered in hong kong cathay pacific is one of the world rsquo s leading airlin 600807

Aug 29, 2021 | Uncategorized

Comprehensive pension review problem: Cathay Pacific

Headquartered in Hong Kong, Cathay Pacific is one of the world’s leading airlines. The disclosures shown below are taken from Note 19 in the Company’s 2010 annual report.

Required

(a) Describe what is meant by service cost and interest cost.

(b) How much pension expense does Cathay Pacific report in 2009 and 2010 for its defined benefit plans?

(c) Cathay Pacific reports a HK$518 million expected return on plan assets as an offset to 2010 pension expense. How was this amount determined? What is the actual gain or loss realized on its 2010 plan assets? What is the purpose of using this estimated amount instead of the actual gain or loss?

(d) What factors affected Cathay Pacific’s 2010 pension liability? What factors affected its 2010 plan assets?

(e) What does the term “funded status” mean? What is the funded status of the pension plans over the previous five years, from 2006 until 2010?

(f) The company reduced its discount rate from 4.8% in 2009 to 4.4% in 2010. What effect(s) did this change have on the balance sheet and the income statement?

(g) Assume that Cathay Pacific decreased its estimate of expected annual wage increases used to determine its defined benefit obligations in 2010. What effect(s) does this decrease have on its financial statements? In general, how does such a decrease affect income?

(h) What journal entry was needed to record pension plan expense in 2010 for Cathay’s defined contribution plans?

the group operates various defined benefit and defined contribution retirement schem 600808

Aug 29, 2021 | Uncategorized

Retirement benefits

The Group operates various defined benefit and defined contribution retirement schemes for its employees in Hong Kong and in certain overseas locations. The assets of these schemes are held in funds administered by independent trustees. The retirement schemes in Hong Kong are registered under and comply with the Occupational Retirement Schemes Ordinance and the Mandatory Provident Fund Schemes Ordinance (“MPFSO”). Most of the employees engaged outside Hong Kong are covered by appropriate local arrangements.

The Group operates the following principal schemes:

(a) Defined benefit retirement schemes

The Swire Group Retirement Benefit Scheme (“SGRBS”) in Hong Kong, in which the Company and Cathay Pacific Catering Services (H.K.) Limited (“CPCS”) are participating employers, provides resignation and retirement benefits to its members, which include the Company’s cabin attendants who joined before September 1996 and other locally engaged employees who joined before June 1997, upon their cessation of service. The Company and CPCS meet the full cost of all benefits due by SGRBS to their employee members who are not required to contribute to the scheme.

Staff employed by the Company in Hong Kong on expatriate terms before April 1993 were eligible to join another scheme, the Cathay Pacific Airways Limited Retirement Scheme (“CPALRS”). Both members and the Company contribute to CPALRS.

The latest actuarial valuation of CPALRS and the portion of SGRBS funds specifically designated for the Company’s employees were completed by a qualified actuary, Watson Wyatt Hong Kong Limited, as at 31st December 2009 using the projected unit credit method. The figures for SGRBS and CPALRS disclosed as at 31st December 2010 were provided by Cannon Trustees Limited, the administration manager.

the group rsquo s obligations are 106 2009 97 covered by the plan assets held by the 600809

Aug 29, 2021 | Uncategorized

The Group’s obligations are 106% (2009: 97%) covered by the plan assets held by the trustees as at 31st December 2010.

The overall expected rate of return on plan assets is determined based on the average rate of return of major categories of assets that constitute the total plan assets.

The difference between the fair value of the schemes’ assets and the present value of the accrued past services liabilities at the date of an actuarial valuation is taken into consideration when determining future funding levels in order to ensure that the schemes will be able to meet liabilities as they become due. The contributions are calculated based upon funding recommendations arising from actuarial valuations. The Group expects to make contributions of HK$378 million to the schemes in 2011.

(b) Defined contribution retirement schemes

Staff employed by the company in Hong Kong are eligible to join a defined contribution retirement scheme, the CPA Provident Fund.

Under the terms of the schemes, other than the Company contribution, staff may elect to contribute from 0% to 10% of their monthly salary. During the year, the benefits forfeited in accordance with the schemes’ rules amounted to HK$18 million (2009: HK$ 19 million) which have been applied toward the contributions payable by the Company.

A mandatory provident fund (“MPF”) scheme was established under the MPFSO in December 2000. Where staff elect to join the MPF scheme, the Company and staff are required to contribute 5% of the employee’s relevant income (capped at HK$20 000). Staff may elect to contribute more than the minimum as a voluntary contribution.

Contributions to defined contribution retirement schemes charged to the Group profit and loss are HK$756 million (2009: HK$677 million).

what is the amount of permanent differences for the year indicate whether the effect 600812

Aug 29, 2021 | Uncategorized

Calculating temporary and permanent differences

Hernan Company reports the following information for the year:

The company has both permanent and temporary differences between book income and taxable income.

Required

(a) What is the amount of temporary differences for the year? Indicate whether the effect is to make book income larger or smaller than taxable income.

(b) What is the amount of permanent differences for the year? Indicate whether the effect is to make book income larger or smaller than taxable income.

what is meant by the term ldquo origination and reversal of temporary differences rd 600813

Aug 29, 2021 | Uncategorized

Interpreting income tax disclosures

The following note was taken from the 2011 Annual Report of Tesco, a global UK-based grocery and discount retailing chain.

Required

(a) Based on this disclosure, which figure do you think was higher: taxable income reported under tax law, or pretax income reported under IFRS? How would you know? Does the magnitude and direction of this difference imply “conservative” accounting or “aggressive” accounting on the part of Tesco?

(b) What is meant by the term “origination and reversal of temporary differences?” What effect did the change in the UK corporate tax rate have on deferred income tax, and why?

(c) What would you expect to be the largest source of Tesco’s deferred income tax liability?

Recognized in the Group income statement

A number of changes to the UK corporation tax system were announced in the June 2010 Budget Statement. The Finance (No.2) Act 2010 included legislation to reduce the main rate of corporation tax from 28 to 27% from 1 April 2011. The proposed reduction from 28 to 27% was substantively enacted at the balance sheet date and has therefore been reflected in these Group financial statements.

In addition to the changes in rates of corporation tax disclosed above, a number of further changes to the UK corporation tax system were announced in the March 2011 UK Budget Statement. A resolution passed by Parliament on March 29, 2011 reduced the main rate of corporation tax to 26% from April 1, 2011. Legislation to reduce the main rate of corporation tax from 26 to 25% from April 1, 2012 is expected to be included in the Finance Act 2011. Further reductions to the main rate are proposed to reduce the rate by 1% per annum to 23% by April 1, 2014. None of these expected rate reductions had been substantively enacted at the balance sheet date and, therefore, are not reflected in these Group financial statements.

The effect of the changes enacted by Parliament on March 29, 2011 to reduce the corporation tax rate to 26%, with effect from April 1, 2011, is to reduce the deferred tax liability provided at the balance sheet date by £32m (£46m increase in profit and £14m decrease in the Group Statement of Comprehensive Income).

The effect of the changes expected to be enacted in the Finance Act 2011 to reduce the corporation tax rate from 26 to 25%, with effect from April 1, 2012, would be to reduce the deferred tax liability provided at the balance sheet date by a further £32m (£46m increase in profit and £14m decrease in the Group Statement of Comprehensive Income).

The proposed reductions of the main rate of corporation tax by 1% per year to 23% by April 1, 2014 are expected to be enacted separately each year. The overall effect of the further changes from 25 to 23%, if these applied to the deferred tax balance at the balance sheet date, would be to reduce the deferred tax liability by £66m (being £33m recognized in 2013 and £33m recognized in 2014).

the operating activities section from recent statements of cash flows for group air 600814

Aug 29, 2021 | Uncategorized

Deferred income taxes and the statement of cash flows

The operating activities section from recent statements of cash flows for Group Air France-KLM is shown below. A note from the Group’s fiscal year 2011 Annual Report is also provided.

Required

(a) Deferred taxes are a negative adjustment to net income in both years. What do these adjustments signify?

(b) What events or circumstances gave rise to the adjustments?

if penben chooses to report under a method consistent with both ifrs and u s gaap th 600625

Aug 29, 2021 | Uncategorized

Penben Corporation has a defined benefit pension plan. At 31 December, its pension obligation is €10 million and pension assets are €9 million. If Penben chooses to report under a method consistent with both IFRS and U.S. GAAP, the reporting on the balance sheet would be closest to which of the following?

A. €10 million is shown as a liability, and €9 million appears as an asset.

B. €1 million is shown as a net pension obligation.

C. There is no choice that reports pension assets and obligations on the balance sheet consistently under IFRS and U.S. GAAP.

comment upon jpmc rsquo s loan loss provisioning over the periods shown do they appe 600750

Aug 29, 2021 | Uncategorized

Bad debts on loans receivable

Excerpts from the 2008 Annual Report for J.P. Morgan Chase & Co. (“JPMC”) are provided in

Note that the balance in the allowance for loan losses account at the end of JPMC’s fiscal 2006 was $7279 million and the balance in their loan asset account was $483 127 million at the same date.

Required

(a) Calculate JPMC’s allowance for loan losses as a percentage of gross loans outstanding for each of the three years for which information has been provided.

(b) What is the dollar value of JPMC’s loan write-offs in 2007 and 2008?

(c) Comment upon JPMC’s loan loss provisioning over the periods shown. Do they appear to have used the provision to create hidden reserves? Are they sitting on a “cookie jar” reserve or are you expecting a big hit to the income statement in future periods as a result of past underprovisioning for bad loans?

the credit balance in the allowance for doubtful accounts is now euro 8600 hilary co 600751

Aug 29, 2021 | Uncategorized

Determining bad debt expense from an aging schedule

Hilary Company’s year-end accounts receivable show the following balances by age:

The credit balance in the allowance for doubtful accounts is now €8600. Hilary Company’s prior collection experience suggests that Hilary should use the following percentages to compute the total uncollectible amount of receivables: 0–30 days, 0.5% 31–60 days, 1.0% 61–120, 10%, and more than 120 days, 70%.

Required

Prepare the journal entry to record Hilary’s bad debt expense.

what is the balance of accounts receivable net on the statement of financial positio 600752

Aug 29, 2021 | Uncategorized

Analyzing receivables and the allowance for doubtful accounts

Vermeulen Company of Ghent, a producer of custom-made furniture, was founded in 2010. Revenues in its first year were €3.5 million, all on account. The balance in the receivables account at the end of the year was €1 million. The company estimated uncollectible receivables at 2% of sales. Based on an aging schedule and other information about customer accounts, €40 000 of receivables were written off on 31 December 2010.

One year later, on 31 December 2011, the balances in selected accounts were as follows:

On 31 December 2011, Vermeulen Company estimated that its accounts receivable balance contained €55 000 of likely uncollectibles. An adjusting entry was made to the allowance account to reflect this estimate. As in the previous year, all sales were on account.

Required

1. What was the balance in accounts receivable (gross) at the end of 2010?

2. What was the balance in the allowance for doubtful accounts account at the end of 2011?

3. What was the bad debt expense for 2011?

4. What was the amount, in euro, of the specific accounts receivable written off during 2011?

5. How much cash was collected in 2011 from customers?

6. What is the balance of accounts receivable (net) on the statement of financial position (i.e., balance sheet) dated 31 December 2011?

do you agree with the following statement ldquo in the banking sector conservative a 600755

Aug 29, 2021 | Uncategorized

Citigroup Inc.: accounting for loan loss reserves∗

Anne Yang, a buy-side† analyst working for a prominent asset management firm in Hong Kong, was considering whether or not to diversify her portfolio by taking a position in a financial institution such as Citigroup Inc., J.P. Morgan Chase & Co., or some other global bank.

Anne was impressed to learn that Citigroup’s reported earnings for the fourth quarter of 2004 had once again surpassed the analysts’ consensus estimates; this time by a penny. While she was encouraged by the earnings performance, she was confused by a comment in a recent BusinessWeek article which indicated that Citigroup achieved its numbers by some “cookie jar” accounting technique.

The technique discussed in the article referred to a bank’s accounting for loan loss reserves. After carefully examining Citigroup’s financial statements and reading the notes company’s in the most recent annual report, she discovered that Citigroup reduced its loan loss reserve allowance in 2004 from $13.243 billion to $11.869 billion, and that this reduction helped boost the earnings figures. Unsure of what that meant, Anne decided to examine the issue further before making her investment decision.

Citigroup Inc.

Citigroup Inc. was formed in 1998 when Citicorp Inc. agreed to a $70 billion merger with Travelers Group Inc. At that time, Citicorp was both a consumer and commercial bank that spanned the globe, while Travelers was a large US-based financial services and insurance provider. The merged entity, Citigroup Inc., became a diversified global financial services holding company whose businesses provided a broad range of financial services to consumer and corporate customers. By the end of 2004, the company had more than 200 million customer accounts and was doing business in more than 100 countries. It employed approximately 148 000 employees in the United States and roughly 146 000 employees outside the United States.

Controversy

Loan loss reserves are reserves that banks record to cover bad debt, and they represent the amount of money that management believes the bank will not be able to collect from the currently outstanding loans it has made to borrowers. The allowance (or loan loss reserves) is established through a provision for loan losses which is charged to earnings. Allowance for loan losses appears on a bank’s balance sheet as a contra-asset, and the amount recorded is a deduction from the outstanding loans receivables. When bad loans are eventually written off, they are charged against the loan loss reserves account.

When the economy slows down, the provision for loan losses of banks usually increases in anticipation of higher debt defaults. This results in a decrease in net income. As a result, the largest determinant of a bank’s profit fluctuations is often its provision for loan losses. These higher reserves magnify the negative impact of the economic cycle on the income and capital of banks. As might be expected, the size and timing of loan loss provisions tend to improve with higher levels of economic activity.

Academic research has found that most banks around the world delayed provisioning for bad loans until it is too late – when the cyclical downturn had already set in – possibly exacerbating the negative impact of the economic cycle on the income and capital of banks.

Because loan loss provisions are based on managerial discretion, they are subject to income smoothing as management can overprovision when earnings are high and under provision, or even release reserves, when earnings are low. Income smoothing goes against accounting regulations, as within these regulations, banks cannot shift funds around at will.

Thus, the controversy surrounding loan loss reserves revolved around whether banks with generous loan loss reserves were manipulating earnings or merely practicing conservative accounting.

Citigroup loan loss reserves footnotes

In its financial footnotes for 2004, Citigroup reported the following with regard to its loan loss reserves:

During the past two years, the worldwide credit environment has continuously improved, as evidenced by declining cash-basis loan balances and lower delinquency rates. Accordingly, the company has reduced its Allowance for Credit Losses.

During 2004, the company released $2.004 billion of reserves, consisting of $900 million from [Global Corporate Investment Bank’s (GCIB)] reserves and $1.104 billion from Global Consumer’s reserves. . . At December 31, 2004, the Company’s total allowance for loans, leases, and commitments was $11.869 billion.

During 2003, the Company released $508 million of reserves, consisting of $300 million in GCIB and $208 million in Global Consumer. At December 31, 2003, the Company’s total allowance for loans, leases and commitments was $13.243 billion.

Management evaluates the adequacy of loan loss reserves by analyzing probable loss scenarios and economic and geopolitical factors that impact the portfolios. . .

The allowance for credit losses represents management’s estimate of probable losses inherent in the lending portfolio. This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, and the loss recovery rates, among other things, are considered in making this evaluation, as are the size and diversity of individual large credits. Changes in these estimates could have a direct impact on the credit costs in any quarter and could result in a change in the allowance.

At December 31, 2004 and 2003, respectively, the total allowance for credit losses, which includes reserves for unfunded lending commitments and letters of credit, totalled $3.490 billion and $4.155 billion for the Corporate loan portfolio and $8.379 billion and $9.088 billion for the Consumer loan portfolio. Attribution of the allowance is made for analytic purposes only, and the entire allowance of $11.869 billion and $13.243 billion at December 31, 2004 and 2003, respectively, is available to absorb probable credit losses inherent in the portfolio, including letters of credit and unfunded commitments. . .

In an interview with CNBC, Citigroup CFO Todd Thomson explained how loan loss reserves were used:

We put up reserves for the bad loans we think we’re going to have. If it turns out [that] we were wrong, [and] things [get] much better than we expected, then we don’t need those reserves. And in fact, according to the accounting rules, we have to release those reserves. . . We have an extremely analytical process internally. We don’t have that much judgment around it. We have to release the reserves as credit continues to get better.

He then said:

I think credit quality is going to continue to be very good. All of our forward-looking indicators continue to tell us that on the consumer side and the corporate side we’re going to have a very benign credit environment for the foreseeable future. So that’s good news. What we’re not going to see in the future is the massive improvement we’ve seen in credit quality, which allowed us to release these reserves. I don’t anticipate that going forward we’re going to be releasing reserves to this extent, unless I’m wrong and things get much better than they are today.

Conclusion

By now, Anne Yang felt more confident in her understanding of loan loss reserves accounting and was considering her possible investment in Citigroup. For 2004, Citigroup beat the analysts’ consensus EPS estimates of $4.03 by a penny, coming in at $4.04. The company had reduced its loan loss reserves during the year citing improved credit quality. Ms Yang understood that the problem with decreasing the reserves was that as banks issued new loans, they would have to replenish the reserves. Furthermore, if credit conditions worsened, banks would have to set aside even a larger amount to cover bad debts, which would further negatively impact profits.

For Anne, it was now time to weigh whether Citigroup’s accounting for loan loss was truly capturing the economic reality of the credit markets or whether it was a technique used by the bank to beat the analysts’ earnings per share numbers. She wondered, was it prudent for Citigroup to reduce its allowance? After all, many people predicted that the US economy could suffer a recession in 2007 owing to falling housing prices due to Federal Reserve Bank tightening of interest rates. If that was to happen, what would be the impact on banks’ performance and their loan loss reserves? Lastly, Anne was curious, had Citigroup maintained the same ratio of allowance for credit losses to loans in 2004, as it had in 2003, by how much would it have missed the consensus analysts’ earnings estimates?

Required

(a) Based on the financial statements for Citibank, describe the primary differences between the financial statements of banks and those of companies not in financial services.

(b) Banks are said to be in the business of “borrowing short and lending long.” What does that mean?

(c) How can banks create the “cookie jar reserves” referred to in the case?

(d) What are loan loss reserves? Using journal entries, show how the reserves are: (a) set up, (b) used, (c) written off, and (d) reversed/released.

(e) Do you agree with the following statement: “In the banking sector, conservative accounting is good accounting.” Why or why not?

review the figures above how does deere compare to cnh on this measure when you use 600762

Aug 29, 2021 | Uncategorized

Deere and CNH Global: performance effects of inventory accounting choice*

Deere and CNH Global compete against each other as manufacturers in the global market for agricultural and construction equipment. Both companies operate finance subsidiaries in order to extend credit to their dealer networks and end-customers. Deere is the larger of the two companies (1.6X greater in sales, 1.4X in assets, and 1.9X in employees). CNH is headquartered in the Netherlands, but like Deere it follows US GAAP and is traded on the New York Stock Exchange.

Despite the obvious similarities between the two companies, they have chosen different cost-flow assumptions for inventory, as revealed in the disclosures shown below.

Required

(a) What is CNH’s policy regarding inventory valuation and cost-flow assumptions?

(b) What is the balance in CNH’s inventory account at the end of 2010, both in dollars and as a percentage of total assets?

(c) What is Deere’s policy regarding inventory valuation and cost-flow assumptions?

(d) What is the balance in Deere’s inventory account at the end of 2010, both in dollars and as a percentage of total assets?

(e) What would the year-end inventory amounts be for Deere if they used the FIFO cost assumption for 100% of its inventories?

(f) Calculate inventory turnover for CNH.

(g) Calculate inventory turnover for Deere using the financial data as reported.

(h) Calculate inventory turnover for Deere, assuming that it used FIFO on 100% of its inventories.

(i) Review the figures above. How does Deere compare to CNH on this measure when you use the data as originally reported? How do they compare when you recast Deere’s financial data on the basis of FIFO?

determine what income before taxes for 2010 2011 and 2012 should have been after cor 600763

Aug 29, 2021 | Uncategorized

Correcting inventory errors

An internal audit at Parker Corporation discovered the following inventory valuation errors:

• The 2010 year-end inventory was overstated by $34 000.
• The 2011 year-end inventory was understated by $70 000.
• The 2012 year-end inventory was understated by $23 000.

The reported income before tax for Parker was:

Required

Determine what income before taxes for 2010, 2011, and 2012 should have been after correcting for the errors.

determine the amount of ending inventory that should appear on the balance sheet 600764

Aug 29, 2021 | Uncategorized

The lower of cost or market rule

Segal Company, a retailer of Nokia mobile phones, uses FIFO for costing its inventory. A physical count of inventory at the end of the year revealed the following:

The net realizable value per unit at year-end was €72, €130, and €105 for the Models 3720, 6700, and 6303, respectively.

Required

Determine the amount of ending inventory that should appear on the balance sheet.

if fraser uses the specific identification method instead how could it maximize earn 600765

Aug 29, 2021 | Uncategorized

Calculating cost of goods sold under FIFO and specific identification

It is 10 December and Fraser Home Goods has four high-end microwave ovens in stock. All are identical, and each is priced at £200. The four ovens were purchased on different dates and at different cost: Oven #1 was purchased on 15 June at a cost of £80; oven #2 on 3 August for £75; oven #3 on 5 September for £70; and oven #4 on 2 October for £65.

Required

(a) Calculate the cost of goods sold using FIFO, assuming that three of the four ovens were sold before the end of the year.

(b) If Fraser uses the specific identification method instead, how could it maximize earnings from the sale of the three ovens? How could it minimize earnings?

(c) Which of these two methods is better, and why?

can you explain why depreciation charges on the two assets are classified differentl 600771

Aug 29, 2021 | Uncategorized

Comparing the effects of depreciation choice on financial ratios

Dieter Loch AG is about to purchase two new assets – a machine for €75 000 and a state-of-the art forklift truck for €40 000. The assets would be acquired at the beginning of 2013. The company’s 2012 income statement and other information are shown below:

Additional information:

• Dieter Loch management expects the addition of the two assets to generate a 20% annual growth rate in sales.
• Depreciation on the new machine will be included as part of cost of goods sold. Depreciation on the new forklift will be classified under other operating expenses.
• Excluding the new machine’s depreciation, cost of goods sold is expected to increase at an annual rate of 7%.
• Excluding the new forklift’s depreciation, selling, general, and administrative (SG&A) expenses are expected to grow at an annual rate of 5%.
• Dieter Loch’s invested capital, not counting the new machine and forklift, is expected to increase at a rate of 15% per year. Average invested capital at the end of 2012 was €500 000.
• Both the machine and the forklift have an estimated useful life of five years, and zero residual value.
• The tax rate is 30%.

Required

(a) Can you explain why depreciation charges on the two assets are classified differently – COGS for the machine and SG&A for the forklift?

(b) Prepare forecasted income statements for 2013 and 2014, assuming that Dieter Loch AG elects to use straight-line depreciation for both assets.

(c) Calculate the firm’s gross profit percentage, NOPAT margin, and return on invested capital.

(d) Repeat (b), assuming that the company elects to use the double-declining balance method instead for both assets.

(e) Repeat (c). How does the choice of different depreciation methods affect the behavior of the ratios in 2013 and 2014?

by 2004 what percentage of the upstream segment costs have been depreciated assume n 600772

Aug 29, 2021 | Uncategorized

Analyzing depreciation on PP&E

The following note is taken from the 2004 Annual Report of ExxonMobil Corporation:

In the upstream segment, depreciation is on a unit-of-production basis, so depreciable life will vary by field. In the downstream segment, investments in refinery and. . . manufacturing facilities are generally depreciated on a straight-line basis over a 25-year life and service station buildings and fixed improvements over a 20-year life. In the chemical segment, investments in process equipment are depreciated on a straight-line basis over a 20-year life. Accumulated depreciation and depletion totaled $133 783 million at the end of 2004 and $124 350 million at the end of 2003.

Required

Based on the above note, answer the following:

(a) By 2004, what percentage of the upstream segment costs have been depreciated? Assume no salvage value and assume that in 2005, no upstream acquisitions or divestitures take place. If the upstream PP&E are used to produce 10% of their capabilities, what would be the depreciation expense and net book value at the end of 2005?

(b) By 31 December 2003, assuming a 20% salvage (residual) value, on average, what is the age of the chemical PP&E?

(c) Assuming no divestiture or retirement of assets, what was the depreciation expense for all PP&E in 2004?

which of the above expenditures should be capitalized and which should be expensed e 600773

Aug 29, 2021 | Uncategorized

Capitalizing or expensing costs

Air France, a subsidiary of the Air France-KLM Group, is one of the world’s largest airlines. It operates a mixed fleet of Airbus and Boeing wide-bodied jets on long-haul routes and relies mainly on the Airbus A320 family of aircraft for shorter flights. Assume that Air France made the following expenditures related to these aircraft in the current year:

(a) Routine maintenance and repairs on various aircraft costing €1.1 billion.

(b) The jet engines on several of the airline’s A321s received a major overhaul at a cost of €18 million. The intent of the overhaul was to improve fuel efficiency and reduce carbon emissions.

(c) The avionics were replaced on the fleet of Boeing 747s. This is expected to extend the useful life of the planes by 3 years.

(d) Noise abatement kits were installed on some of the older A320s in accordance with EU regulations on maximum allowable noise levels on takeoff. The equipment and installation cost €14 million.

(e) The airline painted several of its aircraft as part of a campaign to promote new routes to Asia. The painting cost €1.2 million.

(f) The existing seats on several A320s were replaced with more comfortable seats costing €3.5 million.

(g) New jet engines were installed on several A318s. The total cost was €42 million.

Required

Which of the above expenditures should be capitalized and which should be expensed? Explain your answers.

prepare journal entries for each of the following transactions or events for liu cyb 600774

Aug 29, 2021 | Uncategorized

Journal entries for depreciation and amortization expense

Prepare journal entries for each of the following transactions or events for Liu Cybersystems:

(a) Acquired computers costing $800 000 and software costing $80 000 on 1 January 2011. Liu expects the computers to have a service life of 10 years and $80 000 residual value. The software is expected to have a service life of four years and zero residual value.

(b) Paid $40 000 to install the computers at Liu’s office. Paid $20 000 to test the software.

(c) Liu records depreciation and amortization expense for the computers and the computer software using the straight-line method for 2011 and 2012.

(d) On 1 January 2013, new software on the market makes the software acquired in 2011 obsolete.

(e) On 2 January 2013, Liu revised the depreciable life of the computers to a total of 14 years and the salvage value to $112 000. Give the entry to record depreciation expense for 2013.

(f) On 31 December 2014, Liu sells the computers for $520 000. Give the required journal entries for 2014.

aside from comparing petrobras rsquo depreciation policy assumptions to those of the 600775

Aug 29, 2021 | Uncategorized

Interpreting disclosures for property, plant and equipment

Petrobras, which operates in the energy sector, is Brazil’s largest company. Its shares trade on several of the world’s leading stock exchanges. A portion of Petrobras’ balance sheet, its income statement, and extracts from a note on PP&E are presented in.

Required

Based on the information provided, answer the following questions:

(a) What portion of Petrobras’ “Equipment and other assets” had been “used up” by the end of fiscal 2008?

(b) How many years are left in the lives of Petrobras’ “Equipment and other assets,” on average? State clearly any assumptions that you make in arriving at your estimate.

(c) Suppose that Petrobras assumes a zero salvage value for their “Equipment and other assets.” For each $100 in new asset investments, what is the annual amount of depreciation expense charged to the income statement?

(d) Suppose that other leading energy companies charge $12 in depreciation expense for each $100 invested in new equipment. Are Petrobras’ depreciation policy assumptions materially different from those of their competitors? Support your answer.

(e) What line item on Petrobras’ income statement is most affected by their depreciation policy? Explain why.

(f) Aside from comparing Petrobras’ depreciation policy assumptions to those of their competitors, what other “red flags” might one look for in order to assess whether Petrobras is overly conservative or overly aggressive in taking depreciation expenses? Is there any evidence of these issues on Petrobras’ financial statements?

show the necessary ledger accounts as they would appear in the books of the company 617075

Aug 29, 2021 | Uncategorized

Model: Purchase of debenture in open market Kamal Ltd. issued on 1 April 2007, 40,000 12% debenture of Rs.100 each redeemable at the option of the company after the second year as Rs.104 upon giving two months notice to the debenture holders. The company purchased the following debenture in the open market:

• On 12 June 2009, Rs.8,000 nominal value as cum-interest cost Rs.8,050
• On 24 August, 2009 Rs.14,000 nominal value as ex-interest cost Rs.13,830

These debentures were retained as investments till 30 September 2010, on which date they were cancelled. Show the necessary ledger accounts as they would appear in the books of the company for 2009–10 and for 2010–11 assuming that the company closes its book of accounts every on 31 March. Interest is payable half-yearly on 30 September and 31 March. Ignore income tax.

the company completed the redemption give necessary ledger accounts offered by the a 617076

Aug 29, 2021 | Uncategorized

X Ltd. had issued 4,000 6% debenture of Rs.100 each on 18 January 2006. Interest was payable half-yearly on 30 June and 31 December each year. They were repayable at par after 10 years with the option to redeem them at any time after 31 December 2010 as Rs.103. On 1 January 2011, the balance in the debenture redemption fund A/c stood at Rs.2,14,000 which was invested outside. On 30th June 2011, a notice was given for redemption of the above debenture with the option to receive one new 9% debenture of Rs.100 each as Rs.98 and Rs.5 in cash for each 6% debenture in place of Rs.103 in cash.

The holders of 3,600 debentures exercised this option and the remaining were paid cash. The company sold investments costing Rs.1,44,000 for Rs.1,74,800. The company completed the redemption. Give necessary ledger accounts offered by the above transactions. Ignore the tax.

redraft the balance sheet of the company as on 1 april 2011 after giving effect to t 617079

Aug 29, 2021 | Uncategorized

Model: Redemption by conversion The summarized balance sheet of XY as on 31 March 2011 stood as follows:

The debentures are due for redemption on 1 April 2011. The terms of issue of debentures provided they were redeemable at a premium of 5% and also conferred option to the debenture holders to convent 20% of their holding into equity shares as a pre-determined price of Rs.15.75 per share and the payment in cash. Assuming that:

• Except for 1,000 debenture holders holding 1,00,000 debentures in all, the rest of them exercised the option for maximum conversion
• The investments realize Rs.176 lakh on sale
• All the transactions are put though, without any lag, on 1 April 2011.

Redraft the balance sheet of the company as on 1 April 2011, after giving effect to the redemption. Show your calculation in respect of the number of equity shares to be allotted and the cash payment necessary.

redemption of all preference shares was made on 10 october 2010you are required to s 617080

Aug 29, 2021 | Uncategorized

Model: Redemption by conversion—Redemption of preferecne shares combined The summarized balance sheet of Sri Vasudev Ltd. on 30 September 2010 was as follows:

On 30 September 2010, the following were due for redemption:

• 10,000 6% Redeemable preference shares at a premium of Rs.25 per share.
• 4,000 10% Redeemable debentures shares at a premium of 10% the redemption was made on that date or subsequently this:
• For half the year ending 30 September 2010, the debentures interest and preference dividend was paid out of profits of the company
• On an offer made to the 10% debenture, the outsiders agreed to take new 12% debentures at par in exchange of old debentures ; the company also decided to assume the new debentures
• A fresh issue of 2,000 equity shares of Rs.100 each was made at a premium of Rs.50 per shares and subscribed in full. All moneys due were received forthwith
• Redemption of all preference shares was made on 10 October 2010You are required to show all journal entries for the above transactions to give the company’s opening balance sheet after giving effect to them.

the annual instalment of transfer to the fund was rs 71 000 in march 2011 investment 617082

Aug 29, 2021 | Uncategorized

Model: Redemption of debentures Shree Ltd. had 9,00,000 14% debentures outstanding on 1 April 2010 redeemable on 31 March 2011. On 1 April 2010, the debentures redemption fund stood at Rs.7,49,000 represented by own debentures of the face value of Rs.1,00,000 purchased at an average price of Rs.99 per debenture and 10% stock acquired at par for Rs.6,50,000. The annual instalment of transfer to the fund was Rs.71,000. In March 2011, investments were sold for Rs.6,46,800 and the debentures were redeemed. Show 14% debentures A/c; debentures redemption fund A/c and debentures redemption fund investments A/c.

the company had a balance of rs 30 lakh in its debentures redemption reserve a c on 617083

Aug 29, 2021 | Uncategorized

Model: Purchase and cancellation of debentures On 31 March 2010, Gemini Ltd.”s balance sheet showed 5,00,000 12% fully paid debentures of Rs.100 each. Interest on debentures is payable on 30 September and 31 March every year. On 1 August 2010, the company purchased 1,00,000 of its own debentures as investment ex-interest Rs.98. However, on 31 March 2011, the company cancelled all these debentures. The company had a balance of Rs.30 lakh in its debentures redemption reserve A/c on that date. Pass journal entries for all the transactions during the year ended 31 March 2011.

you are a bank fx dealer looking at the reuters screen you see the following rates 600435

Aug 29, 2021 | Uncategorized

You are a bank FX dealer. You look at your Reuters screen and see the following rates quoted:

The 6-month value date is 182 days after spot value date.

1. Your customer needs to convert his JPY receivables into USD in six months’ time. What two-way forward outright price would you quote for this? Is the JPY at a discount or a premium to the USD? On which side of the price would you deal?
2. He is not necessarily in a hurry to do this transaction, because he thinks that the spot exchange rate will get better for him. He expects the EUR/USD to move to 1.1900 over the next two days, but believes that the JPY is likely to move from its present level of 153 against the EUR to 151.

He also believes that USD interest rates will fall tomorrow by 0.5% but that JPY rates will probably rise 1.0% at the same time.

Should he sell the JPY forward now, or wait two days?

market rates now are as follows for usd and nok 600437

Aug 29, 2021 | Uncategorized

Market rates now are as follows for USD and NOK:

Market rates three months later are as follows:

What would be the effective synthetic forward-forward 3 v 9 cost for NOK for a borrower, created from an FRA 3 v 9 for USD, and all necessary forward foreign exchange deals, taking into account all the relevant bid/offer spreads? Show all the deals necessary based on an amount of NOK 1 million and assume that you are a price-taker.

you are eur based and have the following transactions on your books 600439

Aug 29, 2021 | Uncategorized

You are EUR-based and have the following transactions on your books:

• A 6-month (182 days) forward purchase of USD 10 million.
• A 12-month (365 days) forward sale of USD 10 million.
• A borrowing from a counterparty of USD 10 million at 7% for 12 months (365 days; all the interest paid at maturity).
• A deposit placed with a counterparty of USD 10 million at 6.5% for 3 months (91 days).

Rates are currently as follows:

1. Suppose that the spot exchange rate moves to 1.3000 but interest rates are unchanged. What is the effect on the profit and loss account, not considering discounting?

b. What is the effect considering discounting, and what spot EUR/USD deal would provide a hedge against this risk?

you have a usd 10 million borrowing on which you are paying 8 9 fixed annual money m 600440

Aug 29, 2021 | Uncategorized

You have a USD 10 million borrowing on which you are paying 8.9% fixed (annual money market basis) and which has exactly 5 years left to run. All the principal will be repaid at maturity. The current 5-year dollar interest rate swap spread is quoted to you as 80/90 over treasuries. The current 5-year treasury yield is 9.0%. (US treasuries are quoted on a semi-annual bond basis.) You believe that interest rates are going to fall and wish to swap the borrowing from fixed to floating. Without discounting all the cashflows precisely, what will the resulting net LIBOR-related cost of the swapped borrowing be approximately?

the 3 month usd cash rate and the futures prices for usd are as follows the first fu 600441

Aug 29, 2021 | Uncategorized

The 3-month USD cash rate and the futures prices for USD are as follows. The first futures contract period begins exactly 3 months after spot.

1. What are the zero-coupon swap rates (annual equivalent, bond basis) for each quarterly maturity from 3 months up to 18 months, based on these prices?

b. What should the 18-month par swap rate be on a quarterly money market basis?

you have previously entered a currency swap to receive fixed rate us dollars at 8 an 600444

Aug 29, 2021 | Uncategorized

You have previously entered a currency swap to receive fixed-rate US dollars at 8% (annually, 30/360 basis) based on USD 10 million (with USD 10 million received at maturity) and pay floating-rate Swedish kronor at LIBOR (semi-annually, ACT/360 basis) based on SEK 75 million (with SEK 75 million paid at maturity). The swap terminates on 24 May 2011. It is now February 2010 and the spot USD/SEK exchange rate is 7.6500. The last krona LIBOR fixing was 5.3% for 24 November 2009. The discount factors to the remaining payment dates are as follows. What is the mark-to-market value of the swap now in dollars?

you issue a 3 year fixed rate us dollar bond at 7 annual with a bullet maturity afte 600445

Aug 29, 2021 | Uncategorized

You issue a 3-year fixed-rate US dollar bond at 7% (annual) with a bullet maturity. After all costs, you receive 99.00 from the issue. You swap the bond to floating-rate dollars. You arrange the swap so that your net cashflows from the swapped bond issue give you a par amount at the beginning, a regular LIBOR-related cost based on this par amount for 3 years, and the same par amount to be repaid at maturity. The current par swap rate for 3 years is 7.5% (annual, 30/360 basis) against LIBOR (semi-annual, ACT/360). Assuming that this same rate of 7.5% (annual) can be used as a rate of discount throughout, what all-in floating-rate cost can you achieve above or below LIBOR?

what is the estimated annualised volatility of the gbp usd exchange rate based on th 600446

Aug 29, 2021 | Uncategorized

What is the estimated annualised volatility of the GBP/USD exchange rate, based on the following daily data, assuming the usual lognormal probability distribution for relative price changes and 252 days in a year?

build a spreadsheet model for the interest and principal cash flows of a mortgage an 600457

Aug 29, 2021 | Uncategorized

Build a spreadsheet model for the interest and principal cash flows of a mortgage and then reimplement in VBA. Extend these models to include prepayments, based on a prepayment rate, say as percentage of remaining balance. A prepayment rate curve (because rates can change every period) is given as an input to the model. Convert this into a Mortgage class, similar to that described in this chapter. Note that class methods cannot be directly invoked from spreadsheet cells. Instead, a macro must be written in a “code” module that instantiates the class object and invokes the method.

modify the tranche class in exercise 4 1 to accommodate nas bonds non accelerating s 600474

Aug 29, 2021 | Uncategorized

Modify the Tranche class in Exercise 4.1 to accommodate NAS bonds. Non-Accelerating Senior (NAS) bonds have a fixed principal payment schedule. Usually, this schedule has no principal payments for the first few years. The bonds pay interest on their balance as do standard bonds. NAS bonds are a type of senior bond and thus their principal payment has higher priority than subordinate bonds. Among the senior bonds, principal is distributed to the NAS bonds first according to their schedules. This mechanism lowers the investor”s risk of having excessive prepayments shorten the life of the bond and decreasing its value.

modify the tranche class in exercise 4 1 to accommodate io and po bonds 600477

Aug 29, 2021 | Uncategorized

Modify the Tranche class in Exercise 4.1 to accommodate IO and PO bonds. An interest-only (IO) bond pays interest but not principal. Generally, an IO is linked to one or more other bonds from which it derives its “balance.” The IO pays interest on this effective balance. A principal-only (PO) bond pays no interest, but does pay principal on its balance. A popular combination of these is an “IO/PO split”—an IO linked to a PO. IOs and POs speculate on prepayments. If prepayments are low, then outstanding balances remain high, and interest flows into an IO increasing its value. Thus IO value increases when interest rates increase. If prepayments are high, then principal flows early into a PO increasing its value.

a cash cap table shows the effective interest rates for each tranche for each period 600486

Aug 29, 2021 | Uncategorized

A cash cap table shows the effective interest rates for each tranche, for each period, under a given set of assumptions. Thus the table has two dimensions: time (usually in years) vs. tranche. Each entry in the table is an annualized effective interest rate: interest paid plus the BRCFA paid divided by the previous period balance for that tranche. This rate must be adjusted by the appropriate day count. Make the same assumptions as for decrement tables except that market rates are 20% flat. This places severe stress on the structure because the WAC caps all trigger and limit interest payouts to bonds. The BRCFA accounts fill up and there isn”t enough cash to pay them down. As a result many nuances of the liability waterfall get exercised. Unless the rules are modeled correctly, this table cannot be generated precisely. Extend your model to generate this table.

an example of a price yield table is shown in table 5 12 for a given tranche a price 600487

Aug 29, 2021 | Uncategorized

An example of a price/yield table is shown in Table 5.12. For a given tranche, a price, and a set of loss and prepay speed assumptions, the table shows the yields and other various statistics. The table can be extended/shrunk by specifying different losses and speeds. The PSA collateral cash flow model is used. An additional way to generate the table is to specify the yield and generate the prices. Extend your model to generate this type of table.

TABLE 5.12 Typical Price/Yield Table (Loss vs. Prepayment Rate)

a price yield table can be reconfigured by specifying different inputs and outputs f 600488

Aug 29, 2021 | Uncategorized

A price/yield table can be reconfigured by specifying different inputs and outputs. For example, Table 5.13 has two inputs: tranches vs. losses, and three outputs: WAL, yield, and price. Generalize your previous implementation to allow rearranging these parameters. Out of the three inputs (tranches, losses, CPR), one must be held constant and the others varied.

TABLE 5.13 Price/Yield Table (Tranche vs. Loss Rate)

compare two stochastic models for synthetic credit indexes in the first model a rand 600506

Aug 29, 2021 | Uncategorized

Compare two stochastic models for synthetic credit indexes. In the first model, a random variable represents a default of an asset (section 7.2.2). Assume annual periods, constant recovery rate, and constant equal correlation among assets. In the second model, a random variable represents the time to default of an asset (section 7.2.3). In both models use the initial asset rating to derive an effective annual default rate. Implement both models with Monte Carlo simulation. Assume a portfolio of 100 credits: 5 AAA, 10 AA, 30 A, 45 BBB, 5 BB, and 5 B. Assume the liability structure has attachment points at 0%, 3%, 7%, 10%, 20%, and 30%. Estimate the probability distributions of losses after one and five years. Compare the means and standard deviations of these two distributions. Compare the percentage of mass in the tail beyond 3% loss. Explain why the distributions differ.

given a set of n random variables a covariance matrix m is an n n matrix where m i j 600508

Aug 29, 2021 | Uncategorized

Given a set of n random variables, a covariance matrix M is an n × n matrix where M(i, j) = cov(Zi, Zj). Recall that cov(Zi, Zj) = titj?ij, where ti is the standard deviation of asset i and ?ij is the correlation coefficient of assets i and j. Consider the set of n assets, with defaults modeled by n random variables with binomial distributions. Recall that for a binomial process with probability P, the variance is P × (1 – P). For example, flipping a fair coin a number of times constitutes a binomial process with P = 50%. Suppose every asset shares the same correlation coefficient ?. Build the covariance matrix. The sum of all elements of this matrix is the variance of the total number of defaults. Derive an expression for, and plot, the standard deviation of the total number of defaults as a function of different correlation coefficients (from 0% to 100%) for different numbers of assets (1, 10, 100, 1000). What conclusions can you draw?

boomwichers nv a dutch company financed by shareholders equity only decides during t 600520

Aug 29, 2021 | Uncategorized

Boomwichers NV, a Dutch company financed by shareholders” equity only, decides, during the course of year n, to finance an investment project worth €200m using shareholders” equity (50%) and debt (50%). The loan it takes out (€100m) will be paid off in full in n+5, and the company will pay 5% interest per year over the period. At the end of the period, you are asked to complete the following simplified table (no further investments are to be made):

What do you conclude from the above?

ellingham plc opens a spanish subsidiary which starts operating on 2 january 2011 600521

Aug 29, 2021 | Uncategorized

Ellingham plc opens a Spanish subsidiary, which starts operating on 2 January 2011. On 2 January 2011 it has to buy a machine costing €30m, partly financed by a €20m bank loan repayable in instalments of €2m every 15 July and 15 January over 5 years. Financial expenses, payable on a half-yearly basis, are as follows:

Profits are tax free. Sales will be €12m per month. A month”s inventory of finished products will have to be built up. Customers pay at 90 days.

one of maru rsquo s machines was purchased for 2 500 000 mexican pesos mxn at the be 600566

Aug 29, 2021 | Uncategorized

MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the revaluation model for its property, plant, and equipment. One of MARU’s machines was purchased for 2,500,000 Mexican pesos (MXN) at the beginning of the fiscal year ended 31 March 2010. As of 31 March 2010, the machine has a fair value of MXN 3,000,000. Should MARU show a profit for the revaluation of the machine?

A. Yes.

B. No, because this revaluation is recorded directly in equity.

C. No, because value increases resulting from revaluation can never be recognized as a profit.

the result of the sale of the vehicle is most likely 600568

Aug 29, 2021 | Uncategorized

A financial analyst at BETTO S.A. is analyzing the result of the sale of a vehicle for 85,000 Argentine pesos (ARP) on 31 December 2009. The analyst compiles the following information about the vehicle:

The result of the sale of the vehicle is most likely:

A. a loss of ARP 15,000.

B. a gain of ARP 15,000.

C. a gain of ARP 18,333.

you are required to show debenture redemption fund a c and debenture redemption fund 617073

Aug 29, 2021 | Uncategorized

Model: Sinking fund method ABC Ltd. issued 4,000, 12% debentures of Rs.100 each at par on 1 April 2008. These debentures are redeemable at the end of 5th year at 10% premium. It was resolved that sinking fund should be formed and invested in 10% development bonds of Rs.100 each. Interest on bonds is payable on 31 March every year. Reference to Sinking Fund Table 3 shows that Rs.0.1638 invested at the end of every year at 10% compound interest will produce Rs.1 at the end of 5th year.

10% Development bonds of the required amount were purchased on different dates at the following prices:

You are required to show debenture redemption fund A/c and debenture redemption fund investment A/c for the first 3 years in the books of ABC Ltd. Accounting year of this company ends on 31 March.

in obtaining an understanding of an entity rsquo s internal control an auditor is re 600356

Aug 29, 2021 | Uncategorized

In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the

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what is the npv of the following cashflows using an effective annual interest rate o 600376

Aug 29, 2021 | Uncategorized

What is the NPV of the following cashflows using an effective annual interest rate of 10% per annum?

place the following instruments in descending order of yield working from the rates 600390

Aug 29, 2021 | Uncategorized

Place the following instruments in descending order of yield, working from the rates quoted: