The following data (in thousands of dollars) have been taken from the accounting records of the Maroon Corporation for the just completed year

The following data (in thousands of dollars) have been taken from the accounting records of the Maroon Corporation for the just completed year.

Sales 1,200
Raw materials inventory, beginning 25
Raw materials inventory, ending 50
Purchases of raw materials 180
Direct labor 230
Manufacturing overhead 250
Administrative expenses 400
Selling expenses 200
Work in process inventory, beginning 150
Work in process inventory, ending 120
Finished goods inventory, beginning 100
Finished goods inventory, ending 110

Use the above data to prepare (in thousands of dollars) a schedule of Cost of Goods Manufactured and a Schedule of Cost of Goods Sold for the year. In addition, what is the impact on the financial statements if the ending finished goods inventory is overstated or understated?


Click here for the solution: The following data (in thousands of dollars) have been taken from the accounting records of the Maroon Corporation for the just completed year

Sarah Robertson, CPA had been the auditor of Majestic Co. for several years

Auditing P 5-27 Sarah Robertson, CPA had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2008, Herb Majestic told her that he needed a large bank loan to "tide him over" until sales picked up as expected late 2009. In the course of the audit, Robertson discovered that the financial situation at Majestic was worse than Majestic had revealed and that the company was technically bankrupt. She discussed the situation with Majestic, who pointed out that the bank loan will "be his solution"-he was sure he will get it as long as the financial statements don't look too bad. Robertson stated that she believed the statements will have to include a going concern explanatory paragraph, Majestic said that this wasn't needed because the bank loan was so certain and that inclusion of the going concern paragraph will certainly cause the management of the bank to change its mind about the loan. Robertson finally acquiesced and the audited statements were issued without a going concern paragraph. The company received the loan, but things did not improve as Majestic thought they would and the company filed for bankruptcy in August 2009. The bank sued Sarah Robertson for fraud. Required: Indicate whether or not you think the bank will succeed. Support your answer.


Click here for the solution: Sarah Robertson, CPA had been the auditor of Majestic Co. for several years

Often, questions have been raised "regarding the responsibility of the independent auditor for the auditor for the discovery of fraud

Auditing P 6-22 Often, questions have been raised "regarding the responsibility of the independent auditor for the auditor for the discovery of fraud (including misappropriation of assets and fraudulent financial reporting), and concerning the proper course of conduct of the independent auditor when his or her audit discloses specific circumstances that arouse suspicion as to the existence of fraud."

Required:
a. What are (1) the function and (2) the responsibilities of the independent auditor in the audit of financial statements? Discuss fully, but in this part do not include fraud in the discussion.
b. What are the responsibilities of the independent auditor for the detection of fraud? Discuss fully.
c. What is the independent auditor's proper course of conduct when the audit discloses specific circumstances that arouse suspicion as to the existence of fraud?


Click here for the solution: Often, questions have been raised "regarding the responsibility of the independent auditor for the auditor for the discovery of fraud

For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc., which is a continuing client

Problem 15-40 For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc., which is a continuing client. Jocelyn has assessed the control risk for the company at the maximum for all financial statement assertions involving investments. Consequently, the ICFR audit report will indicate material weaknesses and rather than relying on ICFR during the financial statement audit, all audit evidence will come from substantive procedures. Jocelyn determines that Rogers is unable to exercise significant influence over any investee and there are no related parties.

Morris receives an investment analysis from Rogers’s management revealing the following:
• There is a notation indicating that all securities either are in the treasurer’s safe or held by an independent bank custodian.
• Investments are classified as current or non-current.
• The beginning and ending balances are shown at cost and market.
• Unamortized premiums or discounts are associated with bonds.
• The face amount of bonds or number of shares of stock are given for the beginning and ending of the year.
• Accrued investment income for each investment at the beginning and ending of the year is presented.
• Investment income earned and collected is presented.
• Valuation allowances at the beginning and ending of the year are shown.
• Any sales or additions to portfolios for the year include date, number of shares, face amount of bonds, proceeds, cost, and realized gain/loss.

Required: Explain the audit objective for each of the listed management financial statement assertions relative to investments.

Assertion Audit Objective
1. Existence
2. Completeness
3. Rights
4. Valuation/allocation
Presentation and Disclosure


Click here for the solution: For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc., which is a continuing client

Frank Lou had recently been promoted to construction manager at a development firm

Fraud Case 14-1 Frank Lou had recently been promoted to construction manager at a development firm. He was responsible for dealing with contractors who were bidding on a multi-million dollar excavation job for the new high-rise. Times were tough, several contractors had gone under recently, and the ones left standing were viciously competitive. That morning, four bids were sitting on Frank’s desk. The deadline was midnight, and the bids would be opened the next morning. The first bidder, Bo Freely, was a tough but personable character that Frank had known for years. Frank had lunch with him today, and after a few beers, Bo hinted that if Frank "inadvertently" mentioned the amount of the lowest bid, he'd receive a "birthday card" with a gift of cash. After lunch, Frank carefully unsealed the bids and noticed that another firm had underbid Bo's company by a small margin. Frank took Bo's bid envelope, wrote the low bid amount in pencil on it, and carried it downstairs where Bo's son William was waiting. Later that afternoon, a new bid came in from Bo's company. The next day, Bo's company got the job, and Frank got a birthday card in his mailbox.

Requirements
• Was Frank's company hurt in any way by this fraudulent action?
• How could this action hurt Frank?
• How can a business protect against this kind of fraud?


Click here for the solution: Frank Lou had recently been promoted to construction manager at a development firm

Doctors Maben, Orlando, and Clark have been in a group practice for several years

BTN 12-3 Doctors Maben, Orlando, and Clark have been in a group practice for several years. Maben and Orlando are family practice physicians, and Clark is a general surgeon. Clark receives many referrals for surgery from his family practice partners. Upon the partnership’s original formation, the three doctors agreed to a two-part formula to share income. Every month each doctor receives a salary allowance of $3,000. Additional income is divided according to a percent of patient charges the doctors generate for the month. In the current month, Maben generated 10% of the billings, Orlando 30%, and Clark 60%. The group’s income for this month is $50,000. Clark has expressed dissatisfaction with the income-sharing formula and asks that income be split entirely on patient charge percents.

Required
1. Compute the income allocation for the current month using the original agreement.
2. Compute the income allocation for the current month using Clark’s proposed agreement.
3. Identify the ethical components of this partnership decision for the doctors.

Click here for the solution: Doctors Maben, Orlando, and Clark have been in a group practice for several years

Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts

10. Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts:

Cash = $5 million
Government securities = $7 million
Mortgage loans = $30 million
Other loans = $50 million
Fixed assets = $10 million
Intangible assets = $4 million
Loan-loss reserves = $5 million
Owners’ equity = $5 million
Trust-preferred securities = $3 million

Cash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms of riskiness.

a. Calculate the equity capital ratio.
b. Calculate the Tier 1 Ratio using risk-adjusted assets.
c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk-adjusted assets.

Click here for the solution: Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts

Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC)

Case 13-32 (Ethics and the Manager; Shut Down or Continue Operations) Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Rocky Mountain Region has three check processing centers, which are located in Billings, Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey. Immediately after assuming her new position, Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region's controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows:

AND SO ON

Required:
1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing centers in the region? Explain.
2. Do you think Haley Romeros's decision to shut down the Clayton facility is ethical? Explain.
3. What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services?

Click here for the solution: Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC)

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country

Case 9-30 Master Budget with Supporting Schedules

EARRINGS UNLIMITED

Minimum ending cash balance $50,000
Selling price $10

Recent and forecast sales: January (actual) 20,000 February (actual) 26,000 March (actual) 40,000 April 65,000 May 100,000 June 50,000 July 30,000 August 28,000 September 25,000

Desired ending inventories (percentage 40% of next month's sales)
Cost of earrings 4

Purchases paid as follows: In month of purchase 50% In following month 50% Collection on sales: Sales collected current month 20% Sales collected following month 70% Sales collected 2nd month following 10% Variable monthly expenses: Sales commissions (% of sales) 4% Fixed monthly expenses:
Advertising 200,000
Rent 18,000
Salaries 106,000
Utilities 7,000
Insurance (12 months paid in November) 3,000
Depreciation 14,000
Equipment purchased in May 16,000
Equipment purchased in June 40,000
Dividends declared each quarter 15,000

Balance sheet at March 31:
Assets Cash $74,000
Accounts receivable 346,000
Inventory 104,000
Prepaid insurance 21,000
Property and equipment (net) 950,000
Total assets $1,495,000

Liabilities and Stockholders' Equity
Accounts payable $100,000
Dividends payable 15,000
Capital stock 800,000
Retained earnings 580,000
Total liabilities and stockholders' equity $1,495,000

Agreement with Bank:
Borrowing increments $1,000
Interest rate per month 1%
Repayment increments $1,000
Total of interest paid each quarter 100%
Required minimum cash balance $50,000

Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchase, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.XX

Click here for the solution: You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country

The ledger of Chopin Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared

E3-5 (Adjusting Entries) The ledger of Chopin Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $ 8,400
Notes Payable 20,000
Unearned Rent Revenue 6,300
Rent Revenue 60,000
Interest Expense –0–
Wage Expense 14,000

An analysis of the accounts shows the following.
1. The equipment depreciates $250 per month.
2. One-third of the unearned rent was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $650.
5. Insurance expires at the rate of $300 per month.

Instructions
Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense; Insurance Expense; Interest Payable; and Supplies Expense. (Omit explanations.)

Click here for the solution: The ledger of Chopin Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared

As loan analyst for Madison Bank, you have been presented the following information

E24-4 (Ratio Computation and Analysis; Liquidity) As loan analyst for Madison Bank, you have been presented the following information.

Plunkett Co. Herring Co.
Assets
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets 910,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000

Liabilities and Stockholders’ Equity
Current liabilities $ 300,000 $ 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings 710,000 902,000
Total liabilities and stockholders’ equity $1,410,000 $1,752,000

Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%

Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.

Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.

Click here for the solution: As loan analyst for Madison Bank, you have been presented the following information