Tappit Corp. is a medium sized wholesaler of automotive parts. It has ten stockholders who have been paid a total of $1 million in cash dividends for eight consecutive years. That board’s policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Tappit’s current year’s statement of cash flows must exceed $1 million. President and CEO Willie Morton’s job is secure so long as he produces annual operating cash flows to support the usual dividend.
At the end of the current year, controller Robert Jennings presents president Willie Morton with some disappointing news: The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Robert, "We must get amount above $1 million. Isn’t there some way to increase operating cash flow by another $30,000?" Robert answers, "These figures were prepared by my assistant. I’ll go back to my office and see what I can do." The president replies, "I know you won’t let me down, Robert."
Upon close scrutiny of the statement of cash flows, Robert concludes that he can get the operating cash flows above $1 million by reclassifying a $60,000, 2-year note payable listed in the financing activities section as "Proceeds from bank loan - $60,000." He will report the note instead as "Increase in payables-$60,000" and treat it as an adjustment of net income in the operating activities section. He returns to the president, saying, "You can tell the board to declare their usual dividend. Our net cash flow provided by operating activities is $1,030,000." "Good man, Robert! I knew I could count on you," exults the president.
Instructions:
(a) Who are the stakeholders in this situation?
(b) Was there anything unethical about the president’s actions?
(c) Was there anything unethical about the controller’s actions? Are the board members or anyone else likely to discover the misclassification?
Click here for the solution: Tappit Corp. is a medium sized wholesaler of automotive parts
Showing posts with label parts. Show all posts
Showing posts with label parts. Show all posts
Wednesday, October 14, 2015
Sunday, September 27, 2015
You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet aircraft
Ethics Case 17-6 401(k) plan contributions
You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet aircraft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees' contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.
While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm's investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.”
Required:
1. What is Mr. Maxwell's apparent motivation for the change in the way contributions are handled?
2. Do you perceive an ethical dilemma?
Click here for the solution: You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet aircraft
You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet aircraft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees' contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.
While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm's investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.”
Required:
1. What is Mr. Maxwell's apparent motivation for the change in the way contributions are handled?
2. Do you perceive an ethical dilemma?
Click here for the solution: You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet aircraft
Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training
Integrating Case 16–5 Tax effects of accounting changes and error correction; six situations
Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.
b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2010.
d. At the end of 2010, the company failed to accrue $15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.
e. At the beginning of 2009, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining-balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight-line method.
f. Additional industrial robots were acquired at the beginning of 2008 and added to the company's assembly process. The $1,000,000 cost of the equipment was inadvertently recorded as repair expense. Robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method for both financial reporting and income tax reporting.
Required:
For each situation:
1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2011 related to the situation described. Any tax effects should be adjusted for through the deferred tax liability account.
3. Briefly describe any other steps that should be taken to appropriately report the situation.
Click here for the solution: Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training
Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.
b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2010.
d. At the end of 2010, the company failed to accrue $15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.
e. At the beginning of 2009, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining-balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight-line method.
f. Additional industrial robots were acquired at the beginning of 2008 and added to the company's assembly process. The $1,000,000 cost of the equipment was inadvertently recorded as repair expense. Robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method for both financial reporting and income tax reporting.
Required:
For each situation:
1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change.
2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2011 related to the situation described. Any tax effects should be adjusted for through the deferred tax liability account.
3. Briefly describe any other steps that should be taken to appropriately report the situation.
Click here for the solution: Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training
Tuesday, September 8, 2015
SSG Cycles manufactures and distributes motorcycle parts and supplies
E 19-8 Stock options
SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on January 1, 2011. The options permit holders to acquire 12 million of the company's $1 par common shares for $11 within the next six years, but not before January 1, 2014 (the vesting date). The market price of the shares on the date of grant is $13 per share. The fair value of the 12 million options, estimated by an appropriate option pricing model, is $3 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Prepare the appropriate journal entries to record compensation expense on December 31, 2011, 2012, and 2013.
3. Record the exercise of the options if all of the options are exercised on May 11, 2015, when the market price is $14 per share.
Click here for the solution: SSG Cycles manufactures and distributes motorcycle parts and supplies
SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on January 1, 2011. The options permit holders to acquire 12 million of the company's $1 par common shares for $11 within the next six years, but not before January 1, 2014 (the vesting date). The market price of the shares on the date of grant is $13 per share. The fair value of the 12 million options, estimated by an appropriate option pricing model, is $3 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Prepare the appropriate journal entries to record compensation expense on December 31, 2011, 2012, and 2013.
3. Record the exercise of the options if all of the options are exercised on May 11, 2015, when the market price is $14 per share.
Click here for the solution: SSG Cycles manufactures and distributes motorcycle parts and supplies
Thursday, July 30, 2015
Kelvin Aerospace, Inc., manufactures parts such as rudder hinges for the aerospace industry
Kelvin Aerospace, Inc., manufactures parts such as rudder hinges for the
aerospace industry. The company uses a job-order costing system with a
predetermined plantwide overhead rate based on direct labor-hours. On
December 16, 2008, the company's controller made a preliminary estimate
of the predetermined overhead rate for the year 2009. The new rate was
based on the estimated total manufacturing overhead cost of $3,402,000
and the estimated 63,000 total direct labor-hours for 2009:
Predetermined overhead rate =3,402,000
63,000 hours
= $54 per direct labor – hour
This new predetermined overhead rate was communicated to top managers in a meeting on December 19. The rate did not cause any comment because it was within a few pennies of the overhead rate that had been used during 2008. One of the subjects discussed at the meeting was a proposal by the production manager to purchase an automated milling machine built by Sunghi Industries. The president of Kelvin Aerospace, Harry Arcany, agreed to meet with the sales representative from Sunghi Industries to discuss the proposal.
On the day following the meeting, Mr. Arcany met with Jasmine Chang, Sunghi Industries' sales representative. The following discussion took place:
Arcany: Wally, our production manager, asked me to meet with you because he is interested in installing an automated milling machine. Frankly, I'm skeptical. You're going to have to show me this isn't just another expensive toy for Wally's people to play with.
Chang: This is a great machine with direct bottom-line benefits. The automated milling machine has three major advantages. First, it is much faster than the manual methods you are using. It can process about twice as many parts per hour as your present milling machines. Second, it is much more flexible. There are some up-front programming costs, but once those have been incurred, almost no setup is required to run a standard operation. You just punch in the code for the standard operation, load the machine's hopper with raw material, and the machine does the rest.
Arcany: What about cost? Having twice the capacity in the milling machine area won't do us much good. That center is idle much of the time anyway.
Chang: I was getting there. The third advantage of the automated milling machine is lower cost. Wally and I looked over your present operations, and we estimated that the automated equipment would eliminate the need for about 6,000 direct labor-hours a year. What is your direct labor cost per hour?
Arcany: The wage rate in the milling area averages about $32 per hour. Fringe benefits raise that figure to about $41 per hour.
Chang: Don't forget your overhead.
Arcany: Next year the overhead rate will be $54 per hour.
Chang: So including fringe benefits and overhead, the cost per direct labor-hour is about $95.
Arcany: That's right.
Chang: Since you can save 6,000 direct labor-hours per year, the cost savings would amount to about $570,000 a year. And our 60-month lease plan would require payments of only $348,000 per year.
Arcany: That sounds like a no-brainer. When can you install the equipment?
Shortly after this meeting, Mr. Arcany informed the company's controller of the decision to lease the new equipment, which would be installed over the Christmas vacation period. The controller realized that this decision would require a recomputation of the predetermined overhead rate for the year 2009 because the decision would affect both the manufacturing overhead and the direct labor-hours for the year. After talking with both the production manager and the sales representative from Sunghi Industries, the controller discovered that in addition to the annual lease cost of $348,000, the new machine would also require a skilled technician/programmer who would have to be hired at a cost of $50,000 per year to maintain and program the equipment. Both of these costs would be included in factory overhead. There would be no other changes in total manufacturing overhead cost, which is almost entirely fixed. The controller assumed that the new machine would result in a reduction of 6,000 direct labor-hours for the year from the levels that had initially been planned.
When the revised predetermined overhead rate for the year 2009 was circulated among the company's top managers, there was considerable dismay.
Requirement 1:Recompute the predetermined rate assuming that the new machine will be installed. (Round your answer to 2 decimal places.
Requirement 2:What effect (if any) would this new rate have on the cost of jobs that do not use the new automated milling machine?
Requirement 3:Why would managers be concerned about the new overhead rate?
Requirement 4:After seeing the new predetermined overhead rate, the production manager admitted that he probably wouldn't be able to eliminate all of the 6,000 direct labor-hours. He had been hoping to accomplish the reduction by not replacing workers who retire or quit, but that had not been possible. As a result, the real labor savings would be only about 2,000 hours—one worker. Compute the net increase or decrease in annual manufacturing overhead cost considering 2,000 hours saving.
Click here for the solution: Kelvin Aerospace, Inc., manufactures parts such as rudder hinges for the aerospace industry
Predetermined overhead rate =3,402,000
63,000 hours
= $54 per direct labor – hour
This new predetermined overhead rate was communicated to top managers in a meeting on December 19. The rate did not cause any comment because it was within a few pennies of the overhead rate that had been used during 2008. One of the subjects discussed at the meeting was a proposal by the production manager to purchase an automated milling machine built by Sunghi Industries. The president of Kelvin Aerospace, Harry Arcany, agreed to meet with the sales representative from Sunghi Industries to discuss the proposal.
On the day following the meeting, Mr. Arcany met with Jasmine Chang, Sunghi Industries' sales representative. The following discussion took place:
Arcany: Wally, our production manager, asked me to meet with you because he is interested in installing an automated milling machine. Frankly, I'm skeptical. You're going to have to show me this isn't just another expensive toy for Wally's people to play with.
Chang: This is a great machine with direct bottom-line benefits. The automated milling machine has three major advantages. First, it is much faster than the manual methods you are using. It can process about twice as many parts per hour as your present milling machines. Second, it is much more flexible. There are some up-front programming costs, but once those have been incurred, almost no setup is required to run a standard operation. You just punch in the code for the standard operation, load the machine's hopper with raw material, and the machine does the rest.
Arcany: What about cost? Having twice the capacity in the milling machine area won't do us much good. That center is idle much of the time anyway.
Chang: I was getting there. The third advantage of the automated milling machine is lower cost. Wally and I looked over your present operations, and we estimated that the automated equipment would eliminate the need for about 6,000 direct labor-hours a year. What is your direct labor cost per hour?
Arcany: The wage rate in the milling area averages about $32 per hour. Fringe benefits raise that figure to about $41 per hour.
Chang: Don't forget your overhead.
Arcany: Next year the overhead rate will be $54 per hour.
Chang: So including fringe benefits and overhead, the cost per direct labor-hour is about $95.
Arcany: That's right.
Chang: Since you can save 6,000 direct labor-hours per year, the cost savings would amount to about $570,000 a year. And our 60-month lease plan would require payments of only $348,000 per year.
Arcany: That sounds like a no-brainer. When can you install the equipment?
Shortly after this meeting, Mr. Arcany informed the company's controller of the decision to lease the new equipment, which would be installed over the Christmas vacation period. The controller realized that this decision would require a recomputation of the predetermined overhead rate for the year 2009 because the decision would affect both the manufacturing overhead and the direct labor-hours for the year. After talking with both the production manager and the sales representative from Sunghi Industries, the controller discovered that in addition to the annual lease cost of $348,000, the new machine would also require a skilled technician/programmer who would have to be hired at a cost of $50,000 per year to maintain and program the equipment. Both of these costs would be included in factory overhead. There would be no other changes in total manufacturing overhead cost, which is almost entirely fixed. The controller assumed that the new machine would result in a reduction of 6,000 direct labor-hours for the year from the levels that had initially been planned.
When the revised predetermined overhead rate for the year 2009 was circulated among the company's top managers, there was considerable dismay.
Requirement 1:Recompute the predetermined rate assuming that the new machine will be installed. (Round your answer to 2 decimal places.
Requirement 2:What effect (if any) would this new rate have on the cost of jobs that do not use the new automated milling machine?
Requirement 3:Why would managers be concerned about the new overhead rate?
Requirement 4:After seeing the new predetermined overhead rate, the production manager admitted that he probably wouldn't be able to eliminate all of the 6,000 direct labor-hours. He had been hoping to accomplish the reduction by not replacing workers who retire or quit, but that had not been possible. As a result, the real labor savings would be only about 2,000 hours—one worker. Compute the net increase or decrease in annual manufacturing overhead cost considering 2,000 hours saving.
Click here for the solution: Kelvin Aerospace, Inc., manufactures parts such as rudder hinges for the aerospace industry
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