Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a new garden tool

EX 10-4 Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 9,000 units at $42 each. The new manufacturing equipment will cost $156,000 and is expected to have a 10-year life and $12,000 residual value. Selling expenses related to the new product are expected to be 5% of sales revenues. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor $7.00
Direct materials 23.40
Fixed factory overhead-depreciation 1.60
Variable factory overhead 3.60
Total $35.60

Determine the net cash flows for the first year of the project, Years 2-9 and for the last year of the project.

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Jarman Consulting Inc. provides financial and estate planning services on a retainer basis for the executive officers of its corporate clients

Jarman Consulting Inc. provides financial and estate planning services on a retainer basis for the executive officers of its corporate clients. It incurred the following labor costs on services for three corporate clients during March 2006:

Direct Labor
Contract 1 $12,000
Contract 2 7,200
Contract 3 28,800
Total $48,000

Jarman allocated March overhead costs of $21,600 to the contracts based on the amount of direct labor costs incurred on each contract.

Required
a. Assuming the revenue from Contract 3 was $65,600, what amount of income did Jarman earn from this contract?
b. Based on the preceding information, will Jarman report finished goods inventory on its balance sheet for Contract 1? If so, what is the amount of this inventory? If not, explain why not.


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You are the controller of Software Company, a distributor of computer software, which is planning to acquire a portion of the net assets

You are the controller of Software Company, a distributor of computer software, which is planning to acquire a portion of the net assets of a product line of Midge Company, a competitor enterprises. The projected acquisition cost is expected to exceed substantially the current fair value of the identifiable net assets to be acquired, which the competitor has agreed to sell because of its substantial net losses of recent years. The board of directors of Software asks if the excess acquisition costs may appropriately be recognized as goodwill.

Prepare a memorandum to the board of directors in answer to the question


Click here for the solution: You are the controller of Software Company, a distributor of computer software, which is planning to acquire a portion of the net assets

The following are various activities an auditor does during audit planning

Auditing P 8-28
The following are various activities an auditor does during audit planning:
1. Send an engagement letter to the client.
2. Tour the client's plant and offices.
3. Compare key ratios for the company to industry competitors.
4. Review managements risk management controls and procedures.
5. Identify potential related parties that may require disclosure.
6. Identify whether any specialists are required for the engagement.
7. Review accounting principles unique to the clients industry.
8. Determine the likely users of the financial statements.

Required:
For each procedure, indicate which of the first four parts of audit planning the procedure primarily relates to:
1. accept client and perform initial audit planning;
2. understand the clients business and industry;
3. assess client business risk;
4. perform preliminary analytical procedures.


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The Owl Corporation is planning for 20X2

The Owl Corporation is planning for 20X2. The firm expects to have the following financial result in 20X1 ($000).

INCOME STATEMENT
$ %
Revenue $37,483 100.0
COGS 14,807 39.5
Gross margin $22,676 60.5
Expense 17,721 47.3
EBIT $4,955 13.2
Interest $1,380 3.7
EBT $3,575 9.5
Income tax 1,430 3.8
EAT $2,145 5.7

BALANCE SHEET
ASSETS LIABILITIES & EQUITY
CASH $1,571 ACCTS. PAY. $1,388
ACCTS. REC 6,247 ACCRUALS 985
INVENTORY 2,468 CURR. LIAB. $2,373
CURR. ASSETS $10,286
FIXED ASSETS CAPITAL
GROSS $25,608 DEBT $12,390
ACCUM. DEP. (14,936) EQUITY 6,195
NET $10,672 $18,585
TOTAL ASSETS $20,958 TOTAL L & E $20,958

Management has made the following planning assumptions:

Income Statement
• Revenue will grow by 10%
• The cost ratio will improve to 37% of revenues.
• Expenses will be held to 44% of revenues.

Balance Sheet
• The year end cash balance will be $1.5 million.
• The ACP will improve to 40 days from the current 60.
• Inventory turnover will improve to 7X from 6X.
• Trade payables will continue to be paid in 45 days.
• New capital spending will be $5 million.
• Newly purchased assets will be depreciated over 10 years using the straight-line method taking a full year’s depreciation in the first year.
• The company’s payroll will be $13.7 million at the end of 20X2.
• No dividends or new stock sales are planned.

The following facts are also available:
• The firm pays 10% interest on all of its debt.
• The combined state and federal income tax rate is a flat 40%.
• The only significant payables come from inventory purchases, and product cost is 75% purchased materials.
• Existing assets will be depreciated by $1,727,000 next year.
• The only significant accrual is payroll. The last day of 20X2 will be one week after a payday.

Forecast Owl’s income statement and balance sheet for 20X2. Round all calculations to the nearest $1,000 and use a 360-day year.


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Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2009

P 9.35 Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2009. Henderson Energy is regulated by the state utility commission and because it is a publicly traded company the audited financial statements must be filed with the Securities and Exchange Commission (SEC).

Henderson Energy is considerably more profitable than many of its competitiors, largely due to its extensive investment in information technologies used in its energy distribution and other key business processes. Recent growth into rural markets, however, has placed some strain on 2009 operations. Additionally, Henderson Energy expanded its investments into speculative markets and is also making greater use of derivative and hedging transactions to mitigate some of its investment risks, Because of the complexities of the underlying accounting associated with these activities, Henderson Energy added several highly experienced accountants within its financial reporting team. Internal audit, which has didrect reporting responsibility to the audit committee, is also actively involved in reviewing key accounting assumptions and estimates on a quarterly basis.

Whiteheads discussions with the predeccessor auditor revealed that the client has experienced some difficulty in correctly tracking existing property, plant, and equipment items. This largely involves equipment located at its multiple energy production facilities. During the recent year, Henderson acquired a regional electric company, which expanded the number of energy production facilities.
Whitehead plans to staff the audit engagement with several members of the firm who have experience in auditing energy and public companies. The extent of partner review of key accounts will be extensive.

Based the above information, identify factors that affect the risk of material misstatement in the December 31, 2009 financial statements of Henderson Energy. Indicate whether the factor increases or decreases the risk of material misstatement. Also, identify which audit risk model component is affected by the factor. Use the format below:

Factor-Effect on the Risk of Material Misstatement-Audit Risk ModelcComponent
Henderson is a new client - Increases - Inherent risk

Click here for the solution: Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2009

Tylon's Hardware uses a flexible budget to develop planning information for its warehouse operations

Tylon's Hardware uses a flexible budget to develop planning information for its warehouse operations. For 20X2, the company anticipated that it would have 96,000 sales units for 664 customer shipments. Average storage bin usage for various inventories was estimated to be 200 per day. The costs and cost drivers were determined to be as follows:

Item Fixed Variable Cost driver

Product handling $10,000 $1.25 per 100 units

Storage - 3.00 per storage bin

Utilities 1,000 1.50 per 100 units

Shipping clerks 1,000 1.00 per shipment

Supplies - 0.50 per shipment

During the year, the warehouse processed 90,000 units for 600 customer shipments. The workers used 225 storage bins on average each day to sort, store, and process goods for shipment. The actual costs for 20X2 were:

Item Actual costs

Product handling $10,900

Storage 465

Utilities 2,020

Shipping clerks 1,400

Supplies 340

Question 1: Determine the 20X2 static budget variances.

Question 2: Determine the 20X2 flexible budget variances.

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