Accounting Practical Questions

10. If 12,500 units are produced, what is the total amount of fixed manufacturing cost incurred to support this level of production?

With regards to the differentiating useful lives, the engagement team failed to assess whether the management determined useful lives of plant and equipment were in line with other manufactures in the industry; relying on a discussion with management is not sufficient evidence for the engagement. According to AS 12, the engagement team is to “obtain an understanding of the company and its environment.” If the team failed to prepare adequately (in order to perform an accurate inspection of tangible assets) for the engagement, an outside specialist should have been contracted to determine the condition of the plant and equipment in order to evaluate management’s assertions on useful life. Finally, the audit team needs to look at past data pertaining to useful life calculations to determine if there were any significant departures in estimates; this is due to the sudden change in useful life estimates made this year. If any discrepancies are discovered, additional tests should be performed.

Estimate the project’s operating cash flows for each year of the project’s economic life. (Hint: Use Table 2 as a guide)

These amounts of tax savings should be added to the incremental cost savings for each year to come up with the total cash inflows. The present value of all these cash inflows and outflows can be calculated by discounting them at 12.19%. This rate is calculated by assuming that the purchasing power parity holds in this scenario. The company can do the feasibility analysis by looking at both from the subsidiary’s and parent’s perspective by assuming that the purchasing power parity holds. Hence, this rate can be regarded as opportunity cost of investment because it is the second best alternative for the company for investment purposes.

Lessee Ltd., a British company that applies IFRSs, leased equipment from Lessor Inc. on January 1, 2007, for a period of three years. Lease payments of $100,000 are due to Lessor Inc. each year. Other expenses (e.g., insurance, taxes, and maintenance) are also to be paid by Lessee Ltd. and amount to $2,000 per year. The lessor did not incur any initial direct costs. The lease contains no purchase or renewal options and the equipment reverts back to Lessor Inc. on the expiration of the lease. The remaining useful life of the equipment is four years. The fair value of the equipment at lease inception is $265,000. Lessee Ltd. has guaranteed $20,000 as the

* Since the fair value of investment is less than its cost, the Company should proceed to step 2 for identifying and accounting for impairment. However, there is no indication that OTT does not expect the fair value of the security to fully recover before the expected time of sale. The Company actually does not believe the decline in price to be permanent. In addition, it does not intend to sell this investment in the

i. In 1985 the cash inflow caused by the tax shelter from depreciation will be calculated using the existing 46% rate. In 1986 that tax rate will be reduced to 34% and the equipment will be sold that year so cash inflows from the old equipment will terminate that same year.

Panner, Inc., owns 20 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $84,700 and then sells it to Watkins for $121,000. At the end of the year, Watkins still holds only $26,000 of merchandise. What amount of unrealized gross profit must Panner defer in reporting this investment using the equity method?

A) Cash 14,000 Office Equipment , 7,000 B. Tanner, Capital , , , , 21,000

|5B | |Journalize a series of equipment transactions related to purchase, sale, retirement, | |Moderate | |40–50 |

Tampa Foundry began operations during the current year, manufacturing various products for industrial use. One such product is light-gauge aluminum, which the company sells for $36 per roll. Cost information for the year just ended follows.

6. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at

be used has a 3-year tax life, would be depreciated on a straight-line basis over the project’s 3-

Capital needed for this venture has been estimated to be $400,000. The majority of the costs are associated with the machinery,

Superior Manufacturing is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at $80,000 a year. The project requires a new plant that will cost a total of $1,000,000, which will be depreciated straight line over the next five years. The new line will also require an additional net investment in inventory and receivables in the amount of $200,000. Assume there is no need for additional investment in building and land for the project. The firm's marginal tax rate is 35%, and its cost of capital is 10%. 1. Prepare a statement showing the