a.
Provide the reason for charging low interest rate on loan with review report than that off loan with no review report and also explain for charging a low interest rate on the loan that requires audit report
b.
Compute the annual cost of Company M under each loan agreement and also state whether Company M should keep its existing loan or accept the offer provided by the Bank S or Bank F.
c.
State whether Company M should keep its existing loan or accept the offer provided by the Bank S or accept the offer provided by the Bank F.
d.
Explain whether Company M will desire to do audit by ignoring the potential reduction in interest cost.
e.
Explain the way strategic understanding of the client business has the possibility of increasing audit service.
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Auditing And Assurance Services
- The employee credit union at State University is planning the allocation of funds for the coming year. The credit union makes four types of loans to its members. In addition, the credit union invests in risk-free securities to stabilize income. The various revenue-producing investments, together with annual rates of return, are as follows: The credit union will have 2 million available for investment during the coming year. State laws are credit union policies impose the following restrictions on the composition of the loans and investments: Risk-free securities may not exceed 30% of the total funds available for investment. Signature loans may not exceed 10% of the funds invested in all loans (automobile, furniture, other secured, and signature loans). Furniture loans plus other secured loans may not exceed the automobile loans. Other secured loans plus signature loans may not exceed the funds invested in risk-free securities. How should the 2 million be allocated to each of the loan/investment alternatives to maximize total annual return? What is the projected total annual return?arrow_forwardPickles R Us is a pickle farm located in the Northeast. The following transactions take place: A. On November 6, Pickles borrows $820,000 from a bank to cover the initial cost of expansion. Terms of the loan are payment due in six months from November 6, and annual interest rate of 3%. B. On December 12, Pickles borrows an additional $200,000 with payment due in three months from December 12, and an annual interest rate of 10%. C. Pickles pays its accounts in full on March 12, for the December 12 loan, and on May 6 for the November 6 loan. Record the journal entries to recognize the initial borrowings, and the two payments for Pickles.arrow_forwardIn 2020, XYZ Co. has an existing loan in the amount of $1.5 million with an annual interest rate of 9.5%. The company provides an internal company prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace XYZ’s existing loan agreement with a new one, starting 2021. Sadaf Remo Bank has offered to loan XYZ $1.5 million at a rate of 8.5% but would require XYZ to provide financial statements that have been reviewed by an audit firm. Amaranth Bank has offered to loan XYZ $1.5 million at a rate of 7.5% but would require XYZ to provide financial statements that have been audited by an audit firm. The controller of XYZ approached an audit firm, BRONX Partners, and was given an estimated cost of $12,000 to perform a review and $20,000 to perform an audit. The controller of XYZ approached another audit firm, Essen & Co. for an estimate. Essen & Co, has quoted $15,000 to perform a review, and $30,000 to perform an audit. XYZ…arrow_forward
- In 2020, XYZ Co. has an existing loan in the amount of $1.5 million with an annual interest rate of 9.5%. The company provides an internal company prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace XYZ’s existing loan agreement with a new one, starting 2021. Sadaf Remo Bank has offered to loan XYZ $1.5 million at a rate of 8.5% but would require XYZ to provide financial statements that have been reviewed by an audit firm. Amaranth Bank has offered to loan XYZ $1.5 million at a rate of 7.5% but would require XYZ to provide financial statements that have been audited by an audit firm. The controller of XYZ approached an audit firm, BRONX Partners, and was given an estimated cost of $12,000 to perform a review and $20,000 to perform an audit. The controller of XYZ approached another audit firm, Essen & Co. for an estimate. Essen & Co, has quoted $15,000 to perform a review, and $30,000 to perform an audit. XYZ…arrow_forwardIn 2020, XYZ Co. has an existing loan in the amount of $1.5 million with an annual interest rate of 9.5%. The company provides an internal company prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace XYZ’s existing loan agreement with a new one, starting 2021. Sadaf Remo Bank has offered to loan XYZ $1.5 million at a rate of 8.5% but would require XYZ to provide financial statements that have been reviewed by an audit firm. Amaranth Bank has offered to loan XYZ $1.5 million at a rate of 7.5% but would require XYZ to provide financial statements that have been audited by an audit firm. The controller of XYZ approached an audit firm, BRONX Partners, and was given an estimated cost of $12,000 to perform a review and $20,000 to perform an audit. The controller of XYZ approached another audit firm, Essen & Co. for an estimate. Essen & Co, has quoted $15,000 to perform a review, and $30,000 to perform an audit. XYZ…arrow_forwardSummit Record Company is negotiating with two banks for a $134, 000 loan. Fidelity Bank requires a compensating balance of 18 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 9 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent. Compensating balances will be subtracted from the $134,000 in determining the available funds in part a. a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a-2. Which loan should Summit accept? multiple choice 1 Southwest Bank Correct Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $ 24, 120 at each bank in deposits that will serve as compensating balances. Note: Do not round intermediate calculations. Input…arrow_forward
- Charlton Enterprises negotiated a line of credit at the bank that requires it to pay 12.5% interest on its borrowing. The firm is required to maintain a compensating balance equal to 10% of the amount borrowed. The firm borrowed $500,000 during the year. a.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains no deposit balances at the bank.b.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains a deposit balance of $45,000 at the bank. c.Calculate the effective annual rate on the firm’s borrowing if the firm normally maintains a deposit balance of $145,000 at the bank. d.What is the change in the effective annual rate when the deposit balances increase?arrow_forwardJacobi Supply Company recently ran into certain financial difficulties that have resulted in the initiation of voluntary settlement procedures. The firm currently has $150,000 in outstanding debts and approximately $75,000 in liquidatable short-term assets. Indicate, for each of the following plans, whether the plan is an extension, a composition, or a combination of the two. Also indicate the cash payments and timing of the payments required of the firm under each plan. a. Each creditor will be paid 48 cents on the dollar immediately, and the debts will be considered fully satisfied. b. Each creditor will be paid 80 cents on the dollar in two quarterly installments of 50 cents and 30 cents. The first installment is to be paid in 90 days. c. Each creditor will be paid the full amount of its claims in three installments of 40 cents, 30 cents, and 30 cents on the dollar. The installments will be made in 60-day intervals, beginning in 60 days. d. A group of creditors…arrow_forwardCumberland Furniture wishes to establish a prearranged borrowing agreement with its local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalentrevolving credit agreement, the rate is 2.80% over prime with a commitment feeof 0.50% on the average unused balance. With both loans, the required compensating balance is equal to 20% of the amount borrowed. The prime rate is currently 8%. Both agreements have $4 million borrowing limits. The firm expects on average to borrow $2 million during the year no matter which loan agreement it decides to use. What is the effective annual rate under the line of credit? b. What is the effective annual rate under the revolving credit agreement? (Hint: Compute the ratio of the dollars that the firm will pay in interest and commitment fees to the dollars that the firm will effectively have used of.) If the firm does expect to borrow…arrow_forward
- To ensure that, along with spontaneous financing from accounts payable and accruals, adequate short-term financing will be available, Morton plans to establish an unsecured short-term borrowing arrangement with its local bank, Third National. The bank has offered either a line-of-credit agreement or a revolving credit agreement. Third National's terms for a line of credit are an interest rate of 2.50% above the prime rate, and the borrowing must be reduced to zero for a 30-day period during the year. On an equivalent revolving credit agreement, the interest rate would be 3% above prime with a commitment fee of 0.50% on the average unused balance. Under both loans, a compensating balance equal to 20% of the amount borrowed would be required. The prime rate is currently 7%. Both the line-of-credit agreement and the revolving credit agreement would have borrowing limits of $1,000,000. For purposes of his analysis, Morton estimates that Kanton will borrow $600,000 on the average during the…arrow_forwardJacobi Supply Company recently ran into certain financial difficulties that have resulted in the initiation of voluntary settlement procedures. The firm currently has $150,000 in outstanding debts and approximately $75,000 in liquidatable short-term assets. Each creditor will be paid 50 cents on the dollar immediately, and the debts will be considered fully satisfied. Indicate whether the plan is an extension, a composition, or a combination of the two. Also indicate the cash payments and timing of the payments required of the firm under the plan.arrow_forwardSummit Record Company is negotiating with two banks for a $151,000 loan. Fidelity Bank requires a 28 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 14 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent. Compensating balances will be subtracted from the $151,000 in determining the available funds in part a. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Which loan should Summit accept? Recompute the effective cost of interest, assuming that Summit ordinarily maintains $42,280 at each bank in deposits that will serve as compensating balances. Does your choice of banks change if the assumption in part b is correct?arrow_forward
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