Accounting 381

Project #2 Intermediate Accounting Research

 

Due: March 14th at 5:30 pm, Submit Via D2L

 

Background

In an effort to simplify research, the Financial Accounting Standards Board (FASB) organized and consolidated authoritative generally accepted accounting principles (GAAP) for nongovernmental entities into the FASB Accounting Standards Codification (“ASC” or the “Codification”). This process, which took over 5 years to complete, changed a standards-based model (with thousands of individual standards) to a topically based model (with roughly 90 topics). The intent of the Codification was to reduce the amount of time and effort required to solve an accounting research issue, mitigate the risk of noncompliance through improved usability of the literature, and provide accurate information with real-time updates as Accounting Standards Updates are released. (FASB ASC, About the Codification )

 

 

Assignment – Part 1

To introduce Accounting 381 students to the Codification, you will be required to read Chapter 1 of Shelby Collins ’Guide to Intermediate Accounting Research . Please document your answers from this text to the following questions, length of responses will not be considered in grading (quality over quantity!):

 

 

Chapter 1 – Review Questions:

#1-5, 13, 15-17, and 19-20

 

 

Chapter 1 – Exercises:

#1, 3, 4, 6a, 25 and 26d

 

Assignment – Part 2

To introduce Accounting 381 students to the responsibility and obligation of CPAs to perform research in the Codification, you will be required to analyze the case below:

 

You are newly certified public accountants recently hired by Williams Certified Public Accountants, LLP. Your client, Magnificent Marketers (MM) needs guidance on the application of the correct FASB pronouncement related to their situation. Your direct supervisor wants you to research the authoritative guidance related to this situation and determine the proper course of action before meeting with your client.

Magnificent Marketers (MM) is a marketing company that offers a variety of marketing offerings to its customers. Specifically:

 

· MM will create a TV commercial for $1M, build an app for $500K, and build a Facebook page for $250K. These amounts represent MM’s charges for these items when MM sells them separately to customers. The TV commercial, the app, and the Facebook page are not interrelated; that is, each functions independently of the other offerings.

· If a customer purchases all aforementioned items together, the total cost is $1.5M. Payment terms are 50 percent consideration due at contract signing, with the remaining 50 percent due over the rest of the development period (25 percent at mid-point, 25 percent at completion).

 

Stone, a customer, approaches MM with the hopes of reinventing its image to a younger customer base. Stone has a verbal agreement with MM that is based on MM’s unsigned quote to Stone on November 30, 20X8, for one TV commercial, one app, and a Facebook page. The agreement creates

enforceable rights and obligations pursuant to MM’s customary business practices. None of these items can be redirected by MM to another customer. MM performed a credit check on Stone and has determined that Stone has the intention and ability to pay MM for fulfilling its portion of the contract. Stone is required to pay MM for performance completed to date if Stone cancels the contract with MM for reasons other than MM’s failure to perform under the contract as promised. MM does not think

that the app will be downloaded 500K times in the first month because Stone’s customer base does not quickly accept newly developed technology. On the basis of its experience with similar technology, MM has determined that it takes over three months for Stone’s users to begin to download its apps.

 

MM’s CFO is trying to understand the new revenue recognition model and has turned to your firm to explain how MM would account for the above scenario under the new standard

Required for Part 2:

Each student must turn in their own solutions to this case, which needs to be written in your own words. However, since this is an out of class assignment, you may consult with other students if you need direction. To assure fairness to all students, instructor assistance on this case will not be available. The analysis required below should be NO longer than three pages, there is no minimum length requirement. Please be clear and concise with your responses.

 

1) List the Area and Topic number from the Codification that you will be researching to resolve your clients’ question.

2) Cite the proper ASC (XXX)-(YY)-(ZZ)-(PP) that lists the five-step revenue recognition process as set forth in the Codification.

3) For each of the five steps in the process , analyze in detail and support your conclusion for your client’s situation by citing the proper Codification reference as follows ASC

(XXX)-(YY)-(ZZ)-(PP). Specifically, include:

a. Step One – Is there a contract?

b. Step Two– Identify the performance obligations.

c. Step Three-Determine the transaction price.

d. Step Four-Allocate the transaction price to the performance obligations.

e. Step Five-Recognize revenue when (or as) the entity satisfies a performance obligation. Please just define the decision making process used to determine if revenue should be recognized over time or at a point in time and cite the proper Codification reference. The case above does not give you enough specifics to determine a specific course of action. However, it is your responsibility to give your client all the detail to draw their own conclusion.

 

Grading:

There will be three levels of achievable points related to this project:

 

Level 1: 20 points -substantial effort displayed related to the requirements for Parts 1 and 2. Thoroughly documented answers to the questions in Part 1 and in Part 2, four or more of the five-steps of the new revenue recognition process were properly addressed and cited. The project was well researched, properly documented, and showed proper grammatical usage.

 

Level 2: 10 points – partially address the requirements for Part 1 and Part 2. Incomplete/incorrect answers were documented in Part 1 and/or only three of the five-steps of the new revenue recognition process were properly addressed and cited in Part 2. However, the project showed an honest attempt to complete the requirements along with proper grammatical usage.

 

Level 3: 0 points– significantly lack of effort related to the requirements of the project. Incomplete/incorrect answers were documented in Part 1 and/or only two or less of the five steps of the new recognition process were properly addressed and cited in Part 2.

 

FASB Codification Access:

You may access the FASB Codification database through the American Accounting Association by logging in at http://www2.aaahq.org/ascLogin.cfm using the following:

Student Access: Username – AAA51686 Password – 7SMnx5J

 

Kieso Textbook Guidance: Chapter 18 – Revenue Recognition

 

"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"

P8–9 Rate of return, standard deviation, and coefficient of variation Mike is searching

for a stock to include in his current stock portfolio. He is interested in Hi-Tech,

Inc.; he has been impressed with the company’s computer products and believes

that Hi-Tech is an innovative market player. However, Mike realizes that any

time you consider a technology stock, risk is a major concern. The rule he follows

is to include only securities with a coefficient of variation of returns below 0.90.

Mike has obtained the following price information for the period 2012 through

2015. Hi-Tech stock, being growth-oriented, did not pay any dividends during these

4 years.

Stock price

Year Beginning End

2012 $14.36 $21.55

2013 21.55 64.78

2014 64.78 72.38

2015 72.38 91.80

a. Calculate the rate of return for each year, 2012 through 2015, for Hi-Tech stock.

b. Assume that each year’s return is equally probable, and calculate the average return

over this time period.

c. Calculate the standard deviation of returns over the past 4 years. (Hint: Treat

these data as a sample.)

d. Based on b and c, determine the coefficient of variation of returns for the security.

e. Given the calculation in d, what should be Mike’s decision regarding the inclusion

of Hi-Tech stock in his portfolio?

 

P8–14 Portfolio analysis You have been given the expected return data shown in the first

table on three assets—F, G, and H—over the period 2016–2019.

Expected return

Year Asset F Asset G Asset H

2016 16% 17% 14%

2017 17 16 15

2018 18 15 16

2019 19 14 17

Alternative Investment

1 100% of asset F

2 50% of asset F and 50% of asset G

3 50% of asset F and 50% of asset H

Asset

Expected

return, r

Risk (standard

deviation), sr

V 8% 5%

W 13 10

Using these assets, you have isolated the three investment alternatives shown in the

following table.

a. Calculate the expected return over the 4-year period for each of the three

alternatives.

b. Calculate the standard deviation of returns over the 4-year period for each of the

three alternatives.

c. Use your findings in parts a and b to calculate the coefficient of variation for

each of the three alternatives.

d. On the basis of your findings, which of the three investment alternatives do you

recommend? Why?

 

P8–27 Portfolio return and beta Jamie Peters invested $100,000 to set up the following

portfolio 1 year ago.

Asset Cost Beta at purchase Yearly income Value today

A $20,000 0.80 $1,600 $20,000

B 35,000 0.95 1,400 36,000

C 30,000 1.50 — 34,500

D 15,000 1.25 375 16,500

a. Calculate the portfolio beta on the basis of the original cost figures.

b. Calculate the percentage return of each asset in the portfolio for the year.

c. Calculate the percentage return of the portfolio on the basis of original cost,

using income and gains during the year.

d. At the time Jamie made his investments, investors were estimating that the market

return for the coming year would be 10%. The estimate of the risk-free rate of return

averaged 4% for the coming year. Calculate an expected rate of return for each stock

on the basis of its beta and the expectations of market and risk-free returns.

e. On the basis of the actual results, explain how each stock in the portfolio performed

relative to those CAPM-generated expectations of performance. What

factors could explain these differences?

 

P9–5 The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment

bankers regarding the issuance of new bonds. The investment banker has informed

the firm that different maturities will carry different coupon rates and sell at

different prices. The firm must choose among several alternatives. In each case, the

bonds will have a $1,000 par value and flotation costs will be $30 per bond. The

company is taxed at a rate of 40%. Calculate the after-tax cost of financing with

each of the following alternatives.

Alternative

Coupon

rate

Time to

maturity (years)

Premium

or discount

A 9% 16 $250

B 7 5 50

C 6 7 par

D 5 10 2 75

P9–7 Cost of preferred stock Taylor Systems has just issued preferred stock. The stock

has a 12% annual dividend and a $100 par value and was sold at $97.50 per share.

In addition, flotation costs of $2.50 per share must be paid.

a. Calculate the cost of the preferred stock.

b. If the firm sells the preferred stock with a 10% annual dividend and nets $90.00

after flotation costs, what is its cost?

 

P9–9 Cost of common stock equity: CAPM J&M Corporation common stock has a beta,

b, of 1.2. The risk-free rate is 6%, and the market return is 11%.

a. Determine the risk premium on J&M common stock.

b. Determine the required return that J&M common stock should provide.

c. Determine J&M’s cost of common stock equity using the CAPM.

P9–10 Cost of common stock equity Ross Textiles wishes to measure its cost of common

stock equity. The firm’s stock is currently selling for $57.50. The firm expects to pay

a $3.40 dividend at the end of the year (2016). The dividends for the past 5 years

are shown in the following table.

Year Dividend

2015 $3.10

2014 2.92

2013 2.60

2012 2.30

2011 2.12

After underpricing and flotation costs, the firm expects to net $52 per share on a

new issue.

a. Determine the growth rate of dividends from 2011 to 2015.

b. Determine the net proceeds, Nn, that the firm will actually receive.

c. Using the constant-growth valuation model, determine the cost of retained earnings, rr.

d. Using the constant-growth valuation model, determine the cost of new common

stock, rn.

P9–17 Calculation of individual costs and WACC Dillon Labs has asked its financial manager

to measure the cost of each specific type of capital as well as the weighted average

cost of capital. The weighted average cost is to be measured by using the following

weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity

(retained earnings, new common stock, or both). The firm’s tax rate is 40%.

Debt The firm can sell for $980 a 10-year, $1,000-par-value bond paying annual

interestat a 10% coupon rate. A flotation cost of 3% of the par value is required

in addition to the discount of $20 per bond.

Preferred stock Eight percent (annual dividend) preferred stock having a par

value of $100 can be sold for $65. An additional fee of $2 per share must be paid

to the underwriters.

Common stock The firm’s common stock is currently selling for $50 per share.

The dividend expected to be paid at the end of the coming year (2016) is $4. Its

dividend payments, which have been approximately 60% of earnings per share in

each of the past 5 years, were as shown in the following table.

Year Dividend

2015 $3.75

2014 3.50

2013 3.30

2012 3.15

2011 2.85

It is expected that to attract buyers, new common stock must be underpriced

$5 per share, and the firm must also pay $3 per share in flotation costs. Dividend

payments are expected to continue at 60% of earnings. (Assume that rr= rs.)

a. Calculate the after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cost of common stock.

 

d. Calculate the WACC for Dillon Labs.

 

"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"