Other sets by this creator
You are the independent auditor engaged to audit Millay Corporation's December 31, 2020, financial statements. Millay manufactures household appliances. During the course of your audit, you discovered the following contingent liabilities.
Millay began production of a new dishwasher in June 2020 and, by December 31, 2020, sold 120,000 to various retailers for $500 each. Each dishwasher is under a 1-year warranty. The company estimates that its warranty expense per dishwasher will amount to$25. At year-end, the company had already paid out $1,000,000 in warranty expenses. Millay's income statement shows warranty expenses of$1,000,000 for 2020.
In response to your attorney's letter, Morgan Sondgeroth, Esq., has informed you that Millay has been cited for dumping toxic waste into the Kishwaukee River. Clean-up costs and fines amount to $2,750,000. Although the case is still being contested, Sondgeroth is certain that Millay will most probably have to pay the fine and clean-up costs. No disclosure of this situation was found in the financial statements.
Millay is the defendant in a patent infringement lawsuit by Megan Drabek over Millay's use of a hydraulic compressor in several of its products. Sondgeroth claims that, if the suit goes against Millay. the loss may be as much as$5,000,000. However, Sondgeroth believes the loss of this suit to be only reasonably possible. Again, no mention of this suit is made in the financial statements.
As presented, these contingencies are not reported in accordance with GAAP, which may create prob lems in issuing a favorable audit report. You feel the need to note these problems in the work papers.
Heading each page with the name of the company, balance sheet date, and a brief description of the problem, write a brief narrative for each of the above issues in the form of a memorandum to be incor- porated in the audit work papers. Explain what led to the discovery of each problem, what the problem really is, and what you advised your client to do (along with any appropriate journal entries) in order to bring these contingencies in accordance with GAAP.
Suppose that you sell short 500 shares of Intel, currently selling for $40 per share, and give your broker$15,000 to establish your margin account.
a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Intel stock is selling at (i) $44; (ii)$40; (iii) $36? Assume that Intel pays no dividends.
b. If the maintenance margin is 25%, how high can Intel’s price rise before you get a margin call?
c. Redo parts ( a) and ( b), but now assume that Intel also has paid a year-end dividend of$1 per share. The prices in part ( a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.
partial list of Foothhills Medical Center’s costs follows a. Cost of patient meals b. Nurses’ salaries c. Depreciation of X-ray equipment d. Utility costs of the hospital e. Salary of incentive care personnel f. Cost of X-ray test g. Operating room supplies used on patients (catheters, sutures, ets.) h. Salary of the nutritrionist i. General maintenance of the hospital j. Cost of new heart wing k. Cost of drugs used for patients l. Cost of advertising hospital services on television m. Cost of improvements on the employee parking lot n. Cost intravenous solutions used for patients o. Training costs for nurses p. Costs of laundry services for operating room personnel q. Doctor’s fee r. Overtime incurred in the Patient Records Department due to a computer failure s. Cost of blood tests. t. Cost of maintaining the staff and visitors’ cafeteria u. Depreciation on patient rooms