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All posts in General Questions

1. What are the differences and similarities between a defined contribution plan and a defined benefit plan? As an employee, would you rather have a defined contribution plan or a defined benefit plan? Why? As an employer, would you rather offer a defined contribution plan or a defined benefit plan? Why?

2. What are the components of pension expense? How is the interest rate determined? Why are prior service costs amortized? How do the components of pension expense differ among the various types of contribution and benefit plans?

3. Under the Read Me First material, it states: Congress is considering making defined benefit programs more attractive, including the creation of defined benefit 401(k) plans, which would have many of the advantages employees like in 401(k) plans, such as pre tax employee contributions and matches, but it would pay a guaranteed lifetime benefit. What are your thoughts on this type of plan?

Company bought a window franchise from on January 2, 2010 for $100,000. A research company estimated that the remaining useful life of the franchise was 50 years. Its unamortized cost on the company books at January 1,2010, was $15,000. The company has decided to write off the franchise over the longest possible period. How much should be amortized by the company for the year ended December 31, 2010?

A company is considering external financing. The principal amount is $500m. The interest rate would be 16% per year for 1st 10 years payable in arrears and 0% in subsequent period. The company has no obligation to repay principal amount.

How should the company account for this financial instrument? What accounting standard do you use here?

Ink Co. had beginning work in process inventory of $372,480 in Oct. 1. Of this amount $152,460 was the cost of direct materials and $220,020 was the cost of conversion. The 48,000 units in the beginning inventory were 30% complete with respect to both direct materials and conversion costs.
During Oct., 102,000 units were transferred out and 30,000 remained in ending inventory. The units in ending inventory were 80% complete with respect to direct materials and 40% complete with respect to conversion costs. Costs incurred during the period amounted to $1,171,800 for direct materials and $1,513,920 for conversion.

1) Explain the three steps associated with assessing the risk of material misstatement.

2) How would the auditor change the audit strategy if a risk is a financial statement level risk versus an assertion level risk?

3) What is a substantive test and what is its purpose?

4) What are the advantages and disadvantages of using analytical procedures as substantive tests?

5) Explain a situation where the concepts of audit sampling do not apply to substantive tests.

The balboa bottling company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $120,000 per year, using the straight line method. The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS life of 5 years, and an estimated salvage value of $145,000. The applicable depreciation rates are 20%, 32%, 19%, 12% and 6%. It is expected to economize the electric power usage, labor and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company s marginal tax rate is 35%, and it has a 12% WACC.

a. what is the initial net cash flow if the new machine is purchased and the old one is replaced?