BOR CPAs, Inc. is a closely held corporation owned by three stockholders who use
ID: 2480201 • Letter: B
Question
BOR CPAs, Inc. is a closely held corporation owned by three stockholders who used the initials of their last names to form the corporation’s name: Cyrus Bailey, John Ogden, and Samuel Rogers. The firm’s Certified Public Accountants (CPAs) perform audits of both public companies and privately owned companies. BOR’s CPAs also provide tax services to both individuals and businesses.
The corporation is divided into two profit centers: the Audit Division and the Tax Division. Each division is composed of two cost centers. The Audit Division is composed of two cost-center departments: Public Company Audits and Private Company Audits. The Tax Division is composed of two cost-center departments also: Individual Tax and Business Tax.
BOR, a decentralized organization, is interested in evaluating the performance of the two divisions. The stockholders are responsible for deciding on investment in the two divisions. Cyrus Bailey is in charge of the performance evaluation, and turns to you for assistance. Mr. Bailey is only interested in evaluating operations at the profit center (division) level, and not at the cost center (department) level.
Mr. Bailey is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit season, and would like to evaluate the effect of this on net income. The Tax Division is estimated to have 800 hours of excess capacity.
The unit for determining sales revenue in both divisions is the "engagement," which means the total agreed-upon work for a given client in either audit or tax for a given year. The company charges on average a fee of $75,000 per audit engagement, and $15,750 per tax engagement.
The company has its own Payroll Office, which provides payroll services to both divisions and will allocate its total expenses to the two divisions as service department charges.
The chart below shows some basic data for the company:
Mr. Bailey asks that you prepare Divisional Income Statements showing what 2016 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a negotiated transfer price. The divisional managers tell you that, with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Audit Division would agree to a negotiated rate of $90.00 per hour to be paid to the Tax Division for the additional hours required, with the Tax Division selling all its excess capacity to the Audit Division. The Tax Division would still be responsible for paying the salaries of their employees.
Complete the Divisional Income Statements below. If there is no amount or an amount is zero, enter “0”.
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Score: 0/64
BOR CPAs, Inc.
Divisional Income Statements Under Negotiated Transfer Price
For the Year Ended December 31, 2016
1
Audit Division
Tax Division
Total Company
2
Fees earned:
3
Audit fees (16 engagements)
$1,200,000.00
$1,200,000.00
4
Tax fees (45 engagements)
$708,750.00
708,750.00
5
Transfer-pricing fees
6
Expenses:
7
Variable:
8
Audit hours provided by Audit Division
216,000.00
216,000.00
9
Tax hours provided by Tax Division
283,500.00
283,500.00
10
Excess capacity hours paid to salaried staff
11
Audit hours provided by Tax Division
12
Fixed expenses
50,000.00
65,500.00
115,500.00
13
Income from operations before service department charges
14
Less service department charges for payroll
15
Income from operations
Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services) $110.00 Average hourly cost rate for staff (the average price the company pays to its staff) $60.00 Number of paychecks issued by Audit Division 110 Number of paychecks issued by Tax Division 340 Total expense for Payroll Office $29,250 Amount of assets invested in Audit Division by BOR CPAs, Inc. $10,000,000 Amount of assets invested in Tax Division by BOR CPAs, Inc. $5,000,000Explanation / Answer
Details of Working: Additional Hours from Tax division 800 Tax division additional earning from providing excess hrs @$90 per hr= 72,000 Tax Division salary for 800 hrs @$60= 48,000 Additional Audit Audit div can do with extra hrs from Tax div= 4 Additional revenue for Audit div @75000 per Audit Assignment= 300,000 Payroll cost allocation Audit Tax Total No of payroll checks issued 110 340 450 % of checks issued 24.44% 75.56% Payroll cost Allocated 7,150 22,100 29,250 It is not clear if the given Audits are with extra 4 audits or not, assuming it with extar audits BOR CPAs, Inc. Divisional Income Statements Under Negotiated Transfer Price For the Year Ended December 31, 2016 1 Audit Division Tax Division Total Company 2 Fees earned: 3 Audit fees (16 engagements) $1,200,000.00 $1,200,000.00 4 Tax fees (45 engagements) $708,750.00 708,750.00 5 Transfer-pricing fees 72,000 72,000 6 Expenses: 7 Variable: 8 Audit hours provided by Audit Division 216,000.00 216,000.00 9 Tax hours provided by Tax Division 283,500.00 283,500.00 10 Excess capacity hours paid to salaried staff 48,000 48,000 11 Audit hours provided by Tax Division 72,000 72,000 12 Fixed expenses 50,000.00 65,500.00 115,500.00 13 Income from operations before service department charges $862,000.00 $383,750.00 $1,245,750.00 14 Less service department charges for payroll 7,150 22,100 29,250 15 Income from operations $854,850.00 $361,650.00 $1,216,500.00
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