The accountant for Company X presented the following draft income statement for fiscal year ending 31...

  

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The accountant for Company X presented the following draft income statement for fiscal year ending 31 December 2020 (alongside the actual income statement for 2019) to management to review before it was released to investors. < Condensed Income Statement< (in thousands)< Sales revenue Less: Cost of sales Gross profit Less: Operating expense Operating profit Less: Interest expense Profit before tax Less: Income tax expense Profit after tax Number of shares used in computing earnings per share (EPS) 31 Dec 2020 Draft $37,403 (21,162) 16,241 (12,126) 4,115 (228) 3,887 (348) $3,539 1,458 31 Dec 2019 Actual $39,175 (21,643) 17,5324 (12,702) 4,830 (29) 4,8014 (772) $4,0294 1,579 Management was very worried because the draft income statement showed a profit of only $3,539,000 in 2020, compared with $4,029,000 in 2019. They were concerned that a reduction in profit would result in a fall in the company's share price. < The draft income statement included an expense of $600,000 for stamp duty on long-term rental properties. One of the managers announced a 'clever plan' to increase profit, suggesting the company to 'classify the stamp duty as an asset and expense it over the term of the lease'. The accountant did some calculations and advised that the company may account for the stamp duty cost of $600,000 as "Prepayment asset", and then evenly allocate it to expenses over the lease term of 10 years, which includes 2020 financial year.< ( Additional information • Managers received bonus plans that partly linked their remuneration to the company's share price.< Required: (a) Calculate forecast error in EPS for 2020 using the random walk model. Show your workings and round your answers to 3 decimal places.< Do you think the manager's 'clever plan' can avoid a fall in the company's share price? Utilise the accountant's advice and show your workings. Round your answers to 3 decimal places. Assume the company has a tax rate of 28%. < The accountant for Company X presented the following draft income statement for fiscal year ending 31 December 2020 (alongside the actual income statement for 2019) to management to review before it was released to investors. < Condensed Income Statement< (in thousands)< Sales revenue Less: Cost of sales Gross profit Less: Operating expense Operating profit Less: Interest expense Profit before tax Less: Income tax expense Profit after tax Number of shares used in computing earnings per share (EPS) 31 Dec 2020 Draft $37,403 (21,162) 16,241 (12,126) 4,115 (228) 3,887 (348) $3,539 1,458 31 Dec 2019 Actual $39,175 (21,643) 17,5324 (12,702) 4,830 (29) 4,8014 (772) $4,0294 1,579 Management was very worried because the draft income statement showed a profit of only $3,539,000 in 2020, compared with $4,029,000 in 2019. They were concerned that a reduction in profit would result in a fall in the company's share price. < The draft income statement included an expense of $600,000 for stamp duty on long-term rental properties. One of the managers announced a 'clever plan' to increase profit, suggesting the company to 'classify the stamp duty as an asset and expense it over the term of the lease'. The accountant did some calculations and advised that the company may account for the stamp duty cost of $600,000 as "Prepayment asset", and then evenly allocate it to expenses over the lease term of 10 years, which includes 2020 financial year.< ( Additional information • Managers received bonus plans that partly linked their remuneration to the company's share price.< Required: (a) Calculate forecast error in EPS for 2020 using the random walk model. Show your workings and round your answers to 3 decimal places.< Do you think the manager's 'clever plan' can avoid a fall in the company's share price? Utilise the accountant's advice and show your workings. Round your answers to 3 decimal places. Assume the company has a tax rate of 28%. <

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1 Calculate the forecast error in EPS for 2020 using the random walk model Calculate the 2019 Actual EPS Actual EPS 2019 Profit after Tax 2019 Number ... View the full answer