Question: Harry Johnson’s father, William, was recently
Harry Johnson’s father, William, was recently forced into early retirement at age 63 because of poor health. In addition to the psychological drawbacks of the unanticipated retirement, William’s financial situation is poor because he had not planned adequately for retirement. His situation has inspired Harry and Belinda to take a look at their own retirement planning. Together they now make about $200,000 per year ($110,000 for Belinda and $90,000 for Harry) and would like to have a similar level of living when they retire. Harry and Belinda are both are in their early 40s and they recently received their annual Social Security Benefits Statements indicating that they each could expect about $22,000 per year in today’s dollars as retirement benefits in 25 years at age 67. Although their retirement is a long way off, they know that the sooner they put a plan in place, the larger their retirement nest egg will be.
Required:
(a) Belinda believes that the couple could maintain their current level of living if their retirement income represented 90 percent of their current annual income after adjusting for inflation. Assuming a 4 percent inflation rate, what would Harry and Belindas’s annual income need to be over and above their Social Security benefits when they retire at age 67?
(Hint: Use Appendix A-l or visit the Garman/Forgue companion website.)
Appendix A-l:
Continue to next pages….
(b) Both Harry and Belinda are covered by defined contribution retirement plans at work. Harry contributes $5,400 to his plan and his employer puts in $2,700. Belinda contributes $6,600 and her employer puts in $3,300. Assuming a 7 percent rate of return, what would their combined retirement nest egg (now valued at $400,000) total 25 years from now if they keep contributing?
(Hint: Use Appendix A-3 or visit the Garman/Forgue companion website.)
Appendix A-3:
Continue to next pages….
(c) For how many years would the retirement nest egg provide the amount of income indicated in Question (a)? Assume a 4 percent return after taxes and inflation.
(Hint: Use Appendix A-4 or visit the Garman/Forgue companion website.)
(d) One of Harry’s dreams is to retire in his fifties. What would the answers to Questions (a), (b), and (c) be if he and Belinda were to retire in 12 years?
(e) What would you advise Harry and Belinda to do to meet their income needs for retirement?
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> Makiko Iwanami, a student from Osaka, Japan, is in one of your classes. She is considering the purchase of a used car and has been told that she must buy automobile insurance to register the car and obtain license plates. Makiko has come to you for advic
> Mark and Kelly Prince of Emmertsburg, Iowa, face a crisis. Their automobile insurance company has notified them that their current coverage expires in 30 days and will not be renewed. Mark and the Prince’s younger son each had a minor, at-fault accident
> Julia has always tried to keep her insurance spending under control by purchasing low limits on her policies. Now that her assets and income have grown, she is beginning to reconsider the wisdom of this approach when buying insurance. Julia knows she has
> Belinda Johnson’s parents and maternal grandmother have combined their finances and presented Harry and Belinda with $50,000 cash gift to use to purchase a home. The Johnsons have shopped and found a house in a new housing development t
> Justin Kealey, CPA, is auditing Tustin Companies, Inc. Kealey has accumulated factual, judgmental, and projected misstatements for the current year to evaluate whether there is a sufficiently low risk of material misstatement of the financial statements
> Linda Reeves, CPA, receives a telephone call from her client, Lane Company. The company’s controller states that the board of directors of Lane has entered into two contractual arrangements with Ted Forbes, the company’s former president, who has recentl
> The auditor’s opinion on the fairness of financial statements may be affected by subsequent events. Required: a. Define what is commonly referred to in auditing as a subsequent event, and describe the two general types of subsequent events. b. Identify
> a. Calculate the gross margin percentage for each of State University’s product lines. b. Compare State University’s gross margins to industry averages. Indicate any margins that appear out of line, in relation to the
> You are the audit manager in the audit of the financial statements of Midwest Grain Storage, Inc., a new client. The company’s records show that, as of the balance sheet date, approximately 15 million bushels of various grains are in storage for the Comm
> During an audit engagement, Robert Wong, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies arising from litigation, claims, or assessments. What
> OA Company recently hired a payroll service provider to process its payroll—that service provider has essentially taken over the payroll function, and payroll represents OA’s largest expense. Comment on the following statement: OA’s auditors should make
> In your audit of the financial statements of Wolfe Company for the year ended April 30, you find that a material account receivable is due from a company in reorganization under Chapter 11 of the Bankruptcy Act. You also learn that on May 28 several form
> Valley Corporation established a stock option plan for its officers and key employees this year. Because the options granted have a higher option price than the stock’s current market price, the company has not recognized any cost for the options in the
> You are retained by Columbia Corporation to audit its financial statements for the fiscal year ended June 30. Your consideration of internal control indicates a fairly satisfactory condition, although there are not enough employees to permit an extensive
> Select the best answer for each of the following and explain fully the reason for your selection. a. Which of the following is least likely to be among the auditors’ objectives in the audit of inventories and cost of goods sold? (1) Det
> You are engaged in the audit of the financial statements of Armada Corporation for the year ended August 31, 20X0. The balance sheet, reflecting all your audit adjustments accepted by the client to date, shows total current assets, $8,000,000; total curr
> During your annual audit of Walker Distributing Co., your assistant, Jane Williams, reports to you that, although a number of entries were made during the year in the general ledger account Notes Payable to Officers, she decided that it was not necessary
> The only long-term liability of Range Corporation is a note payable for $1 million secured by a mortgage on the company’s plant and equipment. You have audited the company annually for the three preceding years, during which time the principal amount of
> Describe the audit steps that generally would be followed in establishing the propriety of the recorded liability for federal income taxes of a corporation you are auditing for the first time. Consideration should be given to the status of (a) the liabi
> During the course of any audit, the auditors are always alert for unrecorded accounts payable or other unrecorded liabilities. Required: For each of the following audit areas, (1) describe an unrecorded liability that might be discovered and (2) state w
