1. Suppose you work in a public accounting firm and hopes to eventually become a partner. The management of Allnet Company invited you to prepare a bid to audit their company's financial statements. In discussing the the audit fee, Allnet's management team suggests a fee range in which the amount depends on the reported profit. The higher the profit, the higher will be the audit fee paid to your public accounting firm.

a. Identify the parties potentially affected by this audit and the fee plan proposed.

b. What are the ethical factors in this situation? Explain.

c. Would you recommend that your accounting firm accept this audit fee arrangement? Why or why not?

d. Describe the ethical consideration(s) guiding your recommendation.

2. Assume the owners of Apple decide to open a new company with an innovative mobile app devoted to microblogging for accountants and those learning accounting. The new company will be called Account App.

a. Account App obtains a $500,000 loan and the two owners contribute $250,000 in total from their own savings in exchange for ownership in this new company. What is the new company's total amount of liabilities plus equity? What is the total amount of assets?

b. If the new company earns $80,250 in net income in the first year of operation, compute its return on assets (assume average assets equal $750,000. Assess its performance if competitors average a 10% return.