Case 2 - The second case of the year got 70%. With Chris Leduc. PDF

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The second case of the year got 70%. With Chris Leduc....

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To: Tammy’s Toy Shop From: Financial Assessment Corp. Date: December 6, 2020 Re: Investment into Santiago Enterprises Overview Tammy’s Toy Shop(TTS) investment objective is to purchase 45% of Santiago Enterprises(SE). SE has been a company for over 10 years. However profits has increase due to the marketing to kids and teenagers through various media websites. This report should help understand the financial of SE better on whether or not to invent in the company. With the potential money SE is receiving, they would like to create leading-edge toys for children and teenagers. Issue 1 SE purchased a group of assets for 1.1 million. The assets were out on the books incorrectly, SE did not recorded the transaction based on the appraised values. The correct journal entry is as follows: Assets Appraised Value % of Appraised Purchase Price Allocated Purchase Value (A) of Group (B) Cost (A*B) Land $800,000 51.61% $1,100,000 $567,742 Equipmen $150,000 9.68% $1,100,000 $106,452 t Building $600,000 38.71% $1,100,000 $425,806 Total $1,550,000 100% $1,100,000 Date 2020

Accounts Titles Land Equipment Building Cash (To record purchase of group assets)

Debit $ 567,742 $ 106,452 $ 425,806

Credit

$ 1,100,000

Issue 2 SE owns 19% of Acme Toys and Games Inc.(ATG) shares. ATG paid $110,000 dividends, however SE only recorded $8,500. Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s proportionate interest in the

investee arising from changes in the investee’s other comprehensive income. Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange translation differences. The investor’s share of those changes is recognised in the investor’s other comprehensive income. The correct amount would be 19% of the dividends paid. $110,000*19%= $20,900 SE needs to update the books to show the dividend income is $20,900. Issue 3 With potentially going public, this scenario where Tammy has a $500,000 bond payable and equity investments with a cost of $340,000 and a year-end market value of $380,000. Under IFRS accounts payable and equity are to be recorded in the liability section. in which the bonds payable are to be recorded at face value whereas the equity investment are to be recorded at the year and market value price. Therefore bonds payable will be recorded at $500,000; and equity investment at $380,000 Issue 4 SE decided to exchange a computer tablet-manufacturing machine that had cost $822,000 and had accumulated depreciation of $420,000 with another tablet-making machine with another company. This machine had a cost of $960,000 and had accumulated depreciation of $444,000. The fair value of SE’s machine was $480,000 at the time. SE has recorded a gain of $78,000. An item of PPE is acquired in exchange for a similar asset that has a similar use in the same line of business and has a similar fair value, then the new asset should be recorded at the carrying amount of asset given up instead of the fair value. In the given question the asset given up and received, both are the Tablet - manufacturing machines. SE has not recorded the correct gain on disposal the correct journal entry is as follows: Date Accounts Titles Debit Credit $960,000 2020 Equipment (New) $420,000 Accumulated Depreciation $588,000 Gain on Disposal $822,000 Equipment (Old) (To record exchange of assets) Issue 5 SE changed its estimated percentage of bad debts from 4% of sales to 3% of sales. A note from the controller of SE states that "although historically we have found that our bad debts are running at approximately 4.5% of sales, we feel that our increased profits this year will result in our customers wanting to pay us back on a timely basis". SE changing of provision from 4% to 3% is not advisable. The explanation given is not convincing. Expecting customers to pay citing good profits last year is not a reason at all for decreasing bad debts provision. It reflects the strategy of the management in undermining current year provisions and boosting profits only to experience the bad debts mount up next year. This is a short-term misnomer and is without adhering to the IFRS standards. IFRS rules stipulate that

losses in relation to assets that must be recognized at a value below their carrying amount must be accounted for as losses and not provisions. Experience shows that 4.5% have been the accruing bad debts for SE and the management has admitted it. Even earlier they have been only providing 4% as against the experience of 4.5%. The decision is a backward step to cut the provisions down. The entity must reduce it carrying amount to its recoverable amount and recognize impairment as loss. Companies should be forward looking to present realistic situation in terms of financial statements, which is in the best interest of all stake holders. Issue 6 Due to the decline in popularity of the DVD players, SE has stopped making its top-ofthe-line supercharged DVD player in fire engine red. The DVD-making machine is currently on the books at a cost of $550,000 and has accumulated depreciation totalling $200,000. The fair value of the machine is estimated at $50,000. Impairment should be accounted if the asset is impaired. In this case asset is impaired, impairment loss recognised if carrying value is less than recoverable amount. Recoverable amount is lower of : Fair value less cost to sell or Value in use. Carrying amount of asset = Cost - Accumulated Depreciation = $550,000 - $200,000 = $350,000. Fair value = $50,000. Impairment loss = $350,000 - $50,000 = $300,000. Date Accounts Titles Debit Credit $300,000 2020 Impairment Loss $300,000 DVD Players (To record impairment loss) $300,000 2020 Income Statement $300,000 Impairment Loss (To record loss charged to income statement) Issue 7 SE signed a contract with DIY Depot to supply it with toys for the next five years beginning January 2021. Under the terms of the contract, SE would produce and deliver toys to DIY Depot and DIY Depot would pay SE a fixed amount of $1 million for the five-year contract. SE requested that DIY Depot pay 50% of this amount upfront. Here the recorded revenue of $500,000 is not earned, so it should be recorded as unearned revenue. Under IFRS, amount received advance for goods is treated as unearned revenue. Which is a liability accounts, upon contract period, the obligation is satisfied, the revenue is recognize. Date Accounts Titles Debit Credit $500,000 2020 Cash $500,000 Unearned Revenue (To record unearned revenue from

DIY Depot) Issue 8 TTS is considering investing in Madison Manufacturing (MM). TTS is contemplating purchasing 30% of MM, which would result in a purchase price of $450,000 cash for the investment. Currently, MM is reporting assets of $4,550,000 and liabilities of $3,300,000. Asset values reflect fair market values, except for capital assets, which have a net book value of $630,000 and a fair market value of $825,000, and inventory, which has a fair value that is $20,000 less than book value. The capital assets have a remaining useful life of six years. As the shares of MM are actively quoted and traded in an active market, Tammy has to apply Equity Method to record such investment. Initially it will be recorded asDate 2020

Accounts Titles Debit Credit Investment in Madison Manufacturing $450,000 Cash $450,000 Fair Value of Total Assets = $ 4,550,000 + ( $ 825,000 - $ 630,000 ) - $ 20,000 = $ 4,725,000 Fair Value of Total Liabilities = $ 3,300,000 Thus, Shareholders' Funds = $ 1,425,000 30% share = $ 1,425,000 * 30% = $ 427,500 Cash paid by Tammy for 30% share = $ 450,000 Therefore, she paid more. Recommendation TTS should not invest in SE as there are many issues with bookkeeping. If Tammy want’s to retire soon this would be a grave mistake as she might lose some of her retirement fund. Tammy’s Notes Depreciation is reduction in value of assets due to wear and tear of the asset. Valuation is determination of value of an asset which we can say present value of future economic benefit from the asset. The number of years to depreciate depends on the life of the asset or the year for which economic benefit can be realised from assets. TTS has depreciable assets on its books with a cost of $5.4 million and a fair value of $8.8 million. TTS has heard that under IFRS you may be able to value your depreciable assets at fair value instead of maintaining them at cost IFRS allows the company a choice between the cost model or the revaluation model. Cost model says to record all assets at its historical cost less accumulated depreciation and impairment cost. But the revaluation model gives business the option of carrying the fixed assets

at revalued amount. Under IFRS, Property, Plant & Equipment and intangible assets who's fair value can be measured reliably are valued at Fair Value less subsequent accumulated depreciation and impairment loss. Now What does the Fair Value means- Fair value is the price you would obtain in the open market if sold at the revaluation date. Measured Reliably means that there is an active secondary market which allows fair value to be determined with some reliability. If the asset's fair value cannot be determined, then asset must be reported using the Cost model. Revaluation model is not followed annually, but when the carrying amount is materially different than the assets fair value. But if the carrying amount of asset changes rapidly, the annually revaluation may be required. Materially different depends upon the professional judgement. If the company adopts the revaluation model, they must apply this model to entire class of assets with fair value. If Tammy wishes to adopt IFRS, then she can revalue the asset at fair value less accumulated depreciation and impairment loss....