ACCT 1209 Lecture Notes - Lecture 20: Intangible Asset, Matching Principle, Historical Cost
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You have obtained the following information:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER
| 20X8 | 20X7 | |||
| Note | Draft ($m) | Actual ($m) | ||
| Revenue | (1) | 645.5 | 606.5 | |
| Other income | (2) | 15.6 | 14.4 | |
| Changes in inventories | 3.8 | (16.4) | ||
| Cost of materials | (334.1) | (286.8) | ||
| Employee benefits expense | (91.0) | (83.9) | ||
| Depreciation | (3) | (29.8) | (23.6) | |
| Other expenses | (4) | (116.3) | (100.6) | |
| Interest income, net | (5) | 12.3 | (20.9) | |
| Profit before tax | 106.0 | 130.5 | ||
| Income tax expense | (44.4) | (47.7) | ||
| Profit for the year | 61.6 | 82.8 |
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER
| 20X8 | 20X7 | |||
| Note | Draft ($m) | Actual ($m) | ||
| Assets | ||||
| Non-current assets | ||||
| Intangible assets | (6) | 47.8 | 40.5 | |
| Property, plant and equipment | (7) | 124.5 | 102.5 | |
| 172.3 | 143.0 | |||
| Current assets | ||||
| Inventories | (8) | 30.3 | 27.9 | |
| Trade receivables | 73.1 | 50.3 | ||
| Cash and cash equivalents | 111.4 | 86.0 | ||
| Total assets | 387.1 | 307.2 | ||
| Equity and liabilities | ||||
| Equity | 5.8 | 5.8 | ||
| Share capital | 15.3 | 15.3 | ||
| Share premium | 112.1 | 80.1 | ||
| Retained earnings | 133.2 | 101.2 | ||
| Non-current liabilities | ||||
| Provisions | (9) | 160.1 | 121.4 | |
| Current liabilities | ||||
| Trade payables | 33.5 | 31.8 | ||
| Tax | 50.4 | 44.3 | ||
| Other liabilities | 9.9 | 8.5 | ||
| Total equity and liabilities | 387.1 | 307.2 |
Notes
(1) Revenue from business activities:
| Revenue from business activities | ||
| 20X8 ($M) | 20X7 ($M) | |
| Vehicles | 588.0 | 526.0 |
| Parts and accessories | 39.6 | 36.8 |
| Other | 17.9 | 43.7 |
| 645.5 | 606.5 | |
Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.
Average number of employees:
| 20X8 (Draft) | 20X7 (Actual) | |
| Wage earners | 484 | 499 |
| Salaried employees | 483 | 477 |
| Apprentices and trainees | 36 | 37 |
| 1,003 | 1,013 | |
Other expenses include costs for warranties, administration and distribution, maintenance and insurance.
Interest income, net:
| 20X8 (Draft ($m) | 20X7 (Actual $m) | |
| Interest and similar income | 16.8 | 25.1 |
| Interest and similar expenses | (4.5) | (4.2) |
| 12.3 | 20.9 |
Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.
Property, plant and equipment:
| Land and Buildings | Equipment | Assets under construction | Total | |
| $m | $m | $m | $m | |
| Cost | ||||
| 1 January 20X8 | 61.8 | 212.1 | 19.0 | 292.9 |
| Additions | 5.0 | 28.9 | 9.4 | 43.3 |
| Disposals | 0.0 | (4.5) | 0.0 | (4.5) |
| Reclassification | 3.0 | 8.9 | (11.9) | 0.0 |
| 31 December 20X8 | 69.8 | 245.4 | 16.5 | 331.7 |
| Depreciation | ||||
| Current year | 1.9 | 18.4 | 0.0 | 20.3 |
| Accumulated | 28.7 | 178.5 | 0.0 | 207.2 |
| Net book value | ||||
| 31 December 20X8 | 41.1 | 66.9 | 16.5 | 124.5 |
| 31 December 20X7 | 34.9 | 48.6 | 19.0 | 102.5 |
(8) Inventories comprise:
| 20X8 (Draft $m) | 20X7 (Draft $m) | |
| Raw materials, consumables and supplies | 8.3 | 7.3 |
| Work-in-progress | 6.8 | 4.8 |
| Finished goods | 15.2 | 15.8 |
| 30.3 | 27.9 | |
(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.
The following additional information is available:
(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 â 7,642 vehicles).
(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.
(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.
(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.
(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.
1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.
N.B these are pointers are for this question:
Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement â Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.
Complex Balance Sheet
Presented below is the unaudited balance sheet as of December31, 2016, prepared by Zeus Manufacturing Corporationâsbookkeeper.
| Zeus Manufacturing Corporation Balance Sheet for the Year Ended December 31, 2016 | ||||
| Assets | Liabilities and Shareholders' Equity | |||
| Cash | $225,000 | Accounts payable | $133,800 | |
| Accounts receivable (net) | 345,700 | Mortgage payable | 900,000 | |
| Inventories | 560,000 | Notes payable | 500,000 | |
| Prepaid income taxes | 40,000 | Lawsuit liability | 80,000 | |
| Investments | 57,700 | Income taxes payable | 61,200 | |
| Land | 450,000 | Deferred tax liability | 28,000 | |
| Building | 1,750,000 | Accumulated depreciation | 420,000 | |
| Machinery and equipment | 1,964,000 | Total Liabilities | $2,123,000 | |
| Goodwill | 37,000 | Common stock, $50 par; 40,000 shares issued | $2,231,000 | |
| Total Assets | $5,429,400 | Retained earnings | 1,075,400 | |
| Total Shareholders' Equity | $3,306,400 | |||
| Total Liabilities and Shareholders' Equity | $5,429,400 | |||
Your company has been engaged to perform an audit, during whichyou discover the following information:
Checks totaling $14,000 in payment of accounts payable weremailed on December 31, 2016, but were not recorded until 2017. Latein December 2016, the bank returned a customerâs $2,000 checkmarked "NSF," but no entry was made. Cash includes $100,000restricted for building purposes.
Included in accounts receivable is a $30,000 note due onDecember 31, 2019, from Zeusâs president.
During 2016, Zeus purchased 500 shares of common stock of amajor corporation that supplies Zeus with raw materials. Total costof this stock was $51,300, and fair value on December 31, 2016, was$47,000. The decline in fair value is considered temporary. Zeusplans to hold these shares indefinitely.
Treasury stock was recorded at cost when Zeus purchased 200 ofits own shares for $32 per share in May 2016. This amount isincluded in investments.
On December 31, 2016, Zeus borrowed $500,000 from a bank inexchange for a 10% note payable, maturing December 31, 2021. Equalprincipal payments are due December 31 of each year beginning in2017. This note is collateralized by a $250,000 tract of landacquired as a potential future building site, which is included inland.
The mortgage payable requires $50,000 principal payments, plusinterest, at the end of each month. Payments were made on January31 and February 28, 2017. The balance of this mortgage was due June30, 2017. On March 1, 2017, prior to issuance of the auditedfinancial statements, Zeus consummated a noncancelable agreementwith the lender to refinance this mortgage. The new terms require$100,000 annual principal payments, plus interest, on February 28of each year, beginning in 2018. The final payment is due February28, 2025.
The lawsuit liability will be paid in 2017.
Of the total deferred tax liability, $5,000 is considered acurrent liability.
The current income tax expense reported in Zeusâs 2016 incomestatement was $61,200.
The company was authorized to issue 100,000 shares of $50 parvalue common stock.
Required:
Prepare a corrected classified balance sheet as of December 31,2016.
| Zeus Manufacturing Corporation Balance Sheet December 31, 2016 | |||
| Assets | |||
| Current Assets: | |||
| Cash | $ | ||
| Accounts receivable (net) | |||
| Inventories | |||
| Total current assets | $ | ||
| Long-Term investment, at fair value | |||
| Property, Plant, and Equipment (at cost): | |||
| Land | $ | ||
| Building | $ | ||
| Machinery and equipment | |||
| Total | |||
| Less: Accumulated depreciation | |||
| Total property, plant, and equipment | |||
| Intangible Asset: | |||
| Goodwill | |||
| Other Assets: | |||
| Cash restricted for building purposes | $ | ||
| Officer's note receivable | |||
| Land held for future building site | |||
| Total Assets | $ | ||
| Liabilities | |||
| Current Liabilities: | |||
| Accounts payable | $ | ||
| Current installments of long-term debt | |||
| Lawsuit liability | |||
| Income taxes payable | |||
| Deferred tax liability | |||
| Total current liabilities | $ | ||
| Long-Term Debt: | |||
| Mortgage payable | $ | ||
| Notes payable | |||
| Deferred tax liability | |||
| Total long-term debt | |||
| Total Liabilities | $ | ||
| Shareholders' Equity | |||
| Contributed Capital: | |||
| Common stock, $50 par value | $ | ||
| Additional paid-in capital | |||
| Total paid-in capital | $ | ||
| Retained earnings | |||
| Accumulated Other Comprehensive Loss: | |||
| Unrealized decrease in value of long-term investment | |||
| Total | $ | ||
| Less: Cost of treasury stock | |||
| Total Shareholders' Equity | |||
| Total Liabilities and Shareholders' Equity | $ | ||
