ACCT20002 Lecture Notes - Lecture 11: Call Option, Foreign Exchange Market, Telstra

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pinkporcupine846

7 Sep 2018

School

University of Melbourne

Department

Accounting

Course

ACCT20002

Professor

All

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Document Summary

What is a nancial instrument: any contract that gives rise to a nancial asset of one entity and a nancial liability or equity instrument of another entity . Cash, receivables, payables, investment in shares, investment in debt securities: derivative instruments - 3 characteristics, value changes in response to the change in. A speci ed interest rate, nancial instrument price, commodity price, forex rate, credit rating: requires no initial investment or an initial investment that is smaller than would be required. Call or put options held, call or put options sold: financial instruments may be, singular nancial instruments e. g. loan receivable or payable, compound nancial instruments e. g. convertible notes held or issued. De nition of financial asset: a nancial asset is any asset that is: (a) cash. E. g. cash on hand, deposits with banks or nancial institutions (b) an equity instrument of another entity.

Related Questions

On 1/1/17, Hasper, Inc., paid $372,000 for 60% of Belize's total outstanding common stock when Belize's book value (on 1/1/17) consisted of $100,000 Common Stock and $220,000 Retained Earnings. The 1/1/17 value of the 40% Non-Controlling Interest was $248,000. Belize held patents with 10 year remaining life undervalued in Belize's books by $70,000 and an unrecorded customer list (15-year remaining life) at a $45,000 fair value.

Accounting for this combination is under the equity method. No goodwill nor intra-entity payables or receivables have occurred between the acquisition date and the date of consolidation on 12/31/18.

Intra-entity inventory sales between the two companies have been made as follows:

Year Cost to Hasper Transfer Price to Belize Ending Balance (at transfer price)

2017 $120,000 $150,000 $50,000

2018 $112,000 $160,000 $40,000

The individual financial statements for those two companies as of December 31, 2018 are provided as follows:

Hasper, Inc., Belize, Inc.,

Sales $ (700,000) $ (335,000)

Cost of Goods Sold 460,000 205,000

Operating Expenses 188,000 70,000

Equity Earnings in Belize (28,000) --0--

Net Income (80,000) (60,000)

Retained Earnings, 1/1/18 (695,000) (280,000)

Net Income (80,000) (60,000)

Dividends Declared 45,000 15,000

Retained Earnings, 12/31/18 (730,000) (325,000)

Cash and Receivables 248,000 148,000

Inventory 233,000 129,000

Investment in Belize 411,000 --0--

Buildings, net 308,000 202,000

Equipment, net 220,000 86,000

Patents, net --0-- 20,000

Total Assets 1,420,000 585,000

Liabilities (390,000) (160,000)

Common Stock (300,000) (100,000)

Retained Earnings, 12/31/18 (735,000) (325,000)

Total Liabities anod Stockholders' Equity (1,420,000) (585,000)

a. Show how Hasper determined the $411,000 Investment in Belize account balance. Assume that Hasper defers 100% of downstream intra-entity profits against its share of Belize's income.

b. Show all calculations/prepare consolidation journal entries needed to prepare the necessary consolidation entries.

c. Prepare a consolidated worksheet as at 12/31/18

greentermite612

On January 1, 2014, McIIroy, Inc., acquired a 60 percent interest in the common stock of Stinson, Inc., for $372,000. Stinson's book value on that date consisted of common stock of $100,000 and retained earnings of $220,000. Also, the acquisition date fair value of the 40 percent noncontrolling interest was $248,000. The subsidiary held patents (with a 10 year remaining life) that were undervalued within the company's accounting records by $70,000, and an unrecorded customer list (15 year remaining life) assessed at a $45,000 fair value. Any remaining excess acquistion date fair value was assigned to goodwill. Since acquistion, McIIroy has applied the equity method to its investment in Stinson account and no goodwill impairment has occurred. At year end, there are no intra-entity payables or receivables. Intra-entity inventory sales between the two companies have been made as follows:

Year Cost to McIIroy Transfer price to Stinson Ending Balance (at transfer price)

2014 $120,000 $150,000 $50,000

2015 $112,000 $160,000 $40,000

The individual financial statements for these two companies as of December 31, 2015 and the year then ended follow:

McIIroy, Inc. Stinson, Inc.

Sales $(700,000) $(335,000)

COGs 460,000 205,000

Operating expenses 188,000 70,000

Equity earnings in Stinson (28000) 0

Net income $(80,000) $(60,000)

Retained earnings 1/1/15 $(695,000) $(280,000)

Net income(above) (80,000) (60,000)

Dividends declared 45,000 15,000

Retained earnings 12-31-15 $(730,000) $(325,000)

Cash & receivables $248,000 $148,000

Inventory 233,000 129,000

Investment in Stinson 411,000 0

Buildings (net) 308,000 202,000

Equipment (net) 220,000 86,000

Patents (net) 0 20,000

Total assets $1,420,000 $585,000

Liabilities $(390,000) $(160,000)

Common Stock (300,000) (100,000)

Retained earnings 12-31-15 (730,000) (325,000)

Total liabilities & equities $(1,420,000) $(585,000)

a. Show how McIIroy determined the $411,000 investment in Stinson account balance. Assume that McIIroy defers 100 percent of downstream intra-entity profits against its share of Stinson's income (amounts to be deducted should be indicated with a minus sign.)

Consideration transferred _______________________________

Increase in Stinson's retained earnings 1/1/14 to 1/1/15______________________________

Excess fair value amortization _________________________________

2014 ending inventory profit deferral_____________________________

McIIroy's equity in earnings of Stinson for 2015_____________________

Stinson 2015 dividends declared to McIIroy________________________

Investment account balance 12/31/15_____________________________

b. Prepare a consolidated worksheet to determine appropriate balances for external financial reporting as of Dec. 31, 2015.

Accounts McIIroy Stinson Debit Credit Non Controlling Interest Consolidation total

Sales $(700,000) $(335,000)

COGs 460,000 205,000

Operating exps 188,000 70,000

Equity in earnings of Stinson (28,000) 0

Seperate co. net income (80,000) (60,000)

Cons. net income

To NCI

To parent

Retained earnings 1/1 $(695,000) $(280,000)

Net income (80,000) (60,000)

Dividends declared 45,000 15,000

Retained earnings 12/31 (730,000) (325,000)

Cash & Rec's $248,000 $148,000

Inventory 233,000 129,000

Investment in Stinson 411,000 0

Bldgs (net) 308,000 202,000

Equip(net) 220,000 86,000

Patents(net) 0 20,000

Customer list

Goodwill

Total Assets $1,420,000 $585,000

Liabilities (390,000) (160,000)

Common Stock 300,000 100,000

NCI 1/1

NCI 12/31

Retained earnings 12/31 (730,000) (325,000)

Total Liabilities & equity $(1,420,000) $(585,000)

mauvelouse384

Question 1 (40 marks)

You are the audit manager of a medium-sized firm and have just received a package from Rachel Jones, the financial controller of KidSpace Ltd., an electronic toy manufacturer. This is your firmâs first year as auditor of KidSpace Ltd. The information below was prepared for a board meeting and Rachel, the acting Chief Financial Officer, felt it might be useful to you in preparation of the forthcoming audit for the year ended 30 June 2017.


KidSpace Ltd.
Statement of Financial Position $'000s

Current assets	2017	2016	2015
Cash	1,586	1,743	830
Accounts receivable and other receivables	13,734	11,200	9,623
Inventory	16,498	11,731	7,197
Total current assets	31,818	24,674	17,650
Non-current assets
Property, plant and equipment	14,606	12,840	9,572
Long-term loan receivable	5,200	3,600	3,300
Intangible assets	1,400
Total non-current assets	21,206	16,440	12,872
Total assets	53,024	41,114	30,222
Current liabilities
Trade payables and other payables	9,012	6,288	2,021
Provisions	4,875	3821	4577
Total current liabilities	13,887	10,109	6,598
Non-current liabilities
Long-term loan	20,000	16,000	12,000
Total liabilities	33,887	26,109	18,598
Net assets	19,137	15,505	11,624
Shareholder's equity
Share capital	2,000	2,000	2,000
Retained earnings	17,137	12,505	9,624
Total shareholder's equity	19,137	14,505	11,624

KidSpace Ltd.
Income Statement $'000s
	2017	2016	2015
Sales revenue	76,945	74,927	89,735
Cost of sales	51,840	51,765	63,066
Gross profit	25,105	23,162	26,669
Depreciation	5,595	4,332	2,796
Inventory obsolescence	990	1,173	670
Selling expenses	2,405	3,153	3,317
Administrative expenses	8,925	8,727	11,516
Finance costs	1,040	1,275	1,140
Total expenses	18,955	18,660	19,439
Profit before tax	6,150	4,502	7,230
Tax expense	1,518	1,621	2,386
Profit after tax	4,632	2,881	4,844

Notes:
Trade Receivables	12,034	10,655	9,300
Pre-paids	1,600	500	300
Other receivables	100	45	23
Total Trade & other receivables	13,734	11,200	9,623

Inventory
Raw Materials	6,599	5,866	3,845
WIP	4,333	2,588	1,550
Inventory held for sale	6,699	3,520	1,972
	17,631	11,974	7,367
Provision for Inventory obsolescence	(1,133)	(243)	(270)
Total inventory	16,498	11,731	7,197

Ratios	2017	2016	2015
Profit ratio	7.99%	6.01%	8.06%
Return on shareholder equity	24.20%	19.86%	41.67%
Quick Ratio	0.99	1.18	1.54
Times Interest Earned	6.91	4.53	7.34
Accounts Receivable Turnover (times)	6.78	7.51	9.33
Asset Turnover	1.45	1.84	2.94
Inventory Turnover (times)	3.50	5.35	8.76

During a brief telephone call with Rachel, you made the following notes:

1. One of the conditions of the long-term loan is that the company is not to exceed a debt-to equity ratio of 2:1 at any time and they must maintain a current ratio of 2:1. The loan is reviewed each year on 31 July.
2. Provision for obsolescence of finished inventory held for sale and work-in-progress is provided for at a flat rate of 10%. The amount provided in previous years was 20%. Rachel said that the company believes it has been overly conservative in previous years and 10% is a more realistic level, given the nature of its products.
3. To combat declining sales a senior management incentive scheme based on sales and profit levels was introduced in July 2016.
4. The long-term loan receivable is from a company involved in the development and production of computer software. It is owned by one of the directors.

Required:

a) Identify and explain what the inherent risks for KidSpace Ltd. that you will need to consider. (6 marks)
b) From the information provided, perform additional preliminary analytical procedures:
i) Simple comparison (3 marks)
ii) Current ratio (1 mark)
iii) Return on assets (1 mark)
iv) Gross profit ratio (1 mark)
v) Debt-to-equity ratio. (1 mark)

c) Drawing on information from a) & b), identify and justify:

i) Three key account areas that would require special attention during the audit of the 30 June 2017 financial statements. Also, indicate if those accounts are likely to be over or understated. (12 marks)
ii) Two key assertions at risk for each of those account areas. (12 marks)

d) Identify and discuss any going concern issues to be considered at this stage?. (3 marks)

crimsonlion402

ACCT20002 Lecture Notes - Lecture 11: Call Option, Foreign Exchange Market, Telstra

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