ACCT1021 Lecture Notes - Lecture 16: Cash Cash, Cash Flow, Sales Tax
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Czar was authorized to issue 3,000,000 shares of $1 par Common Stock but has only issued 520,000 shares of common stock as of 12/31/2018. No new shares were issued during 2018.
1. On the âAdjusting Journal Entriesâ worksheet, prepare in journal entry form all adjusting and correcting journal entries based on the following information. All information was provided to you as of 12/31/2018. (Round all numbers to the nearest dollar). Label journal entries a through t.
P- On 2,1, 2018, Czar rented a portion of one store to Pellston Inc. The contract was for 15 months and Czar required all of the cash up front. The rent is being earned equally each month. This is the only item in which rent is being earned by the company.
Q- Czar started to lease some new retail space in 2018 and added shelving and fixtures to this leased space. Based on your review of invoices, the previous accountant capitalized the cost of fixtures but did not capitalize the shipping and installation costs of $2,815. These costs were expensed and recorded as a miscellaneous selling expense. Czar has decided to use double declining balance (DDB) depreciation for this item and to take a full year of depreciation in the year of acquisition. The leasehold improvements have a useful life of 15 years with a salvage value of $12,000.
R- Czar uses the FIFO Inventory Method in valuing inventory. The inventory balance of $340,000 was based on a physical count at 12/31/2018. Based on your analysis, you have noted that $10,000 of marketing games that belonged to Pellston Inc. was included in the account. You also note that $5,600 of goods shipped to Czar f.o.b. destination were in transit on December 31, 2018 and included in the physical count.
Czar Incorporated | ||||||
End of Period Worksheet | ||||||
For the Year Ended December 31, 2018 | ||||||
Unadjusted | Adjusted | |||||
Account Title | Trial Balance | Adjustments | Trial Balance | |||
DR | CR | DR | CR | DR | CR | |
Cash | 264,000 | - | ||||
Accounts Receivable | 555,984 | - | ||||
Allowance for Doubtful Accounts | - | 13,600 | ||||
Interest Receivable | - | - | ||||
Merchandise Inventory | 340,000 | - | ||||
Prepaid Insurance | - | - | ||||
LIFO Reserve | - | 25,600 | ||||
Prepaid Advertising | - | - | ||||
Prepaid Rent | 13,600 | - | ||||
Office Supplies | 4,800 | - | ||||
Note Receivable | 20,000 | |||||
Available for Sale Securities | 300,000 | - | ||||
Office Building | 3,000,000 | - | ||||
Accumulated Depreciation - Office Building | - | 70,000 | ||||
Storage Building | 1,020,000 | - | ||||
Accumulated Depreciation - Storage Building | - | - | ||||
Land | 600,000 | - | ||||
Leasehold Improvements | 180,000 | - | ||||
Accumulated Depreciation - Leasehold Improvements | - | - | ||||
Office Equipment | 260,000 | - | ||||
Accumulated Depreciation - Office Equipment | - | 52,000 | ||||
Patent | 120,000 | - | ||||
Accounts Payable | - | 276,000 | ||||
Sales Tax Payable | - | - | ||||
Salaries Payable | - | 113,600 | ||||
Payroll Taxes Payable | - | 20,000 | ||||
Interest Payable | - | - | ||||
Income Tax Payable | - | - | ||||
Unearned Rent Revenue | - | - | ||||
Loan Payable - First Trust | - | 520,000 | ||||
Loan Payable - Coldwell Bank | - | 1,600,000 | ||||
Common Stock | - | 520,000 | ||||
Additional Paid in Capital | - | 1,599,000 | ||||
Retained Earnings | - | 736,000 | ||||
Accumulated Other Comprehensive Income | - | 20,000 | ||||
Dividends | 67,800 | - | ||||
Sales | - | 3,622,560 | ||||
Sales Returns and Allowances | 33,800 | - | ||||
Sales Discounts | 15,400 | - | ||||
Cost of Goods Sold | 1,583,600 | - | ||||
Sales Salaries Expense | 349,120 | - | ||||
Office Salaries Expense | 219,200 | - | ||||
Advertising Expense | 12,800 | - | ||||
Depreciation Expense - Office Building | - | |||||
Depreciation Expense - Leasehold Improvements | - | - | ||||
Depreciation Expense - Office Equipment | - | - | ||||
Leasing Expense - Stores | 105,600 | - | ||||
Miscellaneous Selling Expense | 18400 | - | ||||
Research & Development Expense | 12,000 | |||||
Rent Expense - Storage Facility | - | - | ||||
Insurance Expense | 12,000 | - | ||||
Office Supplies Expense | 28,000 | - | ||||
Miscellaneous Administrative Expense | 7,336 | - | ||||
Rent Revenue | - | 60,000 | ||||
Interest Revenue on Note Receivable | - | - | ||||
Dividend Revenue on AFS Securities | - | 20,000 | ||||
Interest Expense | - | - | ||||
Bad Debt Expense | 28,000 | - | ||||
Amortization Expense | - | - | ||||
Income Tax Expense | - | - | ||||
Payroll Taxes Expense | 96,920 | - | ||||
Rebate Expense | - | - | ||||
Unrealized holding loss | - | - | ||||
Depreciation Expense-Storage Building | - | - | ||||
Loss on Impairment | - | - | ||||
Rebate Liability | - | - | ||||
Restricted Cash for Future Expansion | - | - | ||||
9,268,360 | 9,268,360 |
Topic 2: Consolidation: Intra-grouptransactions
On 1 July 2015, Ping Pong Ltd acquired all the issued shares ofSing Song Ltd. At the date of acquisition, the shareholdersâ equityof Sing Song Ltd consisted of share capital $120,000; generalreserve $25,000 and retained earnings $55,000. The identifiable netassets of Sing Song Ltd were recorded at amounts equal to theirfair values, except for the following assets:
Carrying amount | Fair value | |
$ | $ | |
Land | 100,000 | 130,000 |
Inventories | 78,500 | 86,100 |
Machinery (cost $86,000) | 52,000 | 56,000 |
Vehicles (cost $58,000) | 47,000 | 53,000 |
The assets of Sing Song Ltd at acquisition date includedgoodwill recorded at $15,000 arising from a business combinationtransaction in 2011. As at the date of acquisition, the vehiclesand machinery were expected to have a further useful life of 6 and8 years respectively, with benefits to be received evenly overthose periods. Inventories on hand on 1 July 2015 was all sold by31 January 2016. The land owned at 1 July 2015 was sold inSeptember 2016 for $150,000. The machinery on hand at 1 July 2015was sold on 1 January 2018 for $38,000.
Adjustments for the differences between carrying amount and fairvalues of assets and liabilities on hand at acquisition date arerecognised on consolidation. When assets are sold or derecognised,any related valuation reserves are transferred to retainedearnings.
At 1 July 2015, Sing Song Ltd owned but had not recorded aninternally generated brand name, an identifiable asset included aspart of the business combination transaction. This brand name wasconsidered by Ping Pong Ltd to have a fair value of $29,000 and anindefinite useful life. An impairment test conducted with respectto the brand name on 30 June 2018 concluded that its recoverableamount at that date was $2,000 less than its carrying amount.
In June 2017, Sing Song Ltd paid a share dividend worth $20,000from the general reserve on hand at 1 July 2015.
The trial balances of both companies at 30 June 2018 showed thefollowing balances:
Ping Pong Ltd | Sing Song Ltd | |||
Dr ($) | Cr ($) | Dr ($) | Cr ($) | |
Sales revenue | 450,000 | 320,000 | ||
Dividend revenue | 17,000 | - | ||
Other income | 11,400 | 17,000 | ||
Proceeds on sale of equipment | 18,000 | - | ||
Proceeds on sale of machinery | - | 38,000 | ||
Cost of sales | 210,000 | 192,550 | ||
Income tax expense | 30,000 | 32,000 | ||
Depreciation and other expenses | 39,000 | 36,000 | ||
Carrying amount of equipment sold | 21,000 | - | ||
Carrying amount of machinery sold | - | 30,500 | ||
Dividend paid | 10,000 | 5,000 | ||
Dividend declared | 20,000 | 12,000 | ||
Transfer to general reserve | 10,000 | 5,000 | ||
Share capital | 200,000 | 140,000 | ||
General reserve | 35,000 | 10,000 | ||
Retained earnings (1 July 2017) | 51,300 | 67,500 | ||
Accounts payable | 69,500 | 36,000 | ||
Loan payable (due 30 June 2022) | 25,000 | 15,000 | ||
Dividend payable | 20,000 | 12,000 | ||
Provisions | 12,500 | 9,300 | ||
Current tax liability | 43,000 | 34,000 | ||
Deferred tax liability | 11,800 | 5,000 | ||
Accumulated depreciation-vehicles | 16,400 | 60,000 | ||
Accumulated depreciation-equipment | - | 34,500 | ||
8%Debentures (matures 30 June 2021) | 25,000 | - | ||
Cash | 2,500 | 1,250 | ||
Receivables | 27,000 | 13,000 | ||
Inventories | 39,700 | 24,500 | ||
Other current assets | 15,200 | 8,200 | ||
Deferred tax assets | 7,500 | 3,500 | ||
Vehicles | 88,000 | 158,000 | ||
Equipment | - | 42,000 | ||
Land | 140,000 | 180,000 | ||
Financial assets | 68,000 | 14,800 | ||
Goodwill | 28,000 | 15,000 | ||
Shares in Sing Song Ltd | 250,000 | - | ||
Debentures in Ping Pong Ltd | - | 25,000 | ||
1,005,900 | 1,005,900 | 798,300 | 798,300 |
Additional information:
On 1 January 2018, Ping Pong Ltd sold an item of equipment toSing Song Ltd for $18,000. The equipment had a carrying amount atthe date of sale of $21,000. Both companies depreciate equipment at20% on a straight line basis.
On 1 May 2017, Sing Song Ltd sold a machine to Ping Pong Ltd for$7,800. The machine had a carrying amount of $7,000 at the date ofsale. Ping Pong Ltd recorded the machine as inventories. Theinventories item was sold to an external party in November 2017 for$8,200.
All interests on the 8% debentures has been paid and brought toaccount in the records of both companies.
During the 2017-2018 financial year, Ping Pong Ltd soldinventories to Sing Song Ltd for $75,000. The cost of theseinventories to Sing Song Ltd was $70,000. Of these inventories, 25%is still on hand at 30 June 2018.
The transfer to the general reserve recorded by Sing Song Ltd inthe current year was from retained earnings recorded at 1 July2015.
The tax rate is 30%.
Required:
Prepare an acquisition analysis.
Prepare the consolidation worksheet entries necessary to preparethe consolidated financial statements for the year ending 30 June2018 for the group comprising Ping Pong Ltd and Sing Song Ltd.
Note: you are not required to prepare the consolidationworksheet and the consolidated financial statements.