ACG-2021 Lecture Notes - Lecture 9: Macrs, Wheaties, Financial Statement

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3 Apr 2017

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Plant assets: plant assets are resources that have. Are used in the operations of a business. Are not intended for sale to customers. Are expected to provide service to the company for a number of years, except for land: referred to as property, plant, and equipment; plant and equipment; and fixed assets, plant assets are critical to a company"s success. Fair value of the asset given up or. Whichever is more clearly determinable: land. All necessary costs incurred in making land ready for its intended uses increase (debit) the land account. Costs typically include: cash purchase price, closing costs such as title and attorney"s fees, real estate broker"s commissions, accrued property taxes and other liens on the land assumed by the purchaser. In addition to all the costs necessary to purchase or acquire land, increase the land account"s balance by other costs incurred to ready the land for its intended use.

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Plant acquisitions for selected companies are as follows.

1. Pearl Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of $812,000. At the time of purchase, Torresâs assets had the following book and appraisal values.

	Book Values	Appraisal Values
Land	$232,000	$174,000
Buildings	290,000	406,000
Equipment	348,000	348,000

To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.

Land	174,000
Buildings	290,000
Equipment	348,000
Cash		812,000

2. Martinez Enterprises purchased store equipment by making a $2,320 cash down payment and signing a 1-year, $26,680, 10% note payable. The purchase was recorded as follows.

Equipment	31,668
Cash		2,320
Notes Payable		26,680
Interest Payable		2,668

3. Sandhill Company purchased office equipment for $18,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment	18,000
Cash		17,640
Purchase Discounts		360

4. Teal Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is $31,320. The company made no entry to record the land because it had no cost basis.

5. Flint Company built a warehouse for $696,000. It could have purchased the building for $858,400. The controller made the following entry.

Buildings	858,400
Cash		696,000
Profit on Construction		162,400

Prepare the entry that should have been made at the date of each acquisition

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1.The useful life of a plant asset is:

The length of time it is used productively in a company'soperations

Never related to its physical life

Its productive life, but not to exceed one year

Determined by the FASB

Determined by law

2. Depreciation:

Measures the decline in market value of an asset

Measures physical deterioration of an asset

Is the process of allocating to expense the cost of a plantasset

Is an outflow of cash from the use of a plant asset

Is applied to land

3. Plant assets are

Tangible assets used in the operation of a business that have auseful life of more than one accounting period

Current assets

Held for sale

Intangible assets used in the operations of a business that havea useful life of more than one accounting period

Tangible assets used in the operation of business that have auseful life of less than one accounting period

4. A company has net sales of $870,000 and average accountsreceivable of $174,000. What is its accounts receivable turnoverfor the period?

0.20

5.00

20.0

73.0

1,825

5. FICA taxes include:

Social Security taxes

Charitable giving

Employee income taxes

Unemployment taxes

6. Times interest earned is calculated by:

Multiplying interest expense times income

Dividing interest expense by income before interest expense

Dividing income before interest expense and any income tax byinterest expense

Dividing interest and income tax expense by income beforeinterest and income tax expense

7. Amortization:

Is the systematic allocation of the cost of an intangible assetto expense over its estimated useful life

Is the process of allocating to expense the cost of a plantasset to the accounting periods benefiting from its use

Is the process of allocating the cost of natural resources toperiods when they are consumed

Is an accelerated form of expensing an asset's cost

Is the same as depletion

8. A method of estimating bad debts expense that involves adetailed examination of outstanding accounts and their length oftime past due is the:

Direct write-off method

Aging of accounts receivable method

Percentage of sales method

Aging of investments method

Percent of accounts receivable method

9. A company purchased a tract of land for its natural resourcesat a cost of $1,500,000. It expects to mine 2,000,000 tons of orefrom this land. The salvage value of the land is expected to be$250,000. The depletion expense per ton of ore is:

$0.75

$0.625

$0.875

$6.00

$8.00

10. The matching principle requires:

That expenses be ignored if their effect on the financialstatements are less important than revenues to the financialstatement user

The use of the direct write-off method for bad debts

The use of the allowance method of accounting for bad debts

That bad debts be disclosed in the financial statements

That bad debts not be written off

11. Liabilities:

Must be certain

Must sometimes be estimated

Must be for a specific amount

Must always have a definite date for payment

Must involve an outflow of cash

12. In the accounting records of a defendant, lawsuits:

Are estimated liabilities

Should always be recorded

Should always be disclosed

Should be recorded if payment for damages is probable and theamount can be reasonably estimated

13. A contingent liability:

Is always of a specific amount

Is a potential obligation that depends on a future event arisingout of a past transaction or event

Is an obligation not requiring future payment

Is an obligation arising from the purchase of goods or serviceson credit

Is an obligation arising from a future event

14. Total asset turnover is calculated by dividing:

Gross profit by average total assets

Average total assets by gross profit

Net sales by average total assets

Average total assets by net sales

Net assets by total assets

15. If the times interest ratio:

Increases, then risk increases

Increases, then risk decreases

Is greater than 1.5, then the company is in default

Is less than 1.5, the company is carrying too little debt

16. Promissory notes that require the issuer to make a series ofpayments consisting of both interest and principal are:

Debentures

Discounted notes

Installment notes

Indentures

Investment notes

17. A company borrowed $300,000 cash from the bank by signing a5-year, 8% installment note. The present value factor for anannuity at 8% for 5 years is 3.9927. Each annuity payment equals$75,137. The present value of the note is:

$75,137

$94,013

$300,000

$375,685

18. A bond traded at 102

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Topics 1 to 3 - Consolidation: Principles, accounting requirements, intra-group transactions and non-controlling interests

Parent Ltd acquired 80% of the issued shares of Subsidiary Ltd on 1 July 2014. At the acquisition date, the equity of Subsidiary Ltd consisted of Share Capital of $200,000; Retained Earnings of $ 74,000 and General Reserve of $6,000.

Parent Ltd uses the full goodwill method. The fair value of non-controlling interest at 1 July 2014 was $63,000.

All the identifiable net assets of Subsidiary Ltd were recorded at fair value at the date of acquisition, except for the following assets:4

	Carrying amount	Fair value
	$	$
Plant (cost $150,000)	100,000	110,000
Land	60,000	76,000

The plant has a further 10-year life, with benefits expected to be received evenly over that period. The land was sold on 1 February 2015 for $80,000. Any valuation reserve in relation to the land is transferred to retained earnings on consolidation.

Three years after acquisition, the financial information at 30 June 2017 of the two companies appears as follows:

	Parent Ltd	Subsidiary Ltd
	$	$
Sales	632,000	440,000
Other revenue:
Debenture interest	10,000	-
Management and consulting fees	10,000	-
Dividends from Subsidiary Ltd	24,000	-
Total revenue	676,000	440,000
Cost of sales	260,000	170,000
Manufacturing expenses	180,000	120,000
Depreciation on plant	30,000	30,000
Administrative expenses	30,000	16,000
Financial expenses	22,000	10,000
Other expenses	28,000	24,000
Total expenses	550,000	370,000
Profit before tax	126,000	70,000
Income tax expense	(50,000)	(34,000)
Operating profit after tax	76,000	36,000
Retained earnings 1 July 2016	100,000	90,000
	176,000	126,000
Transfer to general reserve	6,000	-
Interim dividend paid	20,000	20,000
Final dividends declared	20,000	10,000
	46,000	30,000
Retained earnings 30 June 2017	130,000	96,000
General reserve	100,000	20,000
Other components of equity	26,000	20,000
Share capital	600,000	200,000
Debentures	400,000	200,000
Current tax liability	50,000	34,000
Dividend payable	20,000	10,000
Deferred tax liability	-	14,000
Other liabilities	180,000	24,000
	1,506,000	618,000
Assets
Financial assets	100,000	120,000
Debentures in Subsidiary Ltd	200,000	-
Shares in Subsidiary Ltd	263,200	-
Plant (cost)	240,000	204,000
Accumulated depreciation â plant	(130,000)	(110,000)
Other depreciable assets	152,000	110,000
Accumulated depreciation	(80,000)	(50,000)
Inventory	180,000	170,000
Deferred tax asset	170,800	60,000
Land	402,000	114,000
Dividend receivable	8,000	-
	1,506,000	618,000

Additional information:

(a) The inventory on hand of Subsidiary Ltd on 1 July 2016 included a quantity priced at $20,000 that was transferred from Parent Ltd during the prior financial year. This inventory had cost Parent Ltd $15,000. This entire inventory was sold by Subsidiary Ltd to parties external to the group during the current financial year.

(b) Subsidiary Ltd sold inventory to Parent Ltd for $120,000 during the year. This inventory had an original cost to Subsidiary Ltd of $110,000. This entire inventory was held by Parent Ltd during the year.

(c) On 1 January 2016, Subsidiary Ltd sold an item from its inventory to Parent Ltd for $40,000. Parent Ltd had treated this item as an addition to its plant. The item was put into service as soon as received by Parent Ltd and depreciation charged at 20% p.a. The cost of that item to Subsidiary Ltd was $30,000.

(d) The management and consulting fees of Parent Ltd were all paid by Subsidiary Ltd and represented charges made for administration $4,400 and technical services $5,600. The latter were recognised as manufacturing expenses by Subsidiary Ltd.

(e) All debentures issued by Subsidiary Ltd are held by Parent Ltd. The related interest has been recorded by Parent Ltd accordingly and Subsidiary Ltd recorded the interest paid in financial expenses.

(f) Other components of equity relate to movements in the fair values of the financial assets. The balance of these accounts on 1 July 2016 was $20,000 for Parent Ltd and $16,000 for Subsidiary Ltd.

(g) The tax rate is 30%.

Required:

Prepare an acquisition analysis and the consolidation journal entries necessary for preparation of the consolidated financial statements for the year ending 30 June 2017 for the group comprising Parent Ltd and Subsidiary Ltd.

Note: show all necessary workings and narrations.

Question 1	Max. marks allocated
Acquisition analysis	5
Consolidation entries - accuracy	35
Total	40

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ACG-2021 Lecture Notes - Lecture 9: Macrs, Wheaties, Financial Statement

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