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Cases in Accounting.

Take-Home Mid-Term Exam.


Deadline for submission is Wednesday, March 3, 2010, 14:30

Problem # 1 (35 points)


Hardy

On 1 April 2003 Hardy acquired 4 millions Sibling common shares at $4.5 share, and 10 per cent
of Sibling preferred shares in amount of $500,000 (at face value). As of date of acquisition
Sibling’s retained earnings equaled $8,400,000. The balance sheets for Hardy and Sibling as of
March 31, 2006, are given below

Hardy Sibling
$000 $000
Assets

Long-Term Assets
Property, Plant and Equipment 42,450 22,220
Investments in Sibling’s common
shares 18,000 -0-
Investments in Sibling’s
preferred shares 500 -0-
60,950 22,220

Current Assets
Inventory 9,850 6,590
Receivables 11,420 3,830
Cash 490 -0-
21,760 10,420

Total assets 82,710 32,640

Equity
Common shares (face value $1) 10,000 5,000
Retained Earnings 52,640 15,280
62,640 20,280

Long-Term Liabilities
10% promissory note 12,000 4,000
10% redeemable preferred shares 2,000
12,000 6,000

Current liabilities
Payables 5,600 3,810
Overdraft -0- 570
Taxes 2,470 1,980
8,070 6,360

Total liabilities and equity 82,710 32,640

Additional information
a) Sibling’s property, plant and equipment includes land, reflected in financials at historical
cost $5,000,000. Its fair value at the date of acquisition equaled $7,000,000, and at the
March 31,2006 its fair value became $8,500,000. According to accounting policy, land
should be recorded at its fair value.
b) Also, Sibling’s property, plant and equipment as of date of acquisition included
equipment, which fair value exceeded book value by $4,000,000. Its remaining useful life
as of date of acquisition was 5 years. The equipment is amortized using straight-line
method. Fair values of other net assets were not materially different from book values.
c) During the year Sibling sold goods to Hardy at the price of $1,800,000. These goods
were sold at cost plus 20%. As of March 31 2006, Hardy’s inventory included goods
acquired from Sibling in the amount of $450,000. Sibling’s receivables and Hardy’s
payables included unpaid balance on this operation of $240,000.
d) Goodwill has been impaired by $1,488,000 since acquisition date.

Required
Prepare consolidated balance sheet for Hardy Group as of March 31, 2006 in accordance with
IFRS’s.
Problem # 2 (35 points)
Howdown

1 October 2001 Howdown acquired 80% of Sundown’s common shares at $2.50 (face value is
$1). Retained earnings as of this date was $600,000. 1 April 2003 Howdown acquired 50% of
Jennifer’s common shares (face value is $1). Howdown will exercise joint control over Jennifer
together with ABC Company. Howdown acquired Jennifer by shares exchange: 5 Jennifer’s
shares for 4 Howdown shares. As of date of Jennifer acquisition fair value of Howdown shares
equaled $5 per share. Share exchange is still NOT reflected in Howdown’s books. Balance
sheets for three companies as of September 30 are given below

Howdown Sundown Jennifer


$000 $000 $000
Assets

Long-Term Assets
Property, Plant and Equipment
8,400 2,630 2,000
Investments 4,000 350 -0-
12,400 2,980 2,000

Current Assets
Inventory 750 580 760
Receivables 370 440 300
Cash 120 -0- 240
1,240 1,020 1,300

13,640 4,000 3,300

Equity
Common shares (face value is $1) 2,000 1,500 1,000
Additional Paid-In Capital 1,200 500 700
Retained earnings as of October 1
2002 8,100 900 500
Profit (loss) for the year 1,500 (300) 600
12,800 2,600 2,800

Long-Term Liabilities
Deferred Taxes 400 200 100

Current liabilities
Payables 260 940 220
Taxes 180 190 180
Overdraft 0 70 0
440 1,200 400

13,640 4,000 3,300


Additional Information

1. 1 October 2001 Sundown owned investment property, which fair value exceeded net
book value by $150,000. Sundown carried this property in its books at historical cost less
any accumulated depreciation, but accounting policy of the group is to use fair values for
investment property. Fair value of this property has increased by $40,000 since
acquisition.
Fair value of Jennifer’s property, plant and equipment was $500,000 higher than net book
value as of acquisition date. This difference has been depreciated by $100,000 as of
September 30 2003.
2. In August 2003 Howdown sold goods to Jennifer at cost plus 25%. The transfer price was
$200,000. As of September 30, 2003, half of these goods were inventoried by Jennifer.
3. There was no intercompany receivables/payables as of September 30, 2003.
4. Goodwill in respect of Sundown has been impaired by $320,000 since acquisition, and
goodwill in respect of Jennifer has been impaired by $50,000 since acquisition.
5. Howdown uses proportionate consolidation in accordance with IAS 31 for jointly
controlled companies.

Required: prepare consolidated balance sheet for Howdown group as of September 30, 2003.
Problem # 3 (30 points)
Unadjusted trial balance for Larcher company as of September 30, 2006, is given below.

$000 $000
Common shares, face value $1 100,000
11% bonds 30,000
Retained earnings 23,440
Property, plant and equipment at
original cost (see note i) 216,740
Accumulated depreciation as of 50,740
October 1, 2005
Receivables (see note ii) 25,500
Payables 8,390
Lease payments (see note iii) 800
Sales 247,450
Cost of sales 166,050
Selling expenses 13,400
General and Administrative
expenses (see note ii) 12,300
Income tax expense (see note iv) 400
Bond interest paid (see note v) 1,650
Inventory 16,240
Cash 7,940
460,020 460,020

Further information
(i) Property, plant and equipment

$000 $000 $000


Land Buildings Equipment
Original cost 12,000 80,000 124,740

Depreciation as of October 1, 2005 0 16,000 34,740

Land and buildings were valued at fair market value of $120 million as of October 1, 2005,
including land at $20 million and buildings at $100 million. Service life of buildings which
originally was estimated at 50 years (subject to a zero salvage value) was not revised. After a
revaluation date, the remaining useful life makes 40 years. The Board wants to include land and
buildings in the financial statements for a year ending on September 30, 2006 at a revaluation
cost (given an effect of revaluation on depreciation).

Equipment shall be amortized at 15% using a declining balance method.

(ii) Factoring of receivables

Receivables stated in trial balance at the amount of $25.5 million do not include receivables of
$10 million, which were factored to Merchant Factoring for $9.5 million on September 30, 2005.
The $500,000 difference was recorded as administrative costs. As per terms of factoring
agreement, Larcher has to reimburse Merchant Factoring for the total amount of any receivables
which Merchant Factoring would not be able to collect during 5 months.
(iii) Lease payments

A lease payment of $800,000 was made on September 30, 2005. It is a first of five annual
payments. These annual payments are to be paid at the end of each year. The payments are for
the lease of a piece of equipment. The purchase price of similar equipment is $3 million. The
lease contract meets criteria for a capital lease with an implied interest rate of 10% p.a.

(iv) Income tax

As of September 30, 2005 income tax liability was estimated to be $9 million. Income tax is paid
within 6 months after a fiscal year-end. Income tax payable as of September 30, 2005 was
estimated to be $6.8 million. Correct amount for this tax liability turned out to be $7.2 million
and this sum was paid to the government on March 31, 2006.

(v) Bond interest paid

The Company paid one half of total interest on bonds for a year ended September 30, 2006.

(vi) Lawsuit
An employee has filed a lawsuit against the Company claiming a compensation of damage
incurred as a result of Company’s violation of work place safety regulations. The Company’s
lawyers are of opinion that there are two probable outcomes for the lawsuit:

Outcome probability Compensation by the


Company to the employee
Negligence of the employee 70% $3 ml

Negligence of the Company 30% $6 ml

Lawyer’s fees equal $500,000.

Required:
a) Prepare Income Statement for Larcher for the year ended September 30, 2006. Take into
account further information.
b) Prepare Statement of Changes in Equity for the year ended September 30, 2006.
c) Balance sheet