Objective - The year end for Company is December 31 st . It is now April 20 th a
ID: 2492459 • Letter: O
Question
Objective - The year end for Company is December 31st. It is now April 20th and you have been asked to provide a memo to your Senior Manager that can be used as the basis for discussion with the owner that addresses the issues that concern you and the owner. You must address all of the issues in depth and provide recommendations on how to account for them.
Background - Company follows the Accounting Standards for Private Enterprises. Despite its revenues, company operates with few administrative staff, currently employing 12 individuals in addition to the owner, who is there every day. The owner is considering expanding his operations.
Issues:
1 - He is contemplating two debt options - How will they impact him and the current organization of his company:
a) traditional bank financing, or bonds;
b) He is also considering selling some of his common shares to five of his friends and relatives
2 - In December of this year, one of the company's trucks carrying bike and ski lubrication was in an accident. The substance spilled into a local river, contaminating the water supply. The company’s lawyers have stated that the local residents have filed a lawsuit for $2 million. They expect that the company will be found guilty but the settlement will be between $1.0 million and $1.8 million. The company has let its insurance policy expire and therefore does not have any coverage. Question - analyze the issues (qualitatively and quantitatively); and provide a recommendation
3 - On December 31, four of the company’s trucks were loaded with customer freight and sitting at the company’s loading docks. The goods were delivered to the customers on January 5th and 6th respectively. The revenue of $80,000 was recorded in the books on December 31st. Question - analyze the issues (qualitatively and quantitatively); and provide a recommendation
4 - The owner knows about the importance of internal controls but believes he needs a refresher. He had an individual from purchasing leave earlier this year and is now using the accounts payable person who also prepares the cheques to take care of all purchases. He is beginning to think that this is a good idea as it would save one salary. On the other hand, he does want to maintain controls and is interested in eliminating all potential problems. Question - He would like your recommendations about how he should deal with this.
5 - The company purchased equipment on January 1 five years ago for $80,000 and estimated an $8,000 salvage value at the end of the equipment’s 10-year useful life. On March 31st of this year, the equipment was sold for $21,000. The last entry to record depreciation was at December 21st of the prior year. No entries for the sale have been made yet. Question - analyze the issues (qualitatively and quantitatively); and provide a recommendation.
Explanation / Answer
1.
i) if preferred debt option what ever the the company's financial position i.e. whether in gets profits or losses it has to pay fixed amount as interest or coupon rate on bank loan or bonds respectively
ii) whereas when sold common shares, there is no such obligation to pay fixed amount on their investment. can pay only when company earns profits and also company need not declare dividend it can retain for reinvestment without any restrictions.
so it is always better to go with option ii)
2.
most likely out come with in range should be accrued for creation of provision or liability. as in the given case law suit was filed and company was guilty the contingency loss has to be created. the amount to be created is $1.8million as if range is provided and maximum range limit is to be taken. contingency means existing conditions, situations, or set of circumstances involve uncertainty as to possible gain or loss to an entity that will be resolved when one or more future events occur or fail to occur." If an estimated loss from a loss contingency meets the conditions for loss accrual in ASC 450-20, the loss contingency is accrued.
so contingent loss to be created for $1.8million.
3.
Revenue has to be recorded only when the risk and reward passed to the owner and proper arrangement has been made for the payment for sale or delivery of goods where the payment is assured.. so the revenue recorded on december 31st was wrong as at that time risk and reward not passed to the owner and reversal entry should be made for the entry made on dec31st and make records on jan 5th and 6th.
4.
There should be a separate persons for account payables and purchases which will be best practices of internal control as for this one should not have control over the work of other. if one person is there both for purchases and account payable there is a chance he may show more purchases and which ultimately have more account payables even though the actual purchase are less.
so separate persons should be adopted for better internal controls.
5.
DEPRECIATION UNDER ASC-250
depreciation = (purchase value - salvage value) / no. of yrs of asset life
= 80000 - 8000 / 10
=7200 / per annum
total depreciation for 5 years = 7200*5 = $36000
so present value of the asset = $80000 - $36000
= $44000
any asset sold out should be deducted from carrying amount and the asset sold was for $21000 so after deducting from present value of the asset i.e. which is at the beginning of the year the carrying amount at the end of the year will be $44000 - $21000 = $23000. as the entry for sale was not made, it has to be made as and when the asset was sold and it should be reduced from carrying amount. as per ASC-360.
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