Oak Creek Company is preparing its master budget for 2020. Relevant data pertaining to its sales, production, and direct materials budgets are as follows.

Sales: Sales for the year are expected to total 1,000,000 units. Quarterly sales are 20%, 25%, 25%, and 30%, respectively. The sales price is expected to be $40 per unit for the first three quarters and $46 per unit beginning in the fourth quarter. Sales in the first quarter of 2021 are expected to be 10% higher than the budgeted sales for the first quarter of 2020.

Production: Management desires to maintain the ending finished goods inventories at 20% of the next quarter's budgeted sales volume.

Direct materials: Each unit requires 2 kg of raw materials at a cost of $10 per kilogram. Management desires to maintain raw materials inventories at 10% of the next quarter's production requirements. Assume the production requirements for the first quarter of 2021 are 630,000 kg.

1. Prepare the sales budget by quarters for 2020.

2. Prepare the production budget by quarters for 2020.

3. Prepare the direct materials budget by quarters for 2020.

In the fall of 1999, a group of managers met in Scandinavia for the first of three negotiations involving four companies from three different countries and a family of products. The situation was a common one: a buyer tells a supplier it wants prices reduced by 10 percent and, “Oh by the way, we’ll also be soliciting quotes from your major competitor.” At the heart of the meetings was the buyer’s corporate agenda to cut costs. Cost-cutting is a common theme among large corporations. Even in good times, they have been known to pressure their vendors to lower prices and to play vendors off against each other. This case illustrates what actions a supplier might take in this situation. Other vendors who may find themselves in similar situations can take these actions as well. BACKGROUND FD is a Dutch manufacturer of filtration products. Rather than selling directly to end customers, throughout the 1970s and 1980s, FD sold oil filters and oil filter cartridges (replacements) to Swedish and Finnish heavy equipment manufacturers who, in turn, branded and sold the products to their own customers. In the late 1980s the Scandinavian market for oil filters began to change. The Finnish government consolidated many of the region’s heavy equipment manufacturers into one company, Conquip. About the same time, FF, a Finnish competitor of FD, began supplying filters to Conquip that were similar to those supplied by FD. Because the Finnish government had a stake in both FF and Conquip, FF was able to gain market share quickly. As a result, entire divisions of Conquip began replacing FD as their supplier of filters in favor of FF. By the late 1990s, only Conquip Truck, a Swedish division of Conquip, remained as a dedicated customer of FD filters in the region. FD was determined to keep Conquip Truck as a customer. Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 2 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett In the mid-1990s FD had introduced a new filter cartridge design called LEIF (Low Environmental Impact Filter). FD had hoped that the LEIF products would block further FF inroads into the market for oil filters. The patented LEIF product family, which included LEIF filter housings and LEIF replacement cartridges, was designed to fill increasing demand for environmentally friendly products and to tackle the problem of imitators such as FF. LEIF’s new technology meant that LEIF cartridges were cheaper to produce than the old filters, and so could be offered at a lower price. In the environmentally conscious Scandinavian market, LEIF was the product of choice. Conquip Truck started purchasing LEIF replacement cartridges from FD and prepared to begin purchasing LEIF filter housings as well. But before LEIF could be widely adopted and marketed, Conquip Corporate launched an initiative aimed at reducing supplier costs within its divisions. In 1999, Conquip Corporate sent FD a list and asked FD to quote its best prices for these filters. This RFQ (request for quote) seemed like an ultimatum. If FD did not quote competitive prices, Conquip might force its Conquip Truck division to stop buying from FD. FD had been aware of Conquip’s supplier cost initiative, but the RFQ came rather earlier than FD had hoped, as even within Conquip Truck LEIF still had not been widely adopted. THE NEGOTIATIONS Marc de Winter, the FD marketing and sales director, studied the product list in the RFQ and proposed a meeting in Finland to discuss this request. This meeting turned out to be the first in this case’s series of three meetings and negotiations. Meeting 1: Information Exchange and Relationship Building FD’s goals for the first meeting were to develop a relationship with the Conquip representatives and, in the process, find out about Conquip’s objectives, positions, and interests. Developing personal rapport and trust with Conquip’s corporate office would be extremely important in any future negotiations. FD attended the meeting along with FILTECH, its Swedish distributor. The discussion helped reveal Conquip’s goal: reducing prices on all filtration products supplied by FD and FF Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 3 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett over the next three years. At the meeting, Conquip offered to retain FD as a companywide, primary supplier if FD could meet its price demands. However, de Winter was suspicious of this offer because of the close relationship between Conquip and FF. He thought that it would be difficult to hold Conquip to its promise. Moreover, many of FD’s highvolume products were conspicuously missing from Conquip’s RFQ. De Winter concluded that Conquip just wanted quotes from FD on products that competed directly with FF products, no doubt for the purpose of reducing FF’s prices. Despite his suspicions, de Winter promised to prepare a quotation based on the information given, and a second meeting was scheduled for later that fall to discuss and negotiate pricing options. In a side discussion after the first meeting, FD and FILTECH came to the conclusion that Conquip was trying to replace FD with FF throughout the company. It was a tough situation: unless FD was able to meet Conquip’s demands and convince them to keep FD as a supplier, FD risked losing all of its business with this major Finnish customer. Meeting 2: The Negotiation Before the second meeting de Winter assessed the situation. There were three main issues to discuss: pricing; product type; and volume of sales to Conquip, including to how many and which of Conquip’s divisions FD could sell its LEIF product range. FD and FILTECH’s highest priorities were to maintain positive margins and a long-term sales relationship with Conquip. FD also had some sense that Conquip was interested in sales in the high-margin aftermarket (the market for filter replacement cartridges) and to ensure low procurement costs from FD. Conquip’s interest in scope of sales (number of products), however, was not as clear. FD walked into the negotiation with a poor BATNA: no agreement meant FD risked losing all its Conquip business to FF. FD was aware of this poor BATNA, but did not want to make concessions too easily and look weak. Meanwhile, Conquip seemed to have a strong BATNA: the company could easily switch to FF filters. However, if de Winter could convince Conquip of the value of LEIF’s innovative technology, Conquip’s BATNA would weaken: it would have no supplier of a product that would be equivalent to the patented LEIF product. Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 4 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett Both FD and FILTECH enjoyed sizeable margins on filter sales to Conquip Truck. They knew they could meet Conquip’s 10 percent price cut demand over three years and still enjoy healthy margins. The negotiation began with an almost exclusive focus on the price. The sides haggled over de Winter’s prices on items in Conquip’s RFQ. As a result of this focus on one issue, negotiations proved to be difficult. De Winter did offer a series of different proposals that incorporated different levels of pricing, different product lines, and so on, but Conquip rejected all these proposals, insisting on a 10 percent discount across all products. Conquip would not discuss any other issues without an agreement first on price. It seemed like an impasse until de Winter began to focus on Conquip’s aftermarket sales. He guessed that Conquip might be willing to accept smaller price cuts if it could increase aftermarket sales. Unknown to de Winter at the time, in the aftermarket for FF replacement cartridges, Conquip was losing market share to its competitors. De Winter explained that LEIF’s patents would ensure a strong position for Conquip in the aftermarket. (Customers with LEIF filters would demand LEIF replacement filters manufactured by FD, which only Conquip could supply.) This meeting ended with Conquip agreeing to commit Conquip Truck to LEIF products at prices reduced by 7 to 9 percent (depending on the product) over three years. Conquip also promised to seriously consider FD as a supplier for its other divisions. Meeting 3: Post-Agreement Negotiations Several days after the agreement resulting from meeting 2, de Winter received a phone call from Conquip Corporate indicating that the pricing was not acceptable after all. Conquip Corporate wanted to renegotiate prices before signing the final agreement. De Winter made clear that he was not coming to Finland or Sweden again to renegotiate a deal in which all parties had already come to a verbal agreement. He invited them to Holland if they wanted to renegotiate. Ultimately a meeting was set up between Conquip Corporate and FILTECH in Sweden. This final negotiation resulted in Instructor’s Guide Negotiating Globally IG Appendix 1.2.1 5 Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett an extra price decrease that would be shouldered by FILTECH (not FD) and a promise to give FILTECH more business at another Conquip division in Sweden where business had been lost previously.

DISCUSSION QUESTIONS 1. Why did Conquip send an RFQ with a 10 percent price reduction requirement rather than calling de Winter in for a negotiation? Is there any downside to having run the negotiation this way?

2. At the first negotiation meeting, Conquip made a threat disguised within an offer. The offer was to retain FD as a companywide, primary supplier if FD could meet its price demands. A. What was the threat embedded in this offer? B. Why was this offer not credible to de Winter?

3. If FD could have reduced prices by the 10 percent requested by Conquip and still have a positive and reasonable margin, why negotiate? Why not just reduce the price to save the business?

4. How did Marc de Winter improve his bargaining position at meeting 2? What general negotiation principle did he employ? How well did it work?

Problem 4

Rent A Car, Inc. (RAC) purchased 100 vehicles on January 1, 2020, spending $2 million plus 11 percent total sales tax for a total cost of $2,220,000. RAC expects to use the vehicles for five years and then sell them for approximately $360,000. RAC anticipates the following average vehicle use over each year ended December 31:

To finance the purchase, RAC borrowed $1.8 million by signing a 6% promissory note.  The note is to be repaid in full by December 31, 2024.  On December 31 of each year, RAC makes one payment on the installment note comprising blended interest and principal components.  The amortization schedule for the note is presented below.  RAC has a December 31 year-end.  The company does not make monthly adjustments, but rather makes adjusting entries every quarter.

The note carries loan covenants that require RAC to maintain a minimum times interest earned ratio of 3.0. RAC forecasts that the company will generate the following sales and preliminary earnings (prior to recording depreciation on the vehicles and interest on the note). For purposes of this question, ignore income tax.

Required:

1. Assuming the company makes the required annual payments on December 31, use the amortization schedule to determine:
   1. The amount of the annual payment                                                           
   2. The total interest and principal paid over the note’s life                           

2. What portion of the Note Payable balance would be reported as current versus noncurrent on the December 31, 2021, balance sheet? Fill-in the two blanks below.

Note Payable, Current $                                              

Note Payable, Noncurrent                                          

3. Calculate the depreciation expense that would be recorded in 2020 and 2021, using the (a) straight-line, (b) double-declining balance, and (c) units-of-production depreciation method. [5 marks]

                                                                                                2020                            2021    

a) straight line:

b) double-declining balance:

c) units-of-production:

4. Using the information provided and your answers to requirement 3, determine net income and the loan covenant ratio in 2020 and 2021, assuming the company chooses the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method. [6 marks]

                                                                                                2020                            2021    

a) straight line:

Net Income =

Times Interest Earned Ratio =

b) double-declining balance:

Net Income =

Times Interest Earned Ratio =

c) units-of-production:

Net Income =

Times Interest Earned Ratio =

5. Using your answers to requirement 4, indicate whether the loan covenant would be violated under the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method.
6. If the loan covenant is violated at any point in requirement 5, what can the company do to make sure they are not offside?

Consolidation spreadsheet for continuous sale of inventory - Equity method
Assume that a parent company acquired a subsidiary on January 1, 2016. The purchase price was $600,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following AAP assets:

The AAP assets with a definite useful life have been amortized as part of the parent’s equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired.

Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2018 and 2019:

The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The parent uses the equity method to account for its Equity Investment.

The financial statements of the parent and its subsidiary for the year ended December 31, 2019, follow in part d below.

a. Show the computation to yield the pre-consolidation $80,400 Income loss from subsidiary reported by the parent during 2019.

b. Show the computation to yield the Equity Investment balance of $1,152,000 reported by the parent at December 31, 2019.

c. Prepare the consolidation entries for the year ended December 31, 2019.

d. Prepare the consolidation spreadsheet for the year ended December 31, 2019.

Duval Company acquired a machine on January 1, 2018, that costs $2,700 and has an estimated residual value of $200. Required a) Complete the following schedule for 2019 using: A) straight-line, B) units-ofproduction, C) double declining-balance Method Estimated Useful Life or Units Depreciation Expense for 2019 Accumulated Depreciation at 12/31/2019 A SL 5 years B UOP 10,000 units (estimated total) 1,000 units (actual year 2018) 1,200 units (actual year 2019) C DB 5 years b) Duval estimates the future cash flows from the asset (fair value) to be equal to $1,500. Using the straight-line method, at the end of 2019, what is the result of the impairment test?

Pratt Company acquired all of the outstanding shares of Spider, Inc., on December 31, 2021, for $490,350 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows:

At December 31, 2021, the following financial information is available for consolidation (credit balances in parentheses):

Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2021.

1) Grasshopper Room Company acquired land and buildings for $1,500,000. The land is appraised at $475,000 and the buildings are appraised at $775,000. The debit to the Buildings account will be:
A. $930,000
B. $775,000
C. $570,000
D. $1,025,000

2) Blockware Corporation has selected to use the revaluation model for its assets. Recently it had its building appraised. The appraiser placed a $5.0 M value on the building. Back in 2012 this building was purchased for $4.0M. This increases in value over cost requires a:
A.Dr. to accumulated depreciation
B.Dr. to revaluation surplus
C.Cr. to revaluation surplus
D.Cr. to the building account

3)Big Rock Times Corporation (BRT) acquired equipment on January 1, 2014, for $300,000. The equipment had an estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2017, BRT Corporation revised the total useful life of the equipment to 6 years and the estimated salvage value to be $10,000. Compute the book value of the equipment as of December 31, 2017, if BRT Corporation uses straightminus−line depreciation.
A.$148,333
B.$151,667
C.$190,000
D.$155,000

4)A loss is recorded on the sale of property, plant, and equipment when:
A. the asset's book value is greater than the amount of cash received from the sale
B. the asset is sold for a price greater than the asset's book value
C. a loss on the sale of property, plant, and equipment is not allowed according to GAAP
D. the asset's book value is less than the balance in Accumulated Depreciation

Plug Products owns 80 percent of the stock of Spark Filter Company, which it acquired at underlying book value on August 30, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Spark Filter. Summarized trial balance data for the two companies as of December 31, 20X8, are as follows:

On January 1, 20X8, Plug's inventory contained filters purchased for $77,000 from Spark Filter, which had produced the filters for $57,000. In 20X8, Spark Filter spent $117,000 to produce additional filters, which it sold to Plug for $158,053. By December 31, 20X8, Plug had sold all filters that had been on hand January 1, 20X8, but continued to hold in inventory $47,416 of the 20X8 purchase from Spark Filter.

What is the consolidated net income? I'm coming up with 126,790 but that's not correct

Vanguard Company acquired a depreciable asset on 1 July 2017 for $500,000, paid in cash. The asset was estimated to have a useful life of ten years and was depreciated on a straight-line basis. Vanguard chose the cost model for accounting for assets in this class. Disposal value at the end of the useful life is zero. Indicators of impairment have been identified for the reporting periods ended 30 June 2018, while indicators for a reversal of impairment have been identified for the reporting period ended 30 June 2019. There was no change in the estimated useful life or the disposal value of the equipment.

The recoverable amounts of the depreciable asset on these days were as follows:

Date                            Recoverable amount

30 June 2018                      $360,000

30 June 2019                      $340,000

REQUIRED:                                                                                                                  

Prepare journal entries, including narrations, relating to this depreciable asset from 30 June 2018 to 30 June 2019, assuming that the company complies with AASB 116 – ‘Property Plant and Equipment’ and AASB 136 – ‘Impairment of Assets’. Show all

Plug Products owns 80 percent of the stock of Spark Filter Company, which it acquired at underlying book value on August 30, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Spark Filter. Summarized trial balance data for the two companies as of December 31, 20X8, are as follows: Plug Products Spark Filter Company Debit Credit Debit Credit Cash and Accounts Receivable $ 164,000 $ 91,000 Inventory 227,000 119,000 Buildings & Equipment (net) 270,000 182,000 Investment in Spark Filter Company 281,790 Cost of Goods Sold 168,000 133,000 Depreciation Expense 35,000 25,000 Current Liabilities $ 159,861 $ 27,661 Common Stock 181,000 89,000 Retained Earnings 464,000 205,000 Sales 278,339 228,339 Income from Spark Filter Company 62,590 Total $ 1,145,790 $ 1,145,790 $ 550,000 $ 550,000 On January 1, 20X8, Plug's inventory contained filters purchased for $79,000 from Spark Filter, which had produced the filters for $59,000. In 20X8, Spark Filter spent $119,000 to produce additional filters, which it sold to Plug for $159,339. By December 31, 20X8, Plug had sold all filters that had been on hand January 1, 20X8, but continued to hold in inventory $47,802 of the 20X8 purchase from Spark Filter. Required:

a. Prepare all consolidation entries needed to complete a consolidation worksheet for 20X8. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Compute consolidated net income and income assigned to the controlling interest in the 20X8 consolidated income statement.

c. Compute the balance assigned to the noncontrolling interest in the consolidated balance sheet as of December 31, 20X8.