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.

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.