EMICYEAR2019-2020
Question No 3:
Five Star enterprises is a multinational company situated in Muscat and is operating in more than
26 different countries. Majority of multinational companies are facing a problem that accounting
rules are different around the world. Same is the case with Five Star enterprises. While preparing
their statements, they often have to prepare them twice, once in their home country in accordance
with the home country rules and once abroad in accordance with the foreign rules. Additionally,
every region has different historical backgrounds, norms and political systems. They also have
different patterns of financial accounting practices.
Due to all these factors and practices, businesses are under high risk by treating same problems
differently all over. Likewise others, Five Star enterprises also faces difficulties while preparing
their financial results. The management finds it risky, when same company operating in different
countries follows different pattern of reporting. To consider these different accounting rules, now
throughout the world, there is strong need of international harmonisation, and nearly all the
countries in the world now support to develop a set of international accounting standards.
It focuses on narrowing the areas of difference and to eradicate undesirable alternative practices
in financial reporting. It is process of merging and combining various practices into an organized
structure, which produces collaborative result. It is believed some companies have a public
accountability to a great variety of interest groups. These differences which are in the mind of
accountants lead to different views on what is suitable accounting treatment.
a. You are the country manager of Five Star enterprises Oman. Your head office in Italy, is
receiving collective feedback from all the branches. Being the representative of Five Star
enterprises, what would be your feedback in support of harmonisation?
b. In your opinion, what were the challenges faced by Five Star enterprises while preparing their
annual report and explain how it can be avoided in future?
Your answer should be around 400 words for each question.

In the spring of 2019, Patrick Egbunonu retired as the tennis pro of the Cataraqui Tennis Club, an exclusive indoor/outdoor club in Kingston, Ontario. A special committee of the board of directors was formed to find a replacement for the combined job of tennis pro and owner of the pro shop and bar lounge. Nine candidates had applied for the position, but the board’s first choice was John “The Racquet” Conrad. His qualifications and experience were excellent, and the committee believed his reputation as the two-time Canadian amateur tennis champion would enhance the status and prestige of the club.

After learning of the job offer, Conrad accepted immediately. He was excited about the opportunity to invest his hard-earned savings into a business he knew and loved. On July 1, 2019, Conrad incorporated the pro shop and bar lounge area and deposited $100,000 into the corporation’s bank account in exchange for common shares. Also, on that day, Conrad purchased an inventory of racquets, balls, clothes, shoes, and accessories (i.e. the pro shop inventory) valued at $16,340, liquor inventory valued at $13,660, $11,000 worth of fixtures and $4,000 of glassware. The business was to receive all sales from the pro shop and bar lounge and would pay part-time help to sell goods and serve drinks. The business uses a perpetual inventory system.

Conrad was an immediate success. He was readily accepted by all the members and was regarded as an asset to the club. Much of his time was spent instructing individuals while the better players anxiously awaited an opportunity to strike up a match with Conrad. Given his busy schedule, Conrad did not keep a close watch on his accounting records. He did, however, attempt to keep an accurate cash record and decided not to worry about the rest until fiscal year-end.

On June 30, 2020, Conrad began to examine his records and notes. His cash records revealed the following:

Cash Records Continued:

1 Conrad was required to pay rent to the club in the amount of $1,500 per month for use of the space.

2 Does not include payment made on July 1, 2019, for initial pro shop inventory

3 Does not include payment made on July 1, 2019, for initial liquor inventory

Conrad was sure his bank account was correct, but he did not know what else he should record. He went to Michelle Paquin, a local chartered professional accountant (CPA) and club member, to ask for help.

Paquin began by examining the chequebook, invoices, and other records Conrad had accumulated in a shoe box. She found two outstanding bills: one for additional lounge fixtures of $4,200 (purchased on June 1, 2020) and a $2,000 invoice for the purchase of pro shop goods for resale (purchased on June 18, 2020), due in 30 days. (These items are not included in the above payments list)

On June 30, 2020, Conrad had 11 racquets in the shop, waiting to be restrung. Although he had done no work on the racquets and had not collected any money from customers, his normal rate for restringing was $175 per racquet, including materials.

The members purchased liquor “chit books” or vouchers in the pro shop for use in the bar lounge. Although the chit book cash receipts of $64,550 were noted, $650 of the chits had not been used as of June 30. These amounts could be carried over to the following year.

The fixtures purchased on July 1, 2019, had an estimated useful life of five years, whereas the new fixtures would last an estimated eight years. Due to frequent breakage, glassware had a much shorter useful life of two years. These assets would be depreciated using the straight-line method with no residual value.

During the year, Conrad instructed 606 sets of lessons for $100 per set. He had also played 155 matches with members, charging $150 per match. Conrad had not yet received payment for four of those matches. Davis felt that the social pressures among the club’s memberships would ensure full payment for all debts owed.

On June 30, 2020, Davis helped Conrad take a physical inventory count and found that there was $17,880 worth of pro shop inventory and $11,920 worth of liquor inventory.

Income taxes are calculated at a rate of 30 per cent of net income before tax.

REQUIRED:

1. Journalize all transactions and year-end adjusting entries for the year ending June 30, 2020. Explanations and dates are not required, but please show calculations where applicable and leave two lines between each journal entry. You can number each journal entry instead of dating them – just to keep it simple!

Organize your entries as follows (as a suggestion): • Transactions that occurred during the year (number these as T1, T2, etc....) • Year-end adjusting entries (number these as YE1, YE2, etc...)

2. Post the entries from requirement (1) to the applicable General Ledger accounts.

3. Prepare a worksheet to verify the accuracy of the net income. Check figure: net income before tax should be $35,419. Do not forget to record the income tax expense and income tax payable @ 30% of this amount, thereby resulting in a net income after tax in the amount of $24,793.

4. Prepare an income statement and a statement of retained earnings for the year ended June 30, 2020.

5. Prepare a classified balance sheet as at June 30, 2020.

6. Journalize and post the year-end closing entries to the applicable General Ledger accounts. Explanations and dates are not required, but please show calculations where applicable and leave two lines between each journal entry. You can number each journal entry instead of dating them – just to keep it simple! Organize your entries as follows (as a suggestion): • Closing entries (number these as C1, C2, etc...)

On January 1, 2020, The Fio Corporation purchased a machine for $600,000. The corporation estimated a 5-year useful life (or 300,000 units of useful life) and $60,000 residual/salvage value.

45000 Units were produced in 2020.

6 points:

Complete the following table using the indicated depreciation method and year for each row of the table.

4 points:

What would the journal entry be if the straight-line method was used and the machine was sold on 12/31/2020 for $500,000?

Pronghorn Co. provides the following information about its postretirement benefit plan for the year 2020.

Prepare a worksheet inserting January 1, 2020, balances, showing December 31, 2020, balances, and the journal entry recording postretirement benefit expense. (Enter all amounts as positive.)

A 58-year-old man was admitted for abdominal surgery. He was extremely agitated and had several questions for the health care team. He often asked the same question in a different way. Following surgery, he was lethargic but seemed to be resting comfortably. Shortly after transfer back to the floor, he awoke in pain and was quite agitated. After receiving medication for his pain, he was able to rest. On the third day postoperatively, his wife was obviously upset when she came to visit, although she was trying to hide her feelings. Eventually, she admitted that a notice had arrived in the mail notifying him that his employer had declared bankruptcy and closed down. The patient became very distressed. Later, after his wife left, he became despondent, complaining of a headache and wondering how long he would have to remain in hospital. He told the nurse that he was worried about his benefit plan and whether his hospital costs would be covered.

1. Based on the patient history and the signs and symptoms, discuss the stages of stress response that the patient is experiencing and might experience in the future. (See Three Stages in Stress Response—GAV.)

2. Discuss other problems that this patient might experience as a result of stress and the underlying physiological cause of these problems. (See Stages in Stress Response, Significant Effects of the Stress Response.)

Hands Insurance Company issued a $90 million, one-year note at 8 percent add-on annual interest (paying one coupon at the end of the year) or with an 8 percent yield. The proceeds were used to fund a $100 million, two-year commercial loan with a 10 percent coupon rate and a 10 percent yield. Immediately after these transactions were simultaneously closed, all market interest rates increased 1.5 percent (150 basis points). a. What is the true market value of the loan investment and the liability after the change in interest rates? b. What impact did these changes in market value have on the market value of the FI’s equity?What was the duration of the loan investment and the liability at the time of issuance? d. Use these duration values to calculate the expected change in the value of the loan and the liability for the predicted increase of 1.5 percent in interest rates. e. What is the duration gap of Hands Insurance Company after the issuance of the asset and note? f. What is the change in equity value forecasted by this duration gap for the predicted increase in interest rates of 1.5 percent? g. If the interest rate prediction had been available during the time period in which the loan and the liability were being negotiated, what suggestions would you have offered to reduce the possible effect on the equity of the company? What are the difficulties in implementing your ideas?

The following information is available for Ivanhoe Company. 1. Purchased a copyright on January 1, 2020 for $62,400. It is estimated to have a 10-year life. 2. On July 1, 2020, legal fees for successful defense of the copyright purchased on January 1, 2020, were $17,784.

Prepare the journal entries to record all the events related to the copyright during 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
Jan 1st 2020, July 1st, 2020, Dec 31st, 2020

At December 31, 2021, an impairment test is performed on the copyright purchased in 2020.

It is estimated that the net cash flows to be received from the copyright will be $62,400, and its fair value is $59,280. The accumulated amortization at the end of 2021 was $15,288. Compute the amount of impairment, if any, to be recorded on December 31, 2021. (If there is a loss on impairment, then enter amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Purple Co. began business on January 1, 2020. The following items caused the only differences between pretax financial income and taxable income.

1. On January 2, 2020, heavy equipment costing $800,000 was purchased. The equipment had a life of 4 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below:

                                                      Tax Depreciation                                        

              2020              2021                 2022                   2023                Total    

            $360,000         $180,000          $140,000          $120,000          $800,000

2. On January 2, 2020, $360,000 was collected in advance for rental of a building for a two-year period. The entire $360,000 was reported as taxable income in 2020, but $180,000 of the $360,000 was reported as unearned revenue at December 31, 2020 for book purposes.

3. In 2020, the company had an accounts receivable of $420,000 for goods that had been delivered to the customer in 2020. It will be collected in 2021.

4. Purple Co. deducts insurance expense of $210,000 for tax purposes in 2020, but the expense is not yet recognized for accounting purposes. In 2021, 2022, and 2023, no insurance expense will be deducted for tax purposes, but $70,000 of insurance expense will be reported for accounting purposes in each of these years.

The enacted tax rates existing at December 31, 2021 are:

2020                 20%                             2022                 30%

            2021                20%                              2023                30%

                                                                        2024                30%

Instructions:

1. For items 1)-4), indicate whether it involves a deferred tax asset, deferred tax liability, or permanent difference.

1):                    2):                    3):                    4):                    

Purple’s taxable income for 2020 was $900,000. Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020. Show your work.