“US oil prices turned negative for the first time on record on Monday April 20th, 2020 after oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an historic market collapse which left oil traders reeling.” (The Guardian, April 20th, 2020)
On April 21st, 2020 the US president Donald Trump tweeted: “We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan, which will make funds available so that these very important companies and jobs will be secured long into the future!”
What factors or government policies do you think will help the price of oil to go up?
In: Economics
Case 2 In early 2019, PT X acquired share ownership of 2 entities, namely PT Y and PT Z with the following information: • PT X acquired a 30% stake in PT Y, where previously PT X owned 40% of PT Y. Based on the analysis conducted by PT X, the additional 30% share ownership resulted PT X has control over PT Y. • PT X acquired a 20% stake in PT Z, previously PT X owned 60% of PT Z. Based on the analysis conducted by PT X, on the initial ownership of 60% of PT Z's shares, PT X owns control of PT Z. With the additional 20% ownership of the shares, PT X has permanent ownership has control over PT Z. Towards the end of 2020, PT X sold part of its ownership to the two companies, with the following information: • PT X sold 15% of its ownership in PT Y's shares. Based on the analysis conducted by PT X, the sale did not cause PT X to lose control of PT Y. • PT X sold 40% of its ownership in PT Z's shares. Based on the analysis conducted by PT X, the sale caused PT X to lose control of PT Z. Describe the accounting treatment for PT X for its ownership of PT Y and PT Z when: 1. Acquisition of additional shares in early 2019. 2. Sale of partial ownership towards the end of 2020.
In: Accounting
In: Finance
Z Corporation has taxable income of $100,000 in 2020 after properly accounting for all the following items on the tax return. In reviewing the tax workpapers you discover the following notations. Indicate for each of the following transactions, what necessary adjustment to taxable income that is needed to determine the current E & P.
Label your answers A-E and indicate the dollar amount for each adjustment. If the adjustment is a negative one, enclose the amount in brackets. If no adjustment is needed, state None.
A. During 2020, the company paid $21,000 in federal income taxes
B. During 2020, the company elected to expense $40,000 under Section 179
C. In 2020, the company received $1,000 in tax-exempt income
D. In 2020, the company paid $6,000 in business meals.
E. In 2020, the company had $5,000 in capital gains. From 2019, they had a $4,000 capital loss carryforward which they could utilize in 2020.
In: Accounting
Consolidation of an International Subsidiary at Date of Acquisition
Fairview Corporation, a U.S. company, has a wholly-owned subsidiary in Mexico. The subsidary's functional currency is the Mexican peso, and translation to U.S. dollars is appropriate. The subsidiary was acquired for $10,800,000. The balance sheet of the subsidiary on the date of acquisition is as follows:
| Mexican Subsidiary Balance Sheet at Date of Acquisition |
|
|---|---|
| Assets | |
| Cash and receivables | P9,000,000 |
| Inventories | 21,000,000 |
| Noncurrent assets, net | 45,000,000 |
| Total assets | P75,000,000 |
| Liabilities and stockholders' equity | |
| Liabilities | P15,000,000 |
| Capital stock | 48,000,000 |
| Retained earnings | 12,000,000 |
| Total liabilities and stockholders' equity | P75,000,000 |
The fair values of the subsidiary's inventories are P30,000,000, and the fair values of the subsidiary's noncurrent assets are 42,000,000. All other amounts are reported at approximate fair value. The exchange rate at the date of acquisition is $0.10/peso.
Present a schedule showing the calculation of goodwill for the acquisition, in U.S. dollars, and the entries necessary to consolidate the balance sheets of Fairview and its subsidiary at the date of acquisition.
Instructions:
| Calculation of goodwill (in thousands) | |||
|---|---|---|---|
| P | $/P | U.S.$ | |
| Price Paid | Answer | Answer | Answer |
| Book value | Answer | Answer | Answer |
| Undervaluation of inventories | Answer | Answer | Answer |
| Overvaluationof noncurrent assets | Answer | Answer | Answer |
| Goodwill | Answer | Answer | |
Enter answers in thousands.
| ConsolidationJournal | ||
|---|---|---|
| Description | Debit | Credit |
| (E) | ||
| AnswerInvestment in subsidiaryInventoriesCapital stockCash | Answer | Answer |
| Retained earnings | Answer | Answer |
| AnswerCashCapital stockInvestment in subsidiaryInventories | Answer | Answer |
| (R) | ||
| AnswerInventoriesCashCapital stockInvestment in subsidiary | Answer | Answer |
| Goodwill | Answer | Answer |
| Noncurrent Assets | Answer | Answer |
| AnswerCapital stockCashInvestment in subsidiaryInventories | Answer | Answer |
In: Accounting
QUESTION 4
CASE STUDY
Read the following case study and then answer the
questions.
A market darling falls to Earth: The EOH
Meltdown
Background
EOH was listed on the JSE in 1997. Over the next
twenty years it grew to one of the largest technology businesses on
the African continent.
By 2017 it operated in 36 countries in Africa and
internationally. It had grown its annual turnover to R15,4 bn rand
and was generally viewed as a highly successful company. In 2016
the share price peaked at R177 per share. Because of its
performance, EOH shares were included in most investment
portfolios, including that of pension funds.
However, within a mere four years, EOH's market value
has collapsed, falling from a peak of R20 billion in 2016 to just
R3 billion at present. This is reflected in the 92% plunge in its
share price, from R174.83 to R14.61. So, what has caused this
massive sell-off?
The first cracks begin to show
In 2016, EOH was thrust into a corporate scandal after
allegations of compliance and governance irregularities emerged,
involving various government departments such as Defence, Water and
Sanitation, as well as the South African Police Service and
eThekwini municipality, among others. The rumours in the market
almost instantly translated into a massive loss in shareholder
confidence.
The management of EOH tried to quell the market fears
with the following statement:
"The combination of the macroeconomic environment and
the adverse, unfounded media coverage that EOH received,
temporarily affected the group's position in the market. Despite
these market conditions all areas of the business coped very
well."
For the time-being, the management could hold things
together. By the time the 2017 Annual Results were finalized the
performance of the company did not reflect the negative market
perceptions. But the rumours persisted, and this prompted the
company to launch an internal investigation into public sector
contracts.
Unfolding events
In May 2017, EOH announced that its founder and chief
executive Asher Bohbot, will be stepping down at the end of June
2017 after 19 years as the CEO. Zunaid Mayet who previously worked
as chief executive of the EOH Industrial Technologies division
replaced Bohbot as Group CEO. Bohbot then became the chairman of
the Board.
In March 2018, EOH announced that it would split its
business into two new operating entities. Rob Godlonton was
appointed to head the new EOH subsidiary and the EOH CEO Zunaid
Mayet was relinquishing his role as group CEO to take the reins at
the newly created subsidiary Nextec. This created room for a new
CEO.
In June 2018 Africa News 24-7 reported that the
National Homebuilders Registration Council and the National
Treasury placed EOH on a database of restricted suppliers. It was
believed that the Registration Council requested for the company to
be blacklisted after a contract was breached.
It was further announced that two non-executive
directors will resign from the EOH Holdings board with effect from
1 July 2018: Lucky Khumalo and Johan van Jaarsveld, and that four
executive directors: Brian Gubbins, Rob Godlonton, Ebrahim Laher
and Jehan Mackay, will relinquish their positions in the Board to
focus on their executive roles in the business.
These resignations cleared the way for a new "more
balanced" independent Board to be appointed.
In September 2018 Stephen Van Coller was appointed as
the new CEO. This was followed by the appointment of several other
people to establish a new management team.
In February 2019, the software giant Microsoft served
EOH with notice that they will terminate their channel partner
contract with the EOH after an anonymous whistle-blower filed a
complaint with the United States Securities and Exchange Commission
(SEC) in November 2018. They alleged misconduct and corruption in
relation to a R120 million contract that was concluded with the SA
Department of Defence. Notice was served whilst Microsoft launched
their own investigation.
It was estimated that the loss of the Microsoft
contract would wipe several millions off the profit line of the
company. In response to this news EOH's share price fell a further
4.3% to R13.46. This meant that the share had lost 71% of its value
in the preceding 12 months and 90% in the preceding three years.
Also, in February 2019, EOH founder Asher Bohbot, announced that he
will be stepping down as the Board Chairman in the interest of
improved governance. At the same time two other longstanding
members of the Board also stepped down namely Rob Sporen, a
non-executive director and founding member of EOH, who has been
with the group for 20 years, and Tshilidzi Marwala, another
non-executive director who had served on the board for 11
years.
In the very same month (February 2019) the Board of
EOH requested a law firm; ENSafrica (ENS), to conduct a
comprehensive investigation into EOH contracts in order to identify
any wrongdoing or criminal conduct in the acquisition, award or
execution of those contracts.
Further developments and remedial
actions
In June 2019, Dr Xolani Mkhwanazi, was appointed as
the new Chairman to the Board.
In July 2019, the ENS report was released. Several
senior executives had handed in their resignations prior to the
release of the report.
Although the report was not released to the public,
EOH announced that the investigation by ENS had found evidence of
serious governance failings and wrongdoing at the company. These
included unsubstantiated payments, tender irregularities and other
unethical business dealings primarily limited to public sector
business run from its head office as well as EOH Mthombo, a
division of the company.
EOH announced that they have terminated the employment
relationships with individuals who have been directly implicated in
the identified wrongdoing and indicated that it had reported the
concerns and the details of those implicated to the Directorate for
Priority Crimes Investigation, known as the Hawks.
In August 2019 it was announced that two more
directors resigned from their positions.
What does the future hold?
In October 2019 during an interview, Van Coller (the
new CEO) indicated that the corruption that has tainted EOH related
to contracts entered into between 2014 and 2017. It involved eight
people and approximately 20 suppliers. Action had been instituted
against those implicated.
He further indicated that the Board was busy
developing a comprehensive remedial plan, with a number of
measures, some of which had already been implemented. The recent
appointments of a new board chairperson and three independent,
non-executive directors were important milestones for the group to
enhance and complement leadership capability and governance
oversight.
He also indicated that audit firm PWC assisted the
company with setting up an internal audit function while ENS had
helped implement an anti-bribery programme based upon the
International Standard for Anti Bribery Management
Systems.
One question however remains, can a company such as
EOH survive this ordeal and will the remedial actions be enough to
steer EOH to more peaceful waters? Only time will tell.
Adapted from various newspaper
articles.
4.1 Explain why the events leading up to the
appointment of a new CEO and Chairman to the Board of EOH can be
seen as a breakdown in corporate governance. (4)
4.2 Identify/name four (4) stakeholders of EOH and
indicate how their interests were compromised by the unfolding
events and the drop in the share price. (8)
4.3 Identify and describe four (4) principles listed
by King IV which should have guided the Board of EOH, but which was
somehow compromised. This could relate to mistakes or failures by
the board or management of EOH. (8)
4.4 Will the shareholders of EOH have a possible claim
or legal recourse against the Board members who served between
2016-2018 for the fact that the value of their investments was
destroyed? In other words, can the Board be held liable?
(5)
In: Finance
Advise Linkitin Pty Ltd on sources of finance
Linkitin Pty Ltd is a new company with an interesting new service that shows great potential. However, the company needs more long-term finance to grow. Its founder, Chodar, is an expert in his area but he knows very little about business. He is currently the only shareholder of the company and has no family or friends that could provide further financing.
You have been asked to explain sources of long-term financing. You have decided to keep it simple and explain the difference between debt and equity and provide an example of each that would apply to a start-up business such as Linkitin.
In: Accounting
The Managing Director of Wraymand plc has asked you to prepare the statement of comprehensive income for the group. The company has one subsidiary undertaking, Blonk Ltd. The statements of comprehensive income of the two companies for the year ended 31 March 2020 are set out below. Statements of comprehensive income for the year to 31 March 2020 Wraymand Blonk £000 £000 Sales revenue 38,462 12,544 Cost of sales (22,693) (5,268) –––––– –––––– Gross profit 15,769 7,276 Dividend from Blonk Ltd 580 –––––– 16,349 Distribution costs (6,403) (2,851) Administrative expenses (3,987) (2,466) –––––– –––––– Profit from operations 5,959 1,959 Finance costs (562) (180) –––––– –––––– Profit before tax 5,397 1,779 Taxation (1,511) (623) –––––– –––––– Profit for the year 3,886 1,156 –––––– –––––– Further information: (i) Wraymand plc acquired 75% of the ordinary share capital of Blonk Ltd on 1 April 2019. (ii) During the year, Blonk Ltd sold goods which had cost £1,100,000 to Wraymand plc for £1,600,000. All of the goods had been sold by Wraymand plc by the end of the year.
In: Finance
Record the following transactions on the books of Hope Hospital, which follows FASB (not-for-profit) and AICPA standards. The year is 2020. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
Complete the Journal entrys.
1aHope received $69,000 in cash from pledges made in the previous year that were unrestricted as to purpose but intended to be received and expended in 2020. Record the cash from the pledges made in the previous year.
1bHope received $69,000 in cash from pledges made in the previous year that were unrestricted as to purpose but intended to be received and expended in 2020. Record the reclassification of the pledges received in the previous year.
02Hope received $113,000 in pledges that indicated the money would be received in 2021. The donors imposed no restrictions other than it could be used for any purpose desired by the board.
3aRecord the expense on nursing training.
3bRecord the transfer from donor restricted resources that had been given in 2019 for the purpose of nurse training.
4aOn June 15, 2020, Hope was awarded a $75,000 grant for cancer research by the U.S. Department of Agriculture.
4bDuring 2020, Hope had qualified expenses under the grant totaling $55,000.
4cRecord the expenses reimbursed under the grant totaling $55,000.
5aRecord the receipt in cash.
5bRecord the investment of the funds for future plant expansion.
5cRecord the demarcation of net assets-unrestricted for plant expansion.
In: Accounting
Robertson Real Estate Recapitalization
Founded 25 years ago by CEO Steve Robertson, Robertson Real Estate (RRE) purchases commercial real estate (land and buildings), rents both to tenants. The company has shown consistent annual profits over the past 18 years, and shareholders have been pleased with the company's management. Before he started RRE, Steve was also the founder and CEO of a now bankrupt Ostrich farm. This previous bankruptcy has made him extremely reluctant to undertake any type of debt financing, and he has financed the real estate company 100% with equity. Robertson Real Estate stock currently trades at $37.80 per share and has 8 million shares of common stock outstanding.
The company has been reviewing an opportunity to purchase a large segment of land in the southeastern United States for $85 million and plans to lease this property to one or more farming operations. The land purchase is expected to increase RRE's annual pretax earnings by $14.125 million in perpetuity. Raylynne Givins, the company's new CFO, determined the company's current cost of capital is 10.2%. She feels the company would be more valuable if it added some debt to its capital structure, so she is evaluating whether the company should issue debt to fully finance the project.
Based on conversations with several investment banks, Raylynne believes RRE can issue bonds at par value with a 6% coupon rate. Her analysis suggests a capital structure using 70% equity / 30% debt would be optimal. If the company's debt structure exceeds 30%, RRE's bond rating would be lower and require a significantly higher coupon due to the increased exposure to financial distress and the associated higher financing costs. RRE has a combined state and federal corporate tax rate of 23%.
Questions:
In: Finance