Case Study

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs, such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

Q1:a. Why has Gary Resnick suggested reclassifying some period costs as product costs? (i.e., what is the reason behind such a suggestion and why do you think reclassifying period costs to product costs will improve the net operating income?)

Q2:b. Why do you think Mary was alarmed about the memo? (You might think of it from ethical and other perspectives).

Case Study

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs, such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

Q1:a. Why has Gary Resnick suggested reclassifying some period costs as product costs? (i.e., what is the reason behind such a suggestion and why do you think reclassifying period costs to product costs will improve the net operating income?)

Q2:b. Why do you think Mary was alarmed about the memo? (You might think of it from ethical and other perspectives).

Hoffman Mining Limited needs the use of a large loader truck to transport mining material extracted from its Papua New Guinea gold mine to the associated processing and extraction plant. The cost of purchasing a new Caterpillar loader truck is $500,000. The company can obtain a 10-year interest and principal loan at an 8.50% per annum interest rate from the Bank of PNG Limited to fund the $500,000 purchase cost. If acquired, the loader truck will be depreciated on a straight-line basis over the 10-year asset life. Assume the asset will have no disposal value at the end of the mining project. Based on the above loan terms, the debt repayment schedule will be as follows:

Alternatively, the company can lease the loader truck through the Caterpillar PNG Mining Finance Company on a 10-year lease term based on annual lease payments made in advance (at the beginning of the year) of $60,000. Hoffman Mining Limited has a corporate tax rate of 30%. Assume that the tax benefits from borrowing or leasing payments / allowable deductions are obtained at the end of same year that payments are made.

Should Hoffman Mining Limited borrow-and-buy or lease the Caterpillar loader truck? (Note: Net advantage of leasing (NAL) = (PV of Tax Benefits from Leasing – PV of Tax Benefits from Borrowing) – Opportunity Cost of Leasing)

Complete the journal entries

Jan. 1 - Issued 6,500 shares of no-par common stock for $10 per share.
Jan. 1 - Purchased a computer equipment for $5,000. Monthly depreciation for the equipment is $250.
Jan. 3 – Paid $3,000 in rent on the warehouse building for the month of January
Jan. 6 - Purchased office supplies for $6,000.
Jan. 10 - Performed repairs and maintenance on their machine costing $1,500.
Jan. 11 - Purchased inventory on account for $95,000.
Jan. 16 - Declared and paid $15,000 in dividends to its shareholders.
Jan. 21 - Paid $55,000 to its suppliers for inventory purchased on credit in December 2019 ($45,000) and on January 11, 2020 ($10,000).
Jan. 25 - Provided services for which a customer had paid $7,500 in December of 2019 (hint: see the deferred revenue account in the January 1, 2020 trial balance).
Jan. 31 - Paid its employees $24,800 for work performed from December 26 – January 25. $4,800 was for work performed in December 2019, and 20,000 was for work performed from January 1 – January 25, 2020.
During January Packing Inc. made credit sales for $225,000. The cost of the goods sold was $123,750 (make one summary entry for the entire month).
During January Packing Inc. collected $145,000 in accounts receivable from customers (make one summary entry for the entire month).

Comparative balance sheets for 2021 and 2020, a statement of income for 2021, and additional information from the accounting records of Red, Inc., are provided below.

Additional information from the accounting records:

1. During 2021, $220.0 million of equipment was purchased to replace $160.0 million of equipment (95.0% depreciated) sold at book value.
2. In order to maintain the usual policy of paying cash dividends of $50.0 million, it was necessary for Red to borrow $50.0 million from its bank.

Required:
Prepare the T-account for Red, Inc.

Financial Statement Ratio Analysis

The following information (in $000) has been obtained from Diamond Limited’s financial statements for the fiscal years ending December 31.

2020 2019   2018

Total assets $738 $583 $514

Current liabilities 78 71 93

Total liabilities 229 164 169

Total shareholders’ equity 494 427   387

Income before taxes 87 63 56

Interest expense 10 6 5

Net cash provided by operating activities 117 99 99

Net income 62 49 53

Number of common shares outstanding 67 77 73

Taken from stock market at Dec. 31 $16.3 $12.44 $11.7

Market price per share (not in $000)

There are no preferred shares issued by Diamond.

REQUIRED: Show all calculations. Round all calculations to two decimal places. Use appropriate units for each ratio calculation.

A. Calculate the following items for Diamond Limited for fiscal years 2019 and 2020:

i) Current cash debt coverage ratio

ii) Cash debt coverage ratio

iii) Rate of return on assets

iv) Earnings per share

v) Price earnings ratio

vi) Times interest earned

B. Comment on whether there has been improvement or deterioration from 2019 to 2020 in the ratios calculated. Take the perspective of Diamond’s management. Briefly explain.

Reda Bhd is a company engaging in palm oil plantation which is based in Pahang. On 1
January 2010, the company acquired a factory building and a machine at a cost of
RM4,000,000 and RM800,000 respectively. The estimated useful life of the factory building
and the machine were as follows:
Factory building 50 years
Machine 20 years
Depreciation for all the assets is computed based on the straight-line method. The company
applied the revaluation model for all its property, plant and equipment. The followings are the
relevant information of the machine and the factory building.
Machine
On 30 November 2014, the operation manager of the company has proposed to the board of
directors, a new machine to replace the old machine. The new machine is equipped with the
latest technology which can increase the production capacity of the company. In line with this
decision, the company decided to conduct impairment test for the old machine.
As at 31 December 2014, Reda Bhd received a few offers from other factories to purchase
the available machine at RM500,000. Disposal cost for the machine is RM50,000. The value
in use is approximately RM750,000.
Factory building
At the end of 2016, the carrying value of the factory building was as follows:
RM
Net revalued amount as at 31 December 2014 4,500,000
Accumulated depreciation (From year 2015 to 2016) (200,000)
Impairment loss as at 31 December 2016 (600,000)
Carrying value as at 31 December 2016 3,700,000
The factory building was revalued on 31 December 2014 at RM4,500,000. During the year
2019, there were indications that the impairment loss recognised in 2016 may have been
reversed. The estimated recoverable amount is RM4,300,000.

Calculate the followings:
i. The impairment loss for the machine as at 31 December 2014.

ii. The amount of the reversal of impairment loss to be recognised in the Statement
of Profit or Loss for the factory building as at 31 December 2019. Show all
workings.

c. Prepare the journal entries to record the reversal of impairment loss for the factory
building as at 31 December 2019.

Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:

GALAXY TOYS INTERNAL MEMO

Sept 15

To: Harry Wilson, Controller

Fm: Gary Resnick, Executive Vice President

As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.

Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs--such as the rent on the finished goods warehouse?

Please let me know as soon as possible. The President is pushing for results.

Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

a. Why has Gary Resnick suggested reclassifying some period costs as product costs?

b. Why do you think Mary was alarmed about the memo?

Use the starting balance sheet, income statement, and the list of changes to answer the question.

Between January 1 and March 31, 2020:

1. Cash decreases by $200,000
2. Liabilities decrease by $100,000
3. Paid-In Capital does not change
4. Dividends paid of $400,000

What is the value for Other Assets on March 31, 2020?

Note: Account change amounts are provided in dollars but the financial statement units are thousands of dollars.

Please specify your answer in the same units as the financial statements (i.e., enter the number from your updated balance sheet).