Forecast the Pro forma Financial Statements for Company C using the % of Sales Method assuming: sales increase by $100,000 in 2017; the company must increase Fixed Assets to $200,000 to support the higher level of production; all new financing will come from additional debt, and the payout ratio, the effective tax rate, and the rate of interest on debt will remain unchanged from 2016. Based on two iterations, what do you forecast for the amount of debt and the D/E-ratio required to support this new growth?

On January 1, 2016, Acorn company acquired an 80% interest in Bengal company’s voting stock for $288,000. On that date Bengal had a $300,000 book value and the fair value of the non-controlling interest was $72,000. On January 1, 2017, Bengal acquired 80% of Canaris Company for $104,000 when Canaris had a $100,000 book value and the value of the non-controlling interest was $26,000. In each acquisition, the excess of fair value over book value was assigned to Tradename with a 30-year useful life. These companies reported the following financial information for the years 2016-2018:

Note: Assume that all companies use the equity method of accounting. Note: The solution to part II will include the amortization amounts calculated in Part I.

Required:

1. Calculate the annual amortization pertaining to Bengal and Canaris

b. Calculate the value of Acorn’s investment in Bengal at 12/31/2017.

From the following Account Balance and additional information, you are required to prepare for the year ended 30 June 2016. All figures exclude GST where relevant.

(a) Manufacturing Statement showing each element of cost;

(b) Income Statement.

Green Landscaping Inc. is preparing its budget for the first quarter of 2017. The next step in the budgeting process is to prepare a schedule of cash collections and a schedule of cash payments. The following information has been collected: All sales are on account and 60% is collected in the month of sale, 30% 1 month after the sale, and 10% two months after the sale. Actual sales revenues for November 2016 were $80,000 and December 2016 $90,000. Projected sales revenue for January 2017 $100,000, February 2017 $120,000, and March 2017 $140,000. Purchases of direct materials are made on account and 60% is paid in the month of purchase and 40% in the month following the purchase. Actual purchases of direct materials for December 2016 are $14,000. Projected purchases of direct materials for January 2017 $12,000, February 2017 $15,000, and March 2017 $18,000.

Instructions:
(a) Prepare a schedule of cash collections from sales by month for January, February, and March 2017.
(b) Determine the accounts receivable balance as of March 31, 2017.
(c) Prepare a schedule of cash payments for direct materials by month for January, February, and March 2017.
(d) Determine the accounts payable balance as of March 31, 2017.

The following items are documented in the audit working papers:

1. Sales transaction included in the year ended December 31, 2016, but evidence from the cut-off procedure suggests that the sale should be dated January 2, 2017 ($1,250,000).

2. Warranty expenses in the trial balance for the year to December 31, 2016, total $150,000; the provision for warranty claims as at December 31, 2015, was $100,000. Evaluation of correspondence suggests that an additional $200,000 in warranty claims could result from ongoing disputes with customers. No provision for these claims has been made. Management has made a warranty provision for 2016 of $120,000.

3. Severance expenses related to reorganization of head office administration were incorrectly charged to rental expenses ($578,920). 4. Management has not recorded an impairment for assets. A drought-induced recession has hurt property values in regional cities where seven branch offices are located. (Head office and two branch offices are located in the capital city.) Total land and buildings in the trial balance is $5.5 million.

Required: Independently evaluate each item above and:

i. State whether it is an error or a judgemental misstatement and justify your reasoning.

ii. State the account(s) which would be affected.

Portions of the financial statements for Myriad Products are provided below. MYRIAD PRODUCTS COMPANY Income Statement For the Year Ended December 31, 2016 ($ in millions) Sales $ 700 Cost of goods sold (245 ) Gross margin 455 Salaries expense $ 100 Depreciation expense 78 Patent amortization expense 5 Interest expense 18 Loss on sale of land 4 (205 ) Income before taxes 250 Income tax expense (125 ) Net Income $ 125 MYRIAD PRODUCTS COMPANY Selected Accounts from Comparative Balance Sheets December 31, 2016 and 2015 ($ in millions) Year 2016 2015 Change Cash $ 117 $ 110 $ 7 Accounts receivable 230 247 (17 ) Inventory 445 460 (15 ) Accounts payable 165 154 11 Salaries payable 85 96 (11 ) Interest payable 40 30 10 Income taxes payable 30 20 10 Required: Prepare the cash flows from operating activities section of the statement of cash flows for Myriad Products Company using the direct method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Case 15-6 Effects of stock options

On January 1, 2016, as an incentive to improved performance of duties, Recycling Corp adopted a qualified stock option plan to grant corporate executives nontransferable stock options to 500,000 shares of its unissued $1 par value common stock. The options were granted on May 1, 2016, at $25 per share, the market price on that date. All the options were exercisable one year later and four years thereafter, providing that grantee was employed by the corporation at the date of exercise.

The market price of this stock was $40 per share on May 1, 2017. All options were exercised before December 31, 2017, at times when the market price varied between $40 and $50 per share.

Required:

a. What information on this option plan should be presented in the financial statements of Recycling Corporation at i)December 31, 2016 and ii)December 31, 2017? Explain.

b. It has been said that the exercise of such a stock option would dilute the equity of existing stockholders in the corporation.

i. How could this happen? Discuss.

ii. What conditions could prevent a dilution of existing equities from taking place in this transaction? Discuss.

Question 3

Level Up reported the following information for 2016 and 2017:

Accounts payable, 31 December 2016 $50 000      

Accounts payable, 31 December 2017 $80 000    

Inventory, 31 December 2016 $60 000  

Inventory, 31 December 2017 $150 000    

Cost of goods sold—2017 $1 000 000

Assume that all merchandise purchases are on account. How much cash was paid to suppliers for inventory purchases during 2017?

1. $1 085 000                              
2. $1 060 000                               
3. $1 070 000                          
4. $1 115 000

Question 4:

Which of the following statements is false regarding how the cash flow effects of the changes in the equipment and accumulated depreciation accounts would be reported on a statement of cash flows if the indirect method is used to prepare the operating activities section?                               

1. The cash paid to purchase equipment would be reported as a cash outflow in the investing activities section                                
2. Cash proceeds from the sale of the equipment would be reported as a cash inflow in the investing activities section

3. Depreciation expense would be added to total comprehensive income in the operating activities section                                
4. A loss on the sale of the equipment would be subtracted from total comprehensive income in the operating activities section

The Nathan Company acquired all of the outstanding stock of Caleb Company on January 1, 2014 for P267,800 cash. Caleb had a book value of only P182,000 on that date. However, equipment (having an eight-year life) is undervalued by P52,000 on Caleb’s financial records. A building with a 20-year life was overvalued by P13,000. Subsequent to the acquisition, Caleb reported the following:

In accounting for this investment, Nathan has used the cost method. Selected accounts taken from the financial records of these two companies as of December 31, 2016, are as follows:

Required:

Determine the following account balances as of December 31, 2016.

1. Net Income Attributable to Equity Holders of the Parent
2. Non-controlling Interest in Net Income of Subsidiary
3. Consolidated Net Income
4. Consolidated Equipment (net)
5. Consolidated Buildings (net)
6. Consolidated Goodwill (net)
7. Consolidated Ordinary Shares
8. Consolidated Accumulated Profits