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(solution) We're really struggling trying to get our statement of cash flow


We're really struggling trying to get our statement of cash flow to balance for our project.  We haven't been able to get them to balance for any of the options, however we've been predominately been focusing on Option 1 since there wasn't much to it.  Can someone please help and take a look at the information provided and perhaps offer some guidance as to what we might be doing wrong in Option 1?  The excel file includes all the tabs relevant to option 1.  Please note all the 2013 data was provided for us as well as the unadjusted trial balance 2014 data.  


ACC 1118 W15 ? Prac,ce Set Assignment

 

COMPANY BACKGROUND

 

CM Corporation (CMC) was founded in 1998 by Eric Conner and Phil

 

Martin. The company designs, installs, and services security systems for

 

high-tech companies. The founders, who describe themselves as

 

"entrepreneurial geeks," met in a computer lab when they were teenagers

 

and found they had common interests in working on security systems for

 

critical industries.

 

CMC have released many successful products into the market throughout

 

the past 16 years and they continue to anticipate growth potential for its

 

products, which will require additional funds to finance this growth. As a

 

result, it is planning to go to the market with a new common stock issue at

 

the end of 2015. Conner and Martin have been informed of the different

 

accounting frameworks available to private companies in Canada and have

 

decided to comply with International Financial Reporting Standards (IFRS)

 

due to their plans of going public in the near future. CMC has a December

 

31 fiscal year-end date. CURRENT SITUATION

 

It is now December 1, 2014 and the company?s December 31, 2014 yearend is fast approaching. Connie and Martin have hired you as an accounting

 

intern to help them analyze certain accounting issues so they can gain a

 

better understanding of the exisUng accounting standards and make strategic

 

financial decisions before the 2014 fiscal year ends.

 

CMC has equipment with an original cost of $440,000 and is depreciated

 

over an eight-year life. CMC?s accounting policy for this group of assets is

 

amortized cost subject to annual depreciation using the double-decliningbalance method. This particular equipment has an esUmated a residual

 

value of $50,000. AXer recording depreciation expense for 2014, the

 

equipment is now fully depreciated to its salvage value of $50,000.

 

Going forward, Conner and Martin are questioning the accounting for

 

depreciation. They argue that they don't think it is necessary to record

 

depreciation expense on the income statement because it does not involve a

 

cash outlay. In addition, they do not see the necessity for reducing the

 

equipment value on the balance sheet. They wonder whether CMC should

 

just stop depreciating its equipment from this point forward. COMPLETE REQUIRED #1 CMC is considering replacing this equipment. Conner and Martin believe

 

that the best time for this equipment replacement is at the end of 2014

 

(assume December 31, 2014). However, they are concerned about the

 

effects this replacement might have on their financial statements,

 

specifically on key performance ratios such as Quick Ratio (Acid-Test) and

 

Debt-to-Asset Ratio.

 

Conner and Martin tell you that they have thought of five options regarding

 

the replacement of the old equipment. They could (1) construct the new

 

equipment themselves and then sell the old equipment, (2) exchange the

 

old equipment for new equipment that is more efficient, (3) purchase new

 

equipment and sell the old equipment, (4) overhaul the old equipment, or

 

(5) lease new equipment and sell the old equipment.

 

Conner and Martin appear increasingly confident in your analytical skills,

 

and they have asked you to determine the effects of the above

 

alternatives on the 2014 projected financial statements and ulUmately

 

recommend a course of action. They have gathered the following information

 

to help with this analysis.

 

Option 1: Construct the new equipment in-house and sell the old equipment

 

for cash at a fair value of $60,000. CMC would liquidate short-term

 

investments (FV- NI) to fund construction. The short-term investments have a

 

current fair value of $1 million. AnUcipated actual expenditures for

 

constructing the equipment are $650,000. (Note: Construction is assumed to

 

be completed at year-end.)

 

Option 2: Exchange the equipment for a similar piece of equipment with a

 

fair value of $685,000. Conner and Martin have checked the secondary

 

market and have found that the fair value of the old equipment is $60,000.

 

They estimate that CMC can borrow $350,000 on a one-year, 10% note; the

 

balance will be funded with an accounts payable arrangement with the

 

supplier.

 

Option 3: Purchase the new equipment by giving a non-interest-bearing

 

note with five payments of $164,000 at the beginning of each year to the

 

supplier. The prevailing interest rate for obligations of this nature is 10%.

 

The old equipment will also be sold for $60,000 cash.

 

Option 4: Overhaul the existing equipment. The following immediate

 

expenditures are anUcipated under this approach: (1) The normal annual cost

 

for lubrication and replacement of minor parts to maintain the integrity of

 

the exterior body would be $27,000. (2) The cost of re-wiring interior

 

components in an overhaul would be $125,000. (3) Replacing old worn

 

components would cost $82,000 with associated labour costs of $210,000 for installation. The overhaul is estimated to extend the useful life of the

 

equipment another four years. ?The components being replaced had an

 

original cost of $60,000. (The present equipment's original useful life was

 

eight years at the end of 2014, starting January 1, 2007.) The costs will be

 

financed through a one-year loan for $350,000 at 10%, and the balance will

 

be charged on account.

 

Option 5: Tyler Leasing Company would acquire the equipment and lease it

 

to CMC. The lease payments would be $145,661 for five years, paid at the

 

beginning of each lease period. CMC would guarantee the residual value of

 

$125,000 at the end of the lease period. The fair market value of similar

 

equipment is $685,000. The implicit interest rate in this offer is 10%, which is

 

also CMC?s borrowing rate. The old equipment be retained under this

 

option and used internally for parts. COMPLETE REQUIRED #2 AND REQUIRED #3

 

CMC reports goodwill on its balance sheet. Conner and Martin indicate that

 

the goodwill was from the acquisition of small ?garage-type? soXware

 

development companies purchased a few years ago. CMC purchased the

 

soXware companies so that it could incorporate their soXware into the CMC

 

product line as well as to gain the expertise of their employees.

 

Conner and Martin argue that no amortizaUon should be recorded for

 

goodwill because they have heard there is no reliable way to establish a

 

useful life for the goodwill. However, they also know that a number of

 

lawsuits have been filed against companies that have accounted for

 

intangible assets incorrectly. So they want to know if CMC is doing the right

 

accounting in regard to its goodwill.

 

In addition, they have heard that company names oXen have ?value?

 

similar to a brand. They believe that the CMC name is becoming well-known

 

in the industry and believe that recognizing this brand name in the financial

 

statements makes sense for a fair presentation. They believe that the name is

 

worth at least $125,000. They wonder, though, what effect the recording of

 

this intangible will have on net income.

 

Every year CMC invests significantly in applied research and development,

 

which in many cases lead to successful technological advancements in the

 

security equipment they offer customers. Both shareholders? aspire to

 

provide their clientele with the most effective security devices available to

 

the market. They truly believe that the expected total research and

 

development investment in 2014 of $200,000 will help them achieve this goal. COMPLETE REQUIRED #4 CMC purchased some shares of one of its suppliers, Infrared Co., as an

 

investment. CMC paid $140,186 for the shares. Although management

 

plans to hold this investment for the long-term, the company may need to

 

sell it in the future for liquidity purposes. Conner and Martin also think

 

that making investments in some of their other suppliers can be a good way

 

to ensure quality and consistency in the components they buy from these

 

suppliers. Because many of its suppliers are public companies, it should be

 

fairly easy for CMC to buy shares on the open market.

 

Conner and Martin mention that they might go so far as to buy 10?15%

 

of the common stock of one of their main suppliers and up to 30% of the

 

common stock of another supplier of routers, which are a critical piece in the

 

CMC system. They want you to help them understand whether it makes a

 

difference if they buy just 10?15% or if they buy 30% of these suppliers'

 

shares. Both these suppliers have been around for a while, and with very

 

few exceptions, the parts ordered from them have been of high quality and

 

delivered on time; Conner and Martin tell you that if they do buy these

 

stocks, they anticipate holding them for a long time. COMPLETE REQUIRED #5

 

INSTRUCTIONS:

 

THIS PRACTICE SET IS DUE BY 11:55 PM END OF WEEK 3

 

Students are required to submit a printed AND electronic version of the group

 

report which will include the main report and related exhibits (all

 

spreadsheets from ?Required #1 (b)? and ?Required #2?).

 

There is no minimum or maximum length required for this assignment.

 

Main report must be 1.5 spacing, 12 point font size.

 

All late-submitted reports or incomplete components will receive a grade

 

reduction of 10% per day.

 

Complete the following required in order they appear within the main

 

case study. Please be sure to carefully read the required, incorporate case

 

facts and use your textbook as a point of reference to complete this prac,ce

 

set.

 

Required #1 (10 marks)

 

(a) Determine the following concerning depreciation: (1) What is the general concept underlying depreciation? (2) How does depreciating an asset portray a more realistic picture of both the performance of the

 

company and its financial position? (3) What is the effect on CMC's

 

financial statements if Conner and Martin decide not to depreciate the

 

equipment?

 

(b) Use an Excel spreadsheet to prepare a depreciation schedule for the old equipment over its eight-year life, using the double-declining-balance

 

method. Also within this spreadsheet, record the journal entry for

 

depreciation that would be made in the third year of the equipment's

 

useful life. (Save this under the file name ?Required 1 ? Deprecia,on

 

Schedule?) (c) Please explain the merits of an accelerated depreciation method, such as double-declining-balance. In your answer address the following issues:

 

Does the type of company or industry have anything to do with the

 

choice of depreciation method selected? What effect does matching

 

have on the decision to use double-declining-balance depreciation versus

 

straight-line depreciation?

 

Access the Excel files provided to your group and complete the

 

following steps for EACH option to replace or upgrade the equipment:

 

In Spreadsheets (provided by instructor): (30 marks)

 

1) Record all necessary journal entries in the ?General Journal? tab. Label each entry with a reference number such as ?JE#1, JE#2?. 2) Transfer the adjustments made in (1) above, and reference numbers, to the ?proposed adjustment? column in the ?Trial

 

Balance? tab to establish an ?adjusted trial balance?. 3) Complete the 2014 projected financial statements (all other tabs) per the ?adjusted trial balance? in (2) above. Careful review

 

should be made prior to submikng the practice set to ensure

 

specific statements balances properly tie-in with other statements.

 

For example, ensure cash balance on the statement of financial

 

position agrees to the ending cash balance on the statement of cash

 

flows. In Report (produced by students): (15 marks)

 

4) Perform pros/cons analysis of each option, including qualitative and quantitative factors such as the impact on financial

 

statements areas, key ratios, investor decisions, etc. Please

 

reference your spreadsheets as exhibits to your main report

 

when discussing data pertaining to these spreadsheets. For further information on key ratios (quick ratio and debt-to-assets

 

raUo), please visit: www.investopedia.com

 

5) Recommend an option for CMC to pursue that is supported by the analysis performed in (4) above. Be Advised: You are required to work with and submit five separate

 

spreadsheet files for the five options. You may adjust the structure of the

 

trial balance and individual statements by adding accounts and line items

 

as you see fit. Make sure that all new items created are properly flowing

 

to all inter- related schedules of the financial statements. Please

 

ensure that all spreadsheet formulas used (if any) are properly formaned

 

as marks are based on the numbers provided and not formulas.

 

At the next management team meeting, Conner and Martin express

 

some concern that any new equipment acquired to replace the old

 

equipment may become obsolete within the next two to five years. A

 

number of popular-press articles have recently discussed the increasing

 

number of asset impairments occurring in their industry. Conner and

 

Martin therefore want to know how the accounting rules for

 

impairments would apply to any new equipment. Refer to your text to

 

determine the guidance for on impairments including the timing and

 

calculation of the amount under both accounting models (ASPE and

 

IFRS) and recommend which should be used at CMC. Recall that Conner

 

and Martin think that expenses that do not involve cash ouolow should

 

not be recorded, so be sure you describe the reasons for recording

 

impairments. Required #4 (5 marks)

 

Provide some guidance to CMC management about the proper treatment of

 

goodwill and company names or brands. Also provide some clarification

 

relating to the treatment of the company?s $200,000 investment in R&D

 

activities which have historically been expensed. Remember to write for nonaccountants so they know that you know what you are talking about. Required #5 (4 marks)

 

Use the investment in Infrared Co. to illustrate the accounting and financial

 

reporting implications of an equity investment in a supplier. While the

 

growth prospects for Infrared are quite good, in the current year it reported a

 

net loss of $120,000 and paid cash dividends of $24,000. The fair value of the Infrared shares is $150,000 at year-end. Prepare journal entries for the

 

Infrared investment, assuming:

 

(a) CMC's investment represents 10% of Infrared shares.

 

(b) CMC's investment represents 30% of Infrared shares. Indicate the differenUal effect on income between the accounting for the

 

conditions under assumptions (a) and (b).

 


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