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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




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




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






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




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




(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:


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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Sep 13, 2020





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