intermediate accounting

Project Description:

question 1 (20 marks)

fisher and sons is a small privately owned company that operates a funeral home. during the current year, net income for the company dropped sharply from $1.5 million last year to $800,000 this year. the decrease was due largely to the settlement of a lawsuit for losing a corpse (a highly unusual event for the company).

the company uses chemicals in its embalming process that are felt by some neighbours to be toxic to the environment. the co-owner, nate fisher, has met with some community groups and has promised to pay $30,000 to mitigate the potential damage in order to avoid a potential lawsuit. however, he and his older brother, the other co-owner, david fisher, have not devised a plan yet and no money has been spent as of the year-end.

the company is now developing two new showrooms for caskets; one at a new location and the other at the original location. all direct costs related to the acquisition, development, and construction of the rooms, including interest and management costs, are being capitalized. however, the new showroom was blocked by some nearby elderly communities in the fear that a casket showroom will invoke fear and discomfort of the senior citizens. as a result, nate and david have decided to sell the new show room to nicholas, a florist. nicholas has already agreed to buy the showroom and to turn it into a flower shop at a price that covers all the costs incurred by fisher for constructing the closed showroom. the costs for the closed showroom have been capitalized together with the original showroom.

nate also signed a contract to buy new caskets from vanessa limited at $2,000 per casket. however, the current market value for those caskets is only $1,800 and it has been $1,800 for a couple months already. under this contract, nate’s company must buy a minimum of 10 caskets during the next year. david wants to recognize the loss in value in the year-end financial statements, but nate argues that the loss is temporary and should be ignored.


in response to declining sales, david has come up with an innovative sales plan. the company is offering the deceased’s family a 5-year no-down-payment funeral package with free financing for the first 3 years and 12% interest thereafter. the normal price of the funeral package is $4,000 and the cost is $2,800. the company is also going to offer banquet flowers free of charge, which are valued at $300, for each client. the flowers have a fair value of $300 but because the mother of the fishers has a connection with nicholas the florist, nicholas is only charging $200 (not included in the $2,800 estimated costs) for the flowers.

finally, claire, david and nate’s little sister, has been using the company’s car for a year now but the car still shows up as a non-current asset in the company’s financial statements. and she used to steal some of the cash (the amount of cash is immaterial) from the company’s petty cash box for her personal purpose!

required:

prepare a memo that addresses the financial reporting issues for fisher and sons. please limit your responses to three pages (double-spaced, single-sided, 10-12 font).


question 2 (15 marks)

the december 31, 2011 financial statements for hinton inc contained the following balances:
land $ 600,000
buildings 1,300,000
leasehold improvements 800,000
machinery and equipment 1,600,000

during 2012 hinton had the following transactions:

a. land site # 101 was acquired for $3,000,000. additionally, to acquire the land hinton paid an $180,000 commission to a real estate agent. costs of $30,000 were incurred to clear the land. during the course of clearing the land, timber and gravel were recovered and sold for $16,000.
b. a second land site, #102, with a building was acquired for $600,000. the closing statement indicated that the land was valued at $400,000 and the building value was $200,000. shortly after acquisition the building was demolished at a cost of $40,000. a new building was constructed for $300,000 plus the following costs:

excavation fees $12,000
architectural fees 16,000
building permit fee 4,000

the building was completed and occupied on september 30, 2012.
c. a third piece of land (#103) was acquired for $1,500,000 and was put on the market for resale.
d. extensive work was done to a building occupied by hinton under a lease agreement that expires on december 31, 2021. the total cost of the work was $250,000, as follows:
item cost estimated useful life
painting of ceiling $10,000 1 year
electrical work 90,000 10 years
construction of extension
to current working area 150,000 25 years
the lessor paid half of the cost incurred for the extension to the current working area.
e. during december 2012 $120,000 was spent to improve leased office space.
f. a group of new machines was purchased subject to a royalty agreement, which requires payment of royalties based on units of production for the machines. the invoice price of the machines was $270,000, freight costs were $2,000, unloading costs were $3,000 and the royalty payments for 2005 were $44,000.



required:

prepare an analysis of the changes in each of the following balance sheet accounts for 2012:
a. land
b. buildings.
c. leasehold improvements
d. machinery and equipment
you may ignore the accumulated amortization accounts. for any items above not included in your analysis indicate if and how they would be included in hinton’s financial statements.



question 3 (5 marks)

during 2011, majestic stores incorporated, a dealer in radio and television sets, buys large quantities of a television model that costs $500. the contract reads that if 200 or more are purchased in a year, a rebate of $20 per set will be made. on december 15, the records showed that 150 sets had been purchased, purchases had been recorded as 150 x 500 = $75,000. all these units had been sold. 50 more sets were ordered fob destination. the sets were received on december 22, and a request for the rebate was made. the rebate cheque arrived january 20, after majestic’s books were closed for the year. furthermore the supplier provides terms of 2/10 n/30. majestic has a policy of always paying invoices within the discount period. discounts are recorded as a credit to an interest income account. further investigation reveals that freight of $1,500 was paid to acquire the sets purchased during the year, including the last 50 sets.

required:

a) calculate the ending inventory value at december 31, 2011. (2 marks)

b) what entry should be made on december 31 relative to the rebate? (2 marks)

c) what entry should be made on january 20? (1 mark)
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