Question

What is the answer to these tables? 

here is all the information that had been given to me and my answers to the question that I think needs to be answered to complete the two tables

You have been hired as a Financial Consultant by Heavy Equipment and Machinery Inc. (HEMI).  HEMI is a private corporation that has finished its first year of operations. HEMI's owners plan to list the business on the Toronto Stock Exchange  (TSE) in the next 5 years; accordingly, are keen to have their financial statements reflect the business in the best light possible using the IFRS Accounting Standards.  HEMI's operations are considered to be similar to Wajax Corporation listed on the TSE

1.      HEMI has a perpetual inventory system with purchases and sales being recorded by its computerized inventory system using the weighted average cost method.  HEMI has purchased and placed heavy equipment transmissions at Suncor in Fort McMurray on consignment.  Suncor benefits from having the spare part readily available and HEMI saves on storage costs.  Accountant has been asked by HEMI’s management to provide a profitability report for the consignment arrangement with Suncor.  The accountant extracted the sales ($20,500,000) and cost of sales ($18,504,180) numbers from HEMI’s accounting system.  The accountant wants you to:

a.      Compute the gross profit using the first-in-first out (FIFO) method of costing inventory and the following purchase and sale information (show your calculations):

Date	Activity	Units	Total   Cost	Total   Sales Revenues
December 1	Purchase	15	$6,000,000
December 10	Purchase	16	7,200,000
December 11	Sale (Used by Suncor)	(20)		$8,500,000
December 15	Purchase	16	8,800,000
December 20	Sale (Used by Suncor)	(20)		12,000,000

FIFO means First in First Out: goods purchased first are sold first meaning the ending inventory under FIFO is the most recent inventory.

 

The unit cost.

1-Dec= 6,000,000.00/15.00=400,000.00 $

10-Dec= 7,200,000.00/16.00=450,000.00 $

11-Dec=8,500,000.00/20.00 =425,000.00 $

15-Dec=8,800,000.00/16.00=550,000.00 $

20-Dec=12,000,000.00/20.00=600,000.00 $

Cost of Goods Sold under FIFO

Date	Activity	Units	Unit Cost	Total Sales Revenue	Cost of Goods Sold
11-Dec	Sales (Used by Suncor)	20.00	$425,000.00	$8,500,000.00
1-Dec	Purchase	15.00	$400,000.00		$6,000,000.00
10-Dec	Purchase (Sales 20 – used 15 above)	5.00	$450,000.00		$2,250,000.00
20-Dec	Sales (Used by Suncor)	20.00	$600,000.00	$12,000,000.00
10-Dec	Purchase (Balance units 16-5 =11)	11.00	$450,000.00		$4,950,000.00
15-Dec	Purchase (Sales 20 - consumed 11 as above)	9.00	$550,000.00		$4,950,000.00
Total Sales Revenue/ Cost of Goods Sold				$20,500,000.00	$18,150,000.00

Gross Profit = $20,500,000 - $18,150,000 = $2,350,000

Gross Profit under FIFO Inventory System is $2,350,000.

b.      Explain why the gross profit is higher under one method when compared to the other method.

Under FIFO, previously purchased units are sold earlier, and thus the cost of previous units falls under Cost of Goods Sold.

While under the Weighted Average Inventory Method, the unit price is determined by the weighted average of the units and the cost per unit. Therefore, the price of all units whether purchased in the previous or later period are included in the Cost of Goods Sold.

Since Cost of Goods Sold varies by both methods, so does Gross Profit.

Applying the above logic, in this case, the Weighted Average Cost of Goods Sold is $18,504,180 and under the FIFO $18,150,000.

Since Cost of Goods Sold under FIFO is lower than with Weighted Average Cost Method, Gross Profit under FIFO is BIGGER than with Weighted Average Cost Method.

2.      HEMI’s management is cost conscious and does not spend money unless the benefits exceed the amount spent.  Accountant understands that physical inventory count is good internal control practice; however, he wants you to explain the benefit of a physical inventory count when HEMI has a perpetual inventory system, and the inventory is physically protected.

1. Quick valuation of closing stock: Because of continuous stock taking, the value of closing stock can be known at any time during the year. It greatly facilitates the preparation of profit and loss account and balance sheet at the end of the financial period.

2. Lesser investment in materials: By introducing a system of perpetual inventory control, a regular check on the receipt and issue of materials and stores is undertaken. This considerably reduces the investment in materials and storages expenses are also minimized.

3. Helpful in formulating proper purchase policies: A storekeeper can easily know the time when the quantity of materials will be required by each department of the factory (as various levels of each type of material are clearly determined). All this information is very useful in formulating proper purchase policies.

4. Immediate detection of theft and leakages etc.: With the help of a properly planned system of perpetual inventory control, wastages, leakages, and thefts of materials are at once brought to light and causes for such discrepancies can be known without delay.

 

3.      Accountant wants you to evaluate the following major transactions and provide adjusting journal entries, if necessary.  For each item, explain why you are (or are not) adjusting HEMI’s current account balances and provide supporting calculations for adjustments:

a.      On December 21, HEMI ordered 25 transmissions for a total cost of $15,000,000 which were shipped on December 27 with the terms FOB Destination.  This inventory was not received at year-end and has not been recorded in HEMI’s accounting records.

In the case of a FOB Destination sale, the buyer has title to the goods until the goods reach the buyer's location. That means in an FOB Destination sale transaction, the buyer of the goods will record the purchase when the goods are delivered to his or her location.

 

In the given case, HEMI ordered 25 transmitters at a total cost of $15,000,000 on December 21st and the goods will be shipped on December 27th. Year-end does not ship to HEMI. Therefore, HEMI no nominal of the goods cause within last year did not receive the goods.

 

Therefore, no adjustment is required for this commodity.

b.      There is a product in inventory that cost HEMI $11,000,000 which management has indicated will be sold close to its cost.  Management is estimating selling price to be $12,000,000 and HEMI will have to pay the transportation costs of approximately $2,000,000 on behalf of its customer(s).

In the case of Inventory Valuation, the value of inventory is Cost or NRV, whichever is less.

 

Now, in the given case, the NRV of the inventory that HEMI holds is ($1200000 - $200000) = $1000000.

 

HEMI's inventory cost is $1100000.

 

So, the value of the inventory at the end of the year will be $1000000, i.e., the NRV of the inventory is less than the price of the inventory of $1100000.

 

Therefore, the value of ending inventory must be adjusted accordingly by HEMI.

1.      HEMI purchased land and building for $280,000,000 on September 1, 2019.  Accountant recorded this amount in the Land general ledger account because he did not know how to allocate the costs between land and building.  Your research indicates that similar land could be purchased for $80,000,000 and the building was appraised at 240,000,000 for insurance purposes.  HEMI’s management purchased the building knowing that it needed improvements of $3,000,000 to make it usable for HEMI’s needs.  Accountant recorded these improvements in the Repairs and Maintenance expense general ledger account.  Management expects to sell the land for $200,000,000 and building for 20,000,000 at the end of its useful life of 20 years.  HEMI’s management want to use the cost method of valuing capital assets in order to save on the costs of appraising capital assets. The Accountant wants you to:

a.      Allocate the $280,000,000 cost between land and building (show your calculations).  Provide an adjusting journal entry to transfer the building costs to the proper account.

Allocation of land & Building cost

Price of similar land= $80,000000

Building cost

Insurance= $24000000.

Total =$320000000

Consolidated purchased price $280000000

Allocation Ratio = 80000000:24000000= 8:24=32

Land price = 280000000 x 8/32=70000000$

Building price = 280000000 x 24/32= 210000000

Adjusting Journal Entry

Accountant currently Recorded $280000000 in "Land"

Date	Account titles   and explanation	debit	credit
Sep1 2019	building a/c to   land a/c (To recode allocation of building cost which was previously recorded   in Land")	210000000$
			210000000$

 

b.      Recommend, with justification, the appropriate accounting treatment for the $3,000,000 of building improvement costs.  Provide an adjusting journal entry, if any, to properly account for the building improvement costs.

recommendations on building improvement costs

 

The cost of major improvements made at the time of purchase will be “capitalized” as management was aware of the need for improvement.

 

The accountant considers this cost as “cost/revenue cost” so it must go through an adjustment entry to convert it to construction cost (capitalization).

Adjusting Journal Entry

Date	Account titles   and explanation	debit	credit
	Repair/revenue   expense	3000000	3000000

 

c.      Recommend, with justification, the appropriate depreciation method for building.  Compute the depreciation expense for the year-ended December 31, 2019, showing your calculations.  Provide a depreciation expense adjusting journal entry.

Depreciation method:

Land is not a depreciable asset. Therefore, no depreciation is charged.

   Construction is a depreciable asset There are many depreciation methods used such as straight-line method, compound depreciation method etc.

The most suitable method for construction is the "straight line method" as the building is generally used in a similar manner throughout Life. The expected life of the building is 20 years in this question.

Depreciation is Value of building=210000000$

 Add: Major Improvement= 3000000 $

Total cost =213000000$

minus:  Residual value (20000000$)

Cost=193000000$

Life of building 20 years

Depreciation per year =193000000/20 years= 9650000$

2.      HEMI paid $10,000,000 for equipment to crate its inventory for shipping.  This amount has been recorded in the Equipment general ledger account.  This equipment is expected to be useful for 500,000 crates at which point it will be taken to a recycling depot.  In 2019, the equipment was used to create 50,000 crates.  Accountant wants you to recommend, with justification, the appropriate depreciation method for the equipment.  Compute the depreciation expense for the year-ended December 31, 2019 showing your calculations.  Provide a depreciation expense adjusting journal entry.

Since the equipment must be crated for shipping, the appropriate depreciation method for this equipment would be the units of production method so that the equipment will be depreciated over its economic life based on the number of cases generated each year. year.

 Under units-of-production method, Depreciation expense = [Depreciable cost / Expected units to be produced] x Actual units produced

Cost of the equipment:10000000$

 Residual value :0

Depreciable cost:10000000$

Expected crates to be created:500,000 $

Depreciation expenses per crated: 10000000 / 500000=20$

Number of crated created in this year: 50000

Depreciation expenses this year: 20 x 50000=1000000$

Adjusting Journal Entry

 

Date	Account titles   and explanation	debit	credit
Dec 31, 2019	Equipment Depreciation   expenses	1000000
	Equipment   Accumulated Depreciation		1000000

 

3.      Accountant meticulously calculated that $3,000,000 of advertising and promotion costs were spent to build customer loyalty.  This amount has been recorded in the Goodwill general ledger account.  Accountant wants you to recommend, with justification, the appropriate accounting treatment for costs incurred to build customer loyalty.  Provide an adjusting journal entry, if any, to properly account for costs incurred to build customer loyalty.

Although $3,000,000 was spent building customer loyalty, it was only advertising and promotional expenses and therefore advertising costs should have been debited when this transaction was recorded. take. Again. for a goodwill account. Therefore, it should be rectified by reverting or crediting the incorrectly initially debited goodwill account. The corresponding debit will be given to the advertising cost account, which is the device account that will be debited to record this transaction.

 Adjusting Journal Entry

Date	Account titles and explanation	debit	credit
Dec 31, 2019	advertising and promotion costs	3,000,000
	goodwill		3,000,000

 

 3,000,000

1.      Yukon territorial government entered into an agreement with HEMI to open a warehouse in Whitehorse.  The agreement required the Yukon territorial government to prepay $10,000,000 for future equipment purchases and to buy all of its equipment from HEMI over the next 5 years.  The government also agreed to only use $9,000,000 of the prepayment (i.e., give HEMI a “breakage” if equipment is supplied from the Whitehorse warehouse).  In 2019, HEMI supplied $1,800,000 of equipment from its Whitehorse warehouse.  The Unearned Revenues general ledger account is at a balance of $8,200,000 ($10,000,000 less $1,800,000).  No adjustment has been made for the “breakage”.  Accountant has computed the “breakage” revenue at $200,000 that HEMI can recognize for the year-ended December 31, 2019.  Provide an adjusting journal entry to recognize the breakage revenue.

The breakage income will be figured as under: Amount of gear provided/Total installment got x Amount of breakage evaluated = $1,800,000/$10,000,000 x $1,000,000 = $180,000.

 

Adjusting Journal Entry

Date	Account titles and   explanation	debit	credit
	UNMERITIED INCOME	180000
	TO BREAKAGE INCOME		180000

 

2.      HEMI took out a mortgage of $150,000,000 on September 1, 2019 to purchase the land and building (noted in the Capital Assets section above).  This amount has been recorded in the Mortgage Payable general ledger account.  Accountant has recorded the blended interest and principal monthly payments in the Interest Expense general ledger account.  You have been provided with the following amortization schedule for the mortgage payable:

Month	Opening   balance	Interest   expense	Payment	Closing   balance
September, 2019	150,000,000	525,000	1,532,976	148,992,024
October, 2019	148,992,024	521,472	1,532,976	147,980,520
November, 2019	147,980,520	517,932	1,532,976	146,965,476
December, 2019	146,965,476	514,379	1,532,976	145,946,879
Total		2,078,783	6,131,904

 

The accountant wants you to complete the following:

a.      Using the above amortization schedule, calculate the total principal reduction in the 2019 fiscal year (show your calculations).

Total principal reduction in the 2019 fiscal year can be calculated in two ways such as by:

 -> Subtracting the Closing balance in December, 2019 of loan payable from Opening balance in September 2019

 -> Subtracting total Interest expense from total payment made between Sep. 2019 and Dec. 2019.

 Opening balance of loan payable in September 2019:150,000,000$

Closing balance of loan payable in December 2019 145,946,879$

Total principal reduction in the 2019 fiscal year: 150000000 - $145946879=4,053,121

Alternatively,

Total payments made between Sep. 2019 & Dec. 2019: 6,131,904$

Total interest expense between Sep. 2019 & Dec. 2019: 2,078,783$

Total principal reduction in the 2019 fiscal year: S6131904 $2078783=4,053,121$

 

b.      Provide an adjusting journal entry to move the amount you computed in Part (a) above from Interest Expense to reduction in Mortgage Payable.

When the accountant recognizes the entire payment amount as interest expense, the interest expense account will be debited according to the total amount of payments made from September 2019 to December 2019. So, to transfer the excess to the interest expense account for the total principal. decrease in fiscal year 2019, the interest expense account will be credited, and the mortgage loan payable account will be debited 4053121$.

 

Adjusting Journal Entry

Date	Account titles and explanation	debit	credit
Dec 31,2019	Mortgage loan payable	4,053,121
	Interest expense		4,053,121

 

c.      $12,500,000 of mortgage principal will be paid in the next 12 months.  Provide an adjusting journal entry to move this amount to Current Portion of Mortgage Payable account.

No import is required to reclassify long-term debt as an existing portion of long-term debt as it is merely a reclassification on a company's balance sheet. The total outstanding mortgage loan balance will continue to be the same but reported by separating the loan into the current and the long-term portion of the company's balance sheet as of 31 December. 2019.

 

3.      On November 4, 2019, HEMI was sued for $50,000,000 in damages because one of its transmissions was incorrectly installed by Suncor repair technicians which resulted in significant property damage.   HEMI’s lawyers are of the opinion that the lawsuit is without any merit as the transmission supplied by HEMI was working properly.  The problem was with the incorrect installation of the transmission.  HEMI plans to defend itself through the Canadian legal system which may take as long as 3 years.  The accountant has recorded $40,000,000 in the general ledger because $10,000,000 of damages will be paid for HEMI’s insurance company.  The accountant wants you to explain the appropriate accounting treatment for this contingent loss.  Provide an adjusting journal entry, if any, to properly account this contingent loss considering that the contingent loss is already recorded in the accounting records.

Provisions can be divided into three categories depending on the likelihood of such liabilities.

A "high probability" provision is a liability that is both probable and reasonably likely to be estimated.

The "average probability" case is one where one parameter of the high-probability situation is missing, but not both parameters of the high-probability situation. The financial statements must include these liabilities in the footnote when either condition is valid. First, if the contingency is probable, but the loss cannot be estimated by the company, or second, if the contingency is reasonably probable but not necessarily unlikely. out.

The "Low Probability" provision is that the probability that these liabilities will become material is very low. Therefore, financial reporting is not required.

In question, the company was named as the defendant in a lawsuit, but the lawyers argued that the lawsuit was groundless. The company will not be able to predict the outcome of the lawsuit. Therefore, the situation can be described as a medium-like provision and the liability should be recognized in the footnotes of the financial statements.

adjusting journal entry

Date	Account titles and explanation	debit	credit
Nov 4, 2019	Lawsuit Liability/Contingent Liability Account	50,000,000
	To Lawsuit loss/ Contingent Loss Account		50,000,000

 

1.      Preferred shares cash dividends have been declared and paid.  Common share dividends have been declared, but not paid.  HEMI is authorized to issue 50,000,000.  HEMI issued 12,000,000 common shares on January 2, 2019 (i.e., these were the shares outstanding prior to the stock dividend).  HEMI’s common shares are valued at $21 per share. The accountant wants you to use/disregard any relevant information in preparing the trial balance.

			(Amount in $)
Transaction	Common   Shares	Retained Earning	Cash
Common shares issued on January 2, 2019(12000000 x 21)	25,20,00,000		25,20,00,000
Preference dividend paid		-1,00,000	-1,00,000
Common share stock dividend declared	25,20,000	-25,20,000
Total	25,45,20,000	-26,20,000	25,19,00,000
Notes:
It is assumed that common shares dividend declared but not paid is   the same to whom stock dividend is issued.
It is assumed preferred dividend of $ 1,00,000 paid in cash.
stock dividend assumed at 1% of issued common shares. So, stock   dividend is (252000000 x 1%) =25,20,000$
Trial Balance (At the end of period)
	Debit	Credit
Common   Shares		25,45,20,000
Retained Earning		-26,20,000
Cash	25,19,00,000
Total	25,19,00,000	25,19,00,000