Accounting policies and estimates

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CASE 1 (10 marks)
Download the latest annual report (10-K) of any US based or UAE based company. Locate the company’s disclosure notes, auditor’s report and accounting policies and estimates.
Required:

  1. Describe the subsequent events disclosed by the company. [2.5 Marks]
  2. Which firm is the company auditor? [2.5 Marks]
  3. What is the principle position of the company (financial position from Balance sheet perspective only? [2.5 Marks]
  4. Explain briefly the accounting policies and estimates? [2.5 Marks]
    (Instructions for finding a Form 10-K)
    You will need to locate a company’s Form 10-K, which is the annual report that publicly-held companies file with the Securities & Exchange Commission (SEC). The Form 10-K is usually quite long, exceeding 100 pages in most cases.
    The first thing you need to do is find a recent 10-K for a publicly-held company in which you are interested. This company must meet the criteria described earlier.
    To find a Form 10-K, go to http://www.sec.gov/edgar.shtml#.VOhw6vnF9mX. If you know what company you are interested in, you might also be able to go to that company’s Investor Relations website and locate its Form 10-K there.
    UAE companies post their annual report and other financial data in Investor’s relations. You can also view a short video about how to locate a Form 10-K on the SEC EDGAR site; you can view that video at http://youtu.be/MPgvGua9-RM.

Case 2 (15 marks)
The coronavirus (COVID-19) pandemic has developed rapidly in 2020. Measures taken to contain the virus have affected economic activity, which in turn has implications for financial reporting. The implications include not only the measurement of assets and liabilities but also disclosure and possibly an entity’s ability to continue as a going concern.
Required:
List down accounting implications of the corona virus on the working of the organization.

Case 3 (12.5 marks)
Objectives:
Prepare consolidated financial statements subsequent to acquisition when parent has applied the equity method, initial value method and the partial equity method and preparing worksheet entries to consolidate the financial records
Recognize the complexities in preparing consolidated financial reports emerging from the passage of time, Identify the methods available for a parent company to maintain its investment in subsidiary accounts

On January 1, 2018, ALPHA Company acquired all of BETA Company’s outstanding common stock for $1,263,000 in cash. As of that date, one of BETA’s buildings with a 12-year remaining life was undervalued on its financial records by $108,000. Equipment with a 10-year life was undervalued, but only by $15,000. The book values of all of BETA’s other assets and liabilities were equal to their fair values at that time except for an unrecorded licensing agreement with an assessed value of $60,000 and a 20-year remaining useful life. BETA’s book value at the acquisition date was $1,080,000. During 2018, BETA reported net income of $150,000 and paid $45,000 in dividends. Earnings were $180,000 in 2019 with $45,000 in dividends distributed by the subsidiary. As of December 31, 2020, the companies reported the following selected balances, which include all revenues and expenses for the year:

ALPHA Company

December 31, 2020 BETA Company
December 31, 2020
Debit Credit Debit Credit
Buildings 2,310,000 690,000
Cash and receivables 75,000 135,000
Common stock 1,350,000 600,000
Dividends paid 105,000 15,000
Equipment 420,000 300,000
Cost of goods sold 750,000 180,000
Depreciation expense 150,000 90,000
Inventory 420,000 390,000
Land 495,000 375,000
Liabilities 720,000 390,000
Retained earnings 2,040,000 735,000
Revenues 1,350,000 450,000

Required

  1. If ALPHA applies the equity method, what is its investment account balance as of December 31, 2020?
  2. If ALPHA applies the initial value method, what is its investment account balance as of December 31, 2020?
  3. If ALPHA applies the partial equity method, what is its investment account balance as of December 31, 2020?
  4. Regardless of the accounting method in use by ALPHA, what are the consolidated totals as of December 31, 2020, for each of the following accounts?
     Buildings
     Equipment
     Land
     Depreciation Expense
     Amortization Expense
     Revenue
     Net Income
     Investment in BETA
     Dividend paid
     Cost of Goods Sold
  5. Prepare the worksheet entries required on December 31, 2020, to consolidate the financial records of these two companies. Assume that ALPHA applied the equity method to its investment account.
  6. How would the worksheet entries in requirement (d) be altered if ALPHA has used the initial value method? 
    Case 4: (12.5 marks)
    Objective:
    Understand that a parent’s internal accounting method for its subsidiary investments has no effect on the consolidated financial statement

Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $510,000 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $440,000. Credit balances are indicated by parentheses.

 Adams   Clay

Current assets $ 300,000 $ 220,000
Investment in Clay 510,000 0
Equipment 600,000 390,000
Liabilities (200,000) (160,000)
Common stock (350,000) (150,000)
Retained earnings, 1/1/17 (860,000) (300,000)

In 2017, Clay earns a net income of $55,000 and declares and pays a $5,000 cash dividend. In 2017, Adams reports net income from its own operations (exclusive of any income from Clay) of $125,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows:

 Adams   Clay

Revenues $ (400,000 ) $ (240,000 )
Expenses 290,000 180,000
Investment income Not given 0
Retained earnings, 1/1/18 Not given (350,000 )
Dividends declared 0 8,000
Common stock (350,000 ) (150,000 )
Current assets 580,000 262,000
Investment in Clay Not given 0
Equipment 520,000 420,000
Liabilities (152,000 ) (130,000 )

a. What are the December 31, 2018, Investment Income and Investment in Clay account balances assuming Adams uses the:
• Equity method.
• Initial value method.
b. How does the parent’s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2018, consolidated income statement?
c. How does the parent’s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2018, consolidated balance sheet?
d. What is Adams’s January 1, 2018, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:
• Equity value method.
• Initial value method.
e. What worksheet adjustment to Adams’s January 1, 2018, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?
f. Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.
g. What is consolidated net income for 2018?

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