Project #45515 - Accounting

 

Sensational Construction Inc. (SCI) was incorporated and commenced operations on January 1, 2015. The commercial construction company, which is headquartered in Calgary and has additional offices in Edmonton and High Level, Alberta, is owned by Vincent Ash, Sundeep Kaur and Ng Chiu.

SCI’s bookkeeper, Sebastian Jones, is preparing the company’s financial statements in accordance with IFRS, as the shareholders hope to expand operations internationally at a later date. Sebastian is more familiar with ASPE, so he has requested your assistance in preparing the year-end statements in advance of the company’s first audit. Sebastian has provided you with a trial balance and some information on select transactions.

Sensational Construction Inc.

For the year ended December 31, 2015

Trial balance

Account

DR

CR

Cash

375,000

Accounts receivable

937,500

Allowance for doubtful accounts

15,000

Prepaid expense

616,125

Investments (at cost)

825,000

Land

41,250,000

Buildings

9,525,000

Equipment

7,987,500

Construction in progress

7,500,000

Accounts payable

1,312,500

Accrued liabilities

1,767,413

Note payable

4,912,500

Bonds payable

15,000,000

Ordinary shares

31,500,000

Sales

71,250,000

Cost of goods sold

42,300,000

Administrative expense

1,827,488

Advertising

1,012,500

Bad debt expense

15,000

Insurance expense

1,425,000

Interest expense

2,086,875

Lease expense

1,000,000

Wages expense

7,824,425

Total

126,132,413

126,132,413

Module 5 — Financial Accounting Project

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1. SCI’s income tax rate is 30%; this rate is expected to remain unchanged for the foreseeable future.

2. Ten-year, 9.0% convertible bonds were issued at par on January 1, 2015, when similar non-convertible bonds were yielding 11.0%. Interest is payable semi-annually on June 30 and December 31. At the bondholders’ option, each $1,000 bond may be exchanged for 50 ordinary shares. At issue date, Sebastian credited bonds payable for the net proceeds of $15,000,000; during the year, he debited interest expense for the actual amount of interest paid.

3. On January 1, 2015, SCI issued 15,000,000 ordinary shares equally between all three partners at $1.50 per share. On May 1, 2015, SCI sold an additional 6,000,000 shares for $1.50 each to Kalle Lehto, who will be responsible for international expansion.

4. Monies due on the note payable were borrowed on March 1, 2015. The loan is repayable at $491,250 plus interest at 15% per annum on January 1 of each year. Sebastian erroneously expensed a full year’s interest on the note.

5. On December 31, 2015, SCI purchased 100% of Little Bear Corporation for $825,000 cash. The book and fair market values of Little Bear at acquisition date are as follows:

December 31, 2015

Book value $

Fair market value $

Accounts receivables

150,000

140,000

Inventory

600,000

620,000

Total

750,000

Accounts payable

100,000

100,000

Ordinary shares

70,000

Retained earnings

580,000

Total

750,000

6. Vincent provided Sebastian with the estimated bad debt expense after superficially analyzing the outstanding receivables. Kalle, who has extensive experience in the construction industry, suggested that a rate of 3.0% of the outstanding receivables would be a more appropriate allowance.

7. On January 1, 2015, SCI paid $616,125 for a three-year general insurance policy debiting prepaid expenses for this amount.

8. On May 1, 2015, SCI leased some heavy-duty machinery. The lease term is eight years with annual payments of $1,000,000 first due on May 1, 2015. At the end of the lease term, title to the machinery will transfer to the company. The machinery has a useful life of 10 years with an estimated salvage value of $100,000. SCI knows that the implicit rate in the lease is 6.0% per annum. Sebastian has not yet recorded the lease machinery in the company’s books.

Module 5 — Financial Accounting Project

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9. SCI’s depreciable assets consist of three buildings, owned equipment and the newly leased equipment. The buildings and owned equipment were acquired on January 1, 2015. SCI depreciates all assets on a straight-line basis. The expected useful life of the buildings is 25 years and the owned equipment is eight years. Depreciation has not yet been recorded for the year. For tax purposes, buildings are Class 1 assets (CCA rate 4%) and all equipment is Class 8 (CCA rate 20%).

10.Administrative expenses include $75,000 in meals and entertainment and $67,500 for memberships at Troon Golf Club, where the shareholders entertain clients.

11. As the company has not yet filed its first income tax return, Sebastian did not remit any tax instalment payments during the year.

12.The company’s owners asked Sebastian to use the revaluation model to account for its land. The fair value of the land at December 31, 2015, as determined by appraisal was:

City

Cost

Market value

Calgary

$ 18,000,000

$ 18,900,000

Edmonton

$ 14,250,000

$ 15,200,000

High Level

$ 9,000,000

$ 7,700,000

Sebastian has not yet made any revaluation adjustments. For income tax computation purposes, SCI assumes that 50% of the gains and losses are a permanent difference.

13.During the year, SCI built an office building under contract. The building was completed on December 31, 2015, and contract revenue was properly recorded. The balance in the construction in progress account at year-end was $7,500,000, which included a 20% profit margin. Sebastian has not yet included interest costs related to the construction cost of goods sold. (Assume the construction costs were incurred evenly throughout the year and the weighted-average interest cost was 10%.) Sebastian was also unsure about how to deal with the construction in progress account.

Required:

1. Assist Sebastian by preparing any journal entries necessary to properly adjust for the events discussed above. Add additional accounts as necessary. Properly format the journal entries and include an explanation as to why the adjustment is required. Provide supporting computations where appropriate. Think about being efficient in your adjusting journal entries. For the purposes of this project, ignore any potential GST/HST effects.

2. Prepare financial statements in proper form for SCI, including a non-consolidated statement of financial position, a statement of comprehensive income and a statement of changes in equity. Do not prepare a statement of cash flows.

3. Calculate both the basic and diluted earnings per share for the company.

 

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4. Provide SCI with a list of all notes required for the financial statements, but do not prepare draft notes. Refer to the CPA Canada Handbook – Accounting for guidance, and document which Handbook section provides the necessary details for drafting the required notes.

5. With regard to the acquisition of Little Bear Corporation:

a) Determine the amount of the purchase price allocated to goodwill pertaining to the acquisition of Little Bear Corporation.

b) Complete an acquisition differential and impairment schedule for 2015 and 2016.

c) Compute and list the consolidated balances of all asset, liability and equity accounts that differ from those set out in SCI’s non-consolidated statement of financial position prepared in requirement 2. Do not prepare a consolidated statement of financial position.

Subject Business
Due By (Pacific Time) 10/29/2014 09:31 pm
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