Practical Applications - Accounting
Practical Applications 1
Consolidated Financial Statement Preparation Considerations
Prepared for Oprah Hill, President of SSI
Prepared by Tarun Sinha, partner, assurance, of Krishna Associations, CGAs
September 30, 20X0
Introduction
This report will identify the adjustments that will need to be considered in order to prepare the consolidated financial statements for Sterling Shoes Inc. (SSI) and Footsie Inc. (Footsie)
Financial Accounting Issues
Goodwill Acquisition
The acquisition cost in all the common shares of Footsie, for a cash consideration of $8,000,000, resulted in a discrepancy of $700,000 in the book value ($800,000) and the Fair Market Value ($1,500,000) of the polishing and buffing machine. This discrepancy was allocated to goodwill to avoid any unnecessary reporting. An adjustment will be required to comply with the IFRS. Therefore, the polishing and buffing machine must be adjusted to the fair market value and the discrepancy should be allocated to goodwill and amortized.
Also, SSI intends to keep the Footsie name and brand intact, as a result, a value will need to be established which will reduce the goodwill allocation noted above.
Transfer of Ownership & Foreign Exchange Risk
On September 1, 20X0, after the acquisition of Footsie, SSI transferred the ownership of the shoe manufacturing machinery that SSI purchased on July 1, 20X0 for EUR 400,000 that was borrowed at a rate of 7%. The machinery is expected to have a useful life of 12 years and the loan is repayable in 15 annual installments commencing July 1, 20X0. We need to verify that the useful life is accurate and determine whether the proper amount is being recorded as amortization. Also, we will have to make adjustments for the foreign exchange risk faced by both entities.
Another point to keep in mind is the fact that the loan is repayable in Euros. Therefore, SSI will be faced with monthly foreign exchange risk. SSI may want to consider hedging
Consolidated Financial Statement Preparation Considerations
Prepared for Oprah Hill, President of SSI
Prepared by Tarun Sinha, partner, assurance, of Krishna Associations, CGAs
September 30, 20X0
Introduction
This report will identify the adjustments that will need to be considered in order to prepare the consolidated financial statements for Sterling Shoes Inc. (SSI) and Footsie Inc. (Footsie)
Financial Accounting Issues
Goodwill Acquisition
The acquisition cost in all the common shares of Footsie, for a cash consideration of $8,000,000, resulted in a discrepancy of $700,000 in the book value ($800,000) and the Fair Market Value ($1,500,000) of the polishing and buffing machine. This discrepancy was allocated to goodwill to avoid any unnecessary reporting. An adjustment will be required to comply with the IFRS. Therefore, the polishing and buffing machine must be adjusted to the fair market value and the discrepancy should be allocated to goodwill and amortized.
Also, SSI intends to keep the Footsie name and brand intact, as a result, a value will need to be established which will reduce the goodwill allocation noted above.
Transfer of Ownership & Foreign Exchange Risk
On September 1, 20X0, after the acquisition of Footsie, SSI transferred the ownership of the shoe manufacturing machinery that SSI purchased on July 1, 20X0 for EUR 400,000 that was borrowed at a rate of 7%. The machinery is expected to have a useful life of 12 years and the loan is repayable in 15 annual installments commencing July 1, 20X0. We need to verify that the useful life is accurate and determine whether the proper amount is being recorded as amortization. Also, we will have to make adjustments for the foreign exchange risk faced by both entities.
Another point to keep in mind is the fact that the loan is repayable in Euros. Therefore, SSI will be faced with monthly foreign exchange risk. SSI may want to consider hedging