QUESTION
Question 1: Statement of Financial Position & Cash Flow
Below is the comparative statement of financial position for Whalen Corporations at December 31, 2017
Assets
Cash
61,000 16,000
Accounts Receivable
120,000 110,000
Equipment
33,000 28,000
Less: Accumulated
depreciation
-14,000 -14,000
Total
200,000 140,000
Liabilities and Shareholders’ Equity
Accounts Payable
27,000 19,000
Common Shares
125,000 100,000
Retained Earnings
48,000 21,000
Total
200,000 140,000
Net income of $42,000 was reported and dividends of $15,000 were declared and paid in 2017. New equipment was purchased and old
equipment with a carrying value of $6,000 (cost $13,000 and accumulated depreciation of $7,000)was sold for $8,000.
Required
Prepare a statement of cash flows using the indirect method for cash flows from operating activities. Assume that Whalen prepares financial statements in accordance with ASPE.
Question 2: Percentage of Completion and Completed Contract Methods
Clark Ltd. Began work in 2017 on a contract for $1,200,000. Other details follow:
2017 2018
Costs incurred during the year ……………………………………. $200,000 $612,500
Estimated costs to complete as of December 31 …….. 600,000 0
Billings during the year ………………………………………………… 225,000 900,000
Collections during the year ………………………………………….. 150,000 975,0006
Required
a) Assume that Clark uses the percentage-of-completion method of accounting. What portion of the total gross profit would be recognized in 2017?
b) Assume that Clark uses the completed-contract method of accounting. What portion of the total gross profit would be recognized in 2018?
Question 3: Bundled Sales
Canucks Inc., a software company sells new accounting software and user support bundled together. The fair value of the software is
$1,500 and the fair value of the user support is $500. The user support is valid for a period of 12months from the date of software
purchase. To be able to compete with a competitor’s offering, Loon decided to sell the bundle at a discount for $1,800.During its first
month of sales, 100 units of this software bundle were sold at the discounted price, and expenses were $50,000.
Required
a) Calculate the sale price that should be allocated to each component of the bundle using the adjusted market assessment approach (fair
value). (hint:allocate based on % new price/% total fair value)
b) Calculate the sale price that should be allocated to each component of the bundle using the residual approach. (hint: allocate based on
selling price less fair value of support first)
c) Assuming that the relative fair value method is used (adjusted market assessment approach) and income tax rate is 30%, calculate the
net income applicable to Loon’s first month of sales.
ANSWER
Answer 1
|
Statement of cash flows |
|||
| Cash Flows from Operating activity | |||
| Net Income |
42000 |
||
| Adjustments | |||
| Add: | Depreciation |
7000 |
|
| less: | Gain on sale of asset |
-2000 |
|
| Changes in balance sheet items | |||
| Add: | decrease in accounts Payable |
8000 |
|
| less: | Increase in accounts recievable |
-10000 |
|
| Cash flow from operating activity |
45000 |
||
| Cash Flow from Investing activity | |||
| Less: | Purchase of equipment |
-10000 |
|
| Cash Flow from Investing activity |
-10000 |
||
| Cash Flow from Financing activity | |||
| Add: | increase in Capital |
25000 |
|
| Less: | Payment of dividend |
-15000 |
|
| Cash Flow from Financing activity |
10000 |
||
| Net cash Flow |
45000 |
||
| Opening Cash in hand |
16000 |
||
| Closing cash in hand |
61000 |
||
Answer 2
| Answer-A | |
| Cost incurred in 2017 | 2,00,000 |
| %age completed= 200000/(200000+600000) |
25% |
| Revenue from project | 12,00,000 |
| revenue to be recognized (25% X 1,200,000) | 3,00,000 |
| Gross profit to be recognized in 2017 | 1,00,000 |
| Answer-B | |
| Cost incurred on project in entire life | 8,12,500 |
| Revenue | 12,00,000 |
| Gross profit to be recognized in 2018 | 3,87,500 |
Answer 3
a)
| Answer-A | |
|
Allocated sales price |
Total bundle price x Fair value of software/ Total Fair value of bundle |
| Software = 1800*1500/2000 |
1350 |
| User Support= Bundle price -Allocated sales price of s/w |
450 |
b)
Selling Price of support= $ 500
Selling Price of S/W= 1800-500= $ 1300
c)
| Revenue (1800x 100) |
180000 |
| Less: Expenses |
50000 |
| Profit Before taxes |
130000 |
| Less:Taxes (30%) |
39000 |
| Net Profit |
91000 |
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