Sensational Construction Inc. (SCI) was incorporated and commenced operations on January 1, 2015. The commercial construction company, which is headquartered in New York and has additional offices in New Jersey and Buffalo, 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
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Trial balance Account
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DR
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CR
|
|
Cash
|
375,000
|
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Accounts receivable
|
937,500
|
|
Allowance for doubtful accounts
|
15,000
|
|
Prepaid expense
|
616,125
|
|
Investments (at cost)
|
825,000
|
|
Land
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41,250,000
|
|
Buildings
|
9,525,000
|
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Equipment
|
7,987,500
|
|
Construction in progress
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7,500,000
|
|
Accounts payable
|
1,312,500
|
|
Accrued liabilities
|
1,767,413
|
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Note payable
|
4,912,500
|
|
Bonds payable
|
15,000,000
|
|
Ordinary shares
|
31,500,000
|
|
Sales
|
71,250,000
|
|
Cost of goods sold
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42,300,000
|
|
Administrative expense
|
1,827,488
|
|
Advertising
|
1,012,500
|
|
Bad debt expense
|
15,000
|
|
Insurance expense
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1,425,000
|
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Interest expense
|
2,086,875
|
|
Lease expense
|
1,000,000
|
|
Wages expense
|
7,824,425
|
|
Total
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126,132,413
|
126,132,413
|
|
|
|
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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 KalleLehto, 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.
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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
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Book value $
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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
|
|
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Retained earnings 580,000
|
|
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Total 750,000
|
|
|
|
|
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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.
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 $67,500 for memberships at Troon Golf Club, where the shareholders entertain clients.
11. As the company has not yet filed its first income tax return, Sebastian did not remit any tax instalment payments during the year.
12.The company's owners asked Sebastian to use the revaluation model to account for its land. The fair value of the land at December 31, 2015, as determined by appraisal was:
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City
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Cost
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Market value
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New York
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$ 18,000,000
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$ 18,900,000
|
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New Jersey
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$ 14,250,000
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$ 15,200,000
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Buffalo
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$ 9,000,000
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$ 7,700,000
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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 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
4. Provide SCI with a list of all notes required for the financial statements, but do not prepare draft 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.