EMBA Financial Accounting
Problem Set #2, to be submitted via Canvas
Name:
Part I: Long-lived Tangible Assets (12 points: Q1–Q9 1point each; Q10 3pts)
Please answer the following questions using the excerpts below from London Business School’s financial statements pertaining to fiscal year ended 31 July 2011. For simplicity, the questions refer to this fiscal year as 2011.
1. What is the net book value of tangible assets (as reported at the end of 2011)?
2. What is the balance of accumulated depreciation at the end of 2011?
3. What was the depreciation expense London Business School reported for 2011? For which kind of tangible asset does it incur the largest depreciation expense as a proportion of the total depreciation expense?
4. Which tangible asset category does London Business School depreciate the slowest (i.e. assumes the longest useful life)?
5. Assuming no salvage value for computer equipment, what is the length of useful life London Business School uses for this kind of tangible equipment?
6. List three reasons that contributed to the change from the end of 2010 to the end of 2011 in the net book value of the tangible assets?
7. Did London Business School revalue any tangible assets in 2011?
8. What is the net book value (in thousand GBP) of the freehold and long leasehold (land and buildings) as reported at the end of 2011?
9. How much accumulated depreciation did London Business School report at the end of 2011 for the tangible assets that were revalued?
10. How much pre-tax gain or loss would London Business School need to report in 2012, had it sold all of its freehold land and buildings on August 1, 2011 (first day of the new fiscal year) for £20 million?
Part II: Intangible Assets (10 points: Q1 4pts; Q2 and Q3 3pts)
Golden paid €20 million to purchase Ryanair.com.
Suppose that Ryanair had the following summarized data at the time of the Golden acquisition (amounts in million euros):
Assets
|
|
Shareholders’ Equity and Liabilities
|
Current Assets
|
10
|
|
Total Liabilities
|
25
|
Long-term Assets
|
22
|
|
Shareholders’ Equity
|
7
|
|
|
|
|
|
|
32
|
|
|
32
|
Ryanair’s long-term assets had a current market value of only €18 million.
Requirements:
1. Compute the cost of goodwill purchased by Golden (4 points).
2. Show on a transaction worksheet how Golden accounts for the purchase of Ryanair (3 points).
3. Explain how Golden will account for goodwill in the future (3 points).
Part III: Intercompany Investments (12 points: 3 pts each)
Kieslowski Co. bought 3,400 Blue shares at $35; 660 Red shares at $46.50; and 1,200 White shares at $74—all as available-for-sale investments. On December 31, Blue shares close at $28.375, Red at $48.25, and White at $68.75.
Requirements:
1. Determine the cost and the fair market value of the long-term investment portfolio at December 31.
2. Record Kieslowski’s adjusting entry at December 31.
3. What would Kieslowski report on its Income Statement and Balance Sheet for the information given? Make the necessary disclosures. Ignore income taxes.
4. How would your findings change if the company classified these securities as trading?
Part IV: Liabilities (16 points: 4 pts each)
Soapy Fashion plc experienced these events during the current year.
Requirement:
For each item, indicate the account and the related amount to be reported as a current liability on Soapy Fashion’s Balance Sheet as at December 31.
1. On August 31, Soapy Fashion signed a six-month, 4% note payable to purchase a boat costing £82,000. The note requires payment of principal and interest at maturity.
2. On August 31, Soapy Fashion received cash of £1,200 in advance for service revenue. This revenue will be earned evenly over six months.
3. Revenues of £750,000 were covered by Soapy Fashion’s service warranty. On January 1, provision for warranty repairs was £11,400. During the year, Soapy Fashion recorded warranty expense of £30,000 and paid warranty claims of £34,600.
4. Soapy Fashion owes £85,000 on a long-term note payable. On December 31, 10% interest for the year plus £25,000 of this principal are payable within one year.