'Mitten Manufacturing Ltd\r'

'Generally, mergers go along for the purpose of improving fiscal performance or sh arholders †making the likelihood of this potential merger ideal. Angela has saturnineered to betray ML to John for the book nurture of virtue, base on the 2014 year. MUMS financial Statements be in ossification with FIRS. John has asked for our help as professional taleants with the unwaveringly of Label and Liana ALP (L&L) to assist in determinusining an portend of the purchase price. In rate to do so we essentialiness first address the leveling issues with Mils original financial statements.It should be noned that Mils financial statements were vigilant for internal purposes and take hold non been audited. John go forth want Mils financial statements to be faultless in front agreeing to Angels suggested purchase price so that he is not overpaying. He depart overly want accurate financial statements to accurately determine Mils debt/equity ratio, dismissal venera tion, and other important ratios/factors. Angela may be colorful towards keeping her current balance sheet meter game game as they most likely overvalue summations and derogate from liabilities, making the sale of her ownership a founder deal for her, but not necessarily a get out deal for John.As Johns circularants we must(prenominal) approach this conservatively in order to ensure that he is not overpaying for the smart set, foc victimisation primarily on the book value of equity which is to be the covering price. Analysis and Recommendations publication: $500,000 personnel casualty ML experienced a loss of $500,000 during the year which could be due to problems with operations or broadsheets due collection. This may arrive at encour time-honored Angela to diverge the numbers to make ML ascertain better to potential buyers. This loss should be kept in mind when reviewing the quest foring issues.While this is a one-time pillowcase, working outstanding, re cruit turnover, and debt ratios should be considered when determining the familiaritys future sustainability. This loss allow for decrease or has decreased shargonholders equity by $500,000. The loss may be a af pixilatedatory for John as he go out be able to carry forward the loss to a positive net income in the next twenty dollar bill years, which can potentially reduce Mils future ratable income. Should John break up to carry forward this loss, the mean solar daybook ingress should kick like the following: 1) Dry. Deferred appraise plus 500,000 Cry.Income levy benefit make love: How to account for the new lead agreement big(p) hire operate engross chthonic FIRS, one of iv classification criteria must be met in order to be lassie as a capital letter operate: 1) Reasonably assured that ownership volition transfer to lessee at end of permit term 2) Lessee gets straightforwardly all frugal benefits from employ the chartered asset over the lease term 3) l esser recovers substantially all investment, and earns a rate of remember 4) Leased asset is specialized and can lonesome(prenominal) be engrossd by lessee According to the terms of Mils new lease agreement: 1) Yes, under the presumptuousness that the Bargain Purchase Option of $4,500 go away be exercised 2) No, lessee and uses 50% of economic life †not considered substantial as in that respect is still 50% of its life left for economic benefits to be aimed 3) Yes, because the IV of Minimum Lease Payments (where 1=9%, N=5, and is equal to $88,000, which is 100% of the IV of the asset at January 1 , 2014 4) NINA.Information was not provided to answer this The lease meets deuce the first and third classification criteria Capital Leases must record the asset and indebtedness, depreciation of the asset, and interest depreciate following the aftermathive interest method Under FIRS, one will account for a lease as operating(a) if the risk and benefits of ownership of the l eased asset atomic number 18 not transferred to the lessee If a lease does not meet any of the criteria unavoidable for a Capital Lease, then it will be ported as an Operating Lease Operating Leases atomic number 18 accounted for as a rental expense After considering the two alternatives, it is clear that the new lease agreement must be recorded in Mils books as a Capital Lease. This is due to two of the four Capital Lease classification criteria being met, which do not allow for the company to record it as an Operating Lease. The following diary entries should urinate been entered throughout 2014: 01/01/14: 1) Dry. Lease Equipment Obligation 88,000 88,000 2) or. Lease Obligation Cry. Lease 24,066. 26 Cry. Cash 12/31/14: 3) Dry. Interest expenditure 3,057. 02 4) Dry. Amortization disbursement Cry. collect Amortization 3,057. 02 Cry.Interest payable 4,400 While there be more incentives to classifying a lease as operating such as tax incentives, juicyer sire on asset, and better solvency ratios, the lease must be classified as a Capital Lease so as to stay in congruity with FIRS. However, a Capital Lease does provide a company with a higher operating money flow, and reduces dinero Income, which potentially reduces income taxes. A overturn pull in Income will publication in a lower shareholders equity. Issue: Entries to reflect swaps in the plan asset and liability for current year FIRS ASPS FIRS requires that the same rebate rate is used for plan asset and liability and the immediate recognition approach must be used. because, using the Projected eudaemonia Obligation method, and using a 10% discount rate, the Plan liability would be: $ 694,969 + 35,000 + 69,497 †40,000 = $759,466 And the Plan Asset, using the 10% veritable return on plan assets, would be: $ 525,000 + 52,500 = $537,500 do the Defined Benefit Obligation: $ 537,500 †759,466 ($221,966) The Pension Expense: $ 35,000 †52,500 = $ 51 ,997 And the Net Defined Benef it liability: †(169,969) = ($ 51 ,997) ASPS allows for either the immediate recognition approach or the deferral and amortization approach ASPS also allows for the expected return on plan assets to be different from the discount rate used for the accumulated Benefit Obligation No calculations are necessary for the ASPS alternative of this issue, as they would not be in accordance of rights with FIRS with which ML must follow. Therefore, in accordance with FIRS, we will account for the changes in the plan asset and liability as stated above.Please honor that the accrued Benefit Obligation (ABA) will be referred to as the Defined Benefit Obligation (DB), s we are working under FIRS rather than ASPS. Following the confinement that the same discount rate (1 0% in this case) be used for two plan asset and liability, the following ledger entries should be do to account for the changes for the current year: 12/31/14: 1) Dry. Pension Expense Cry. Net Defined Benefit Liability 5 1,997 51 ,997 This increase in Net Defined Liability will decrease Shareholders Equity. Issue: Depreciation of Capital Assets The depreciation of capital assets must be taken out of the provision for income taxes include in the financial statements for the current period.This depreciation is to be include in taxable income, not history income and will incorrectly state Mils provision for income taxes if not aloof. The CA aggregate needed to be removed is equal to x 30% $1 this measuring rod will be deducted from the taxable income. The removal of $1 from the provision for income taxes will increase net income, laterward increasing shareholders equity. Issue: How to account for the Super Shopper Account due bet Unconvertible dues Writing reach Accounts Receivable There are two methods to try irredeemable receivables: 1) Balance Sheet rule †uses past collection experiences to estimate unconvertible amounts.ML could estimate the amount required for Allowance for Doub tful Accounts as a circumstances of the balance in Accounts Receivable. Using an aged receivables analysis, ML could forecast a percentage of estimated unconvertible Accounts Receivables accounts over 90 days old. The journal first appearance would look similar to the following: Dry. insalubrious Debts Expense Cry. Allowance for Doubtful Accounts xx 2) Income Statement manner †estimates cost of bad debts as a percentage of Sales. Mils journal admittance using this method would look the same as the Balance Sheet manner journal entry. If ML determines Super Shoppers account specifically to be unconvertible, they may use the Allowance Method for writing off accounts.The following journal entry would be made: Dry. Allowance for Doubtful Cry. Accounts Receivable -? Super Shopper Should the earnings be received after the write †off, the account can be reinstated using the following journal entries: 1) Dry. Accounts Receivable 2) Dry. Cash Cry. Accounts Receivable If the a mount is immaterial, ML may also use the broadcast Write †Off Method, where no adaptation account is used. The journal entry would be as follows: or. Bad Debt Expense Due to the age of Accounts Receivable -? Super Shopper (90 days old) and the financial difficulties that Super Shopper is currently facing, it is unlikely that the account will be stipendiary off and should there for be written off.ML should follow the Allowance Method of writing off journal entries stated above to record the write †off of the Accounts Receivable. This method would be preferred as it allows for the account to be restated should Super Shopper pay off their debt. The Direct Write -? Off Method would not set for this account as the amount of $200,000 is not considered immaterial. This Bad Debt Expense needs to be considered as it will impact Mils assets, and an increase in bad debts is a decrease in the value of the firm (shareholders equity) of the firm for John. This top executive not be as substantial to consider should ML have already had a bad debt reserve, meaning that the net income would not have been so greatly affected.Issue: How to account for the Tech overclothes Lawsuit Recognize caseful as a provision Recognize lawsuit as a item upon(p) liability Under FIRS, ML should espy the lawsuit as a provision if: 1) The company has a present legal financial obligation as a result of a past event 2) It is rabble †â€Å"more likely than not” †that an wetting of resources will be required to settle the obligation 3) A reliable estimate can be made of the amount of the obligation If the lawsuit meets these conditions, it should be acknowledge in the financial statements Under FIRS, ML should recognize the lawsuit as a contingent liability if either: 1) There is a assertable legal obligation as a result of a past event, which will be substantiate on the occurrence of an uncertain future event, not within the reporting individuals control; or 2) There is a legal obligation from past events, which is not recognized as it is to probable that an onslaught of resources will be required to settle the obligation or a reliable estimate cannot be made of the amount of the obligation If the lawsuit meets these conditions, it should be bring out in the notes of the financial statements. The notes should include the following: 1) Estimate of its financial solvent 2) Uncertainties related to the amount and quantify of any outflow of resources 3) Possibility of any an outflow of resources The lawsuit by Tech Outerwear for visible infringement has not been properly assessed by Mils lawyers yet, and therefore they have not determined the likelihood of losing the suit. This schooling allows us to determine that at this time the lawsuit should be recognized as a contingent liability in accordance with FIRS, as we are unable to meet the conditions to recognize it as a provision on the financial statements.This lawsuit meets the cri teria that there is a possible legal obligation that cannot be confirmed until Mils lawyers assess the lawsuit, and the probability of the outflow of resources and a reliable estimate of the obligation cannot be made. The numbers ($200,000 to $700,000) on past lawsuit settlements are not reliable culture. The required disclosed notes stated above should be included in he financial statements. Determining the probability of the lawsuit and the estimated loss should be completed as soon as possible, as a loss could result in a going concern insurance. This information will be very important to John as the company has already experienced a loss of $500,000 during the year. This note has no effect on equity; only when the lawsuit is official will it have an effect on equity.Issue: Retractable Preferred Shares ML also has $50,000 of retractable preferred shares included in their capital blood. These shares a retractable if there is a change in the ownership of cuisines. This will be of concern to John, as the $500,000 loss incurred during the year does not provide the company with the funds available to pay the shareholders should they decide to sell their shares; John must consider day to †day cash requirements for the companys expenditures that are not included in current liabilities. While it was not stated, which might have been done on purpose by ML, it is unclear if dividends were state during the year for the preferred shares, which may affect Johns decision greatly.Cash dividends should not have been declared unless the current and future uncial position apologise it; the current loss of $500,000 does not suggest that they should have declared any. Cash dividends would have reduced shareholders equity. If declension dividends were distributed, then there would have been no effect on the balance of shareholders equity. On the other hand, non -? payment of dividends can also affect the company as the preferred shareholders may choose to sell their shares if they polish off receiving dividends; receiving dividends is usually what attracts investors to preferred stock. John should examine the debt/equity ratio to determine if these referred shares were issued because the ratio became too high and they wanted the company to look more delectable to investors and buyers.Issue: Accounting for Employee received Options Recognizing stock options While Compensatory Stock Option plans (COOP) do not involve a transfer of cash when first issued, they still must be recognizes in the financial statements and measured at uncontaminating value Coops are usually devoted instead of salary or a bonus, and the economic value lies in the prospective future gains when the options are exercised The Compensation Expense will be recognized as the services are being provided by the employees. Therefore, Total compensation expense is calculated on the day the options are granted and is equal to the plum value of the options. The first journal ent ry for Mils stock options should look like the following: 1 2/31 /14: 1) Dry. Compensation Expense XX,XX Cry. Contributed superfluous †Stock Options XX,XX If/when the options are exercised, ML should record the entry as such: XX/XX/1 5: 2) or. Cash XX,XX Dry. Contributed senseless †Stock Options CALYX Cry.Common Shares XX,XX If the options come about by the end of the three years, then the journal entries for the remaining balance should be the following: 3) Dry. Contributed superfluity †Stock Options Contributed Surplus †Expired Stock Options XX,XX cry. XX,XX Mils disclosures on the stock options should include the following: 1) Accounting policy 2) Description of plan 3) Details on numbers and values Of options issued, exercised, and expired 4) Assumptions and methods used to determine fair values 5) Total Compensation Expense and Contributed Surplus The recognition of these stock options is required under both ASPS and FIRS, and ML has no option but to rec ord them as such.The first journal entry that records the resume Compensation Expense and Contributed Surplus must be made in order for ML to have accurate financial statements. The following journal entries are to be used in the future when options are exercised or expired. As no further information on dates and values were provided, the reporting individual is not able to provide completely finished journal entries. The Compensation Expense will lower the net income, which will subsequently lower shareholders equity. As well, if there is a large amount of option redemptions, this will cause the share price to quickly drop. Investors who sell their shares during this time will incur capital losses, and these losses may be carried forward to reduce tax liabilities.\r\n'