Background

You recentlyacceptedthecontrollerpositionfor JavatheHut, a regional

coffee chain.

The owner informs you that a complete financial statementpackage willbe required as part of a new bank loan compliance requirements ("covenants").

Prior to your arrival, the company had one accountant and relied heavilyon the auditors in the preparation of financial statements. With the new controller position, the expectation is that youwillassumethe preparation of financial statements.

On your first day of work on April 1, 2018, the Java the Hut accountant informs you that there were a number of transactionsin the first quarterof 2018 that she was unsure of theappropriateaccounting. Consequently, she recorded the cash activity in Other Assets - Holding account as a temporary holding account. The good news is that the Java the Hut accountant maintained excellent detail of the various transactions and has a series of supporting schedules for you.

::,,. The project reflects a "real-life" challenge in that you are responsible for accountingissuesmonthsfollowingtheactualtransaction.Inthiscase, an acquisition was completed on 1/1 and you are now responsible for acquisition accounting and consolidating financial statements for thefirst threemonths,orfirst quarter.

Project Requirements

Eliminate Other Assets - Holding account balance on Java the Hut Ledgers

1.suggesttheappropriatejournalentriestorecognizethefirst quarter

transactions, currently reported in Other Assets - Holding in the balance sheet of Java the Hut (Parent Company) outlined in Schedule 1.

The goal of the journal entries is to eliminate the balance in the Other Asset - Holding account with new accounts to reflect the appropriate accounting recognition.

Prepare Acquisition Journal Entry to reflect fair values of New Castle Coffee on 1/1

2.how to dotheacquisitionaccountinganalysisofNewCastleCoffee using

theinformationin Schedule2 and Schedule 2A

3.suggest the acquisition journal entry for New Castle Coffee based on your work above.

4.Using the journal entry in Number 3, compare the journal entry values by

account and amount and identify all differences compared to Schedule 2.

Adjust Schedule 3for Acquisition Values

Because the project uses a situation you may encounter in practice, the reported results of New Castle Coffee on 3/31 included in Schedule 3 do not include any adjustments for the acquisition. Remember that the accounting department of New Castle Coffee would keep functioning as if the acquisition never occurred until new values are established. In practice, this is often a number of months following an acquisition to complete the appropriate accounting.

s. Using only the Balance Sheet Amounts in Schedule 3, calculate new balances by using the differences identified in Number 4 above and adding/subtracting to Schedule 3 amounts.

Only the Cash Account through Retained Earnings arerequiredtobe adjusted

For example:

Land

Schedule 3 Reported

Increase in Acquisition Value+

Schedule 3 Adjusted

$50,000 10,000

$60,000

Recognizesubsidiary earnings on Java theHut(Parent) Ledgers

6.On Java's books, prepare the appropriate journal entries to recognizethefirst quarter accounting for NCC Coffee (Calculated from Trial Balance in Schedule3)and Newark Coffee earnings(Schedule 6) below.

PrepareConsolidatingWorksheets for the Income Statement and Balance Sheet

7.Prepare journal entries torecognizetheintercompanytransactions and

eliminationsidentifiedin Schedule 6.Anysupporting calculations should be included.

8.Prepare consolidatingworksheets fortheincome statement (first quarter

of 2018)and forthebalance sheet (as of March31,2018).

YAll adjustments included in the steps to this point should be included

YItisrecommendedthatyou utilizetheconsolidatingworksheet formats we will cover in class

YConsolidatingworksheetsshouldutilize spreadsheet software

Prepare Consolidated Financial Statements for the Bank Reporting Package

Income Statement & Balance Sheet

9.Prepareconsolidatedfinancialstatementsforthebankreporting requirement outlined in the Background section above:

Y Income Statement for the first quarter of2018 (Multi-StepFormat- See Format in Schedule 7)

YBalance Sheetas ofMarch31,2018(Classified Format-See Format

inSchedule 7)

Statement of Cash Flows

10. PrepareconsolidatedStatementofCashFlowusingtheindirect method forthe first quarter of 2018.

YUse the financial statements in Number 8 or 9 as the basis to prepare

thestatement of cash flow.

YRegardingcapitalexpenditures,thechangeinthe Construction in Progress("CIP')should be assumedtoequal capital expenditures.

PreparationReference & Guidelines-Financial Statements

Y Schedule 7 referenced below includes aconsolidatingincome statement and balance sheet worksheet examples. Schedule 7 also includes the appropriate accounts for your financial statements, except for those accounts that are eliminated in the consolidating process.

YTheStatement ofCashFlowshouldusetheformatcovered in our class examples.

YRemember,financialstatementsheadingsandpresentation format

shouldbe used.

Schedules Attached

Schedule 1

Schedule 2 Schedule 2A Schedule 3

Schedule4 *

Schedule 5

Schedule 6

Schedule 7

Schedule 1 Java the Hut Account Analysis Other Assets - Holding Account Analysis as of 3/31/18 Acquisition of New Castle Coffee on 1f1f18 Stock acquisition of 1,000 shares outstanding (Par Value $1.00) Percent of shares outstanding 100% Purchase price atsettlement $ 150,000 Professional fees incurred $ 12,000 Debt set-up fees (revolving credit agreement) $ 6,000 AchIsItIon of New Castle Coffee on 111,118 100,000 I Equity investment in Newark Coffee Activity Purchase of 40% interest of shares outstanding 111 $ Dividends received on 3J1 in cash $ EqUIty Investment In Newark Coffee Actlwty '3 44,000 (2,000) 42,000 I I Other Assets - Holding Account Analysis as of 381,118 |$ 210,000 I b Schedule 2 Trial Balance of New Castle Coffee as of 01101118 Accounts Debit Credit WTC Checking 1,000 WTC money market account 4,000 Accounts Receivable 15,000 Allowance for uncollectible accounts 2.000 Inventory 8,000 Prepaids rent - current 5,000 Land 50,000 Building 85,000 Equipment 48,000 Accumulated Depreciation 15,000 Debt set up costs, net 5,000 Accounts payable 12,000 Accrued payroll and benefits 3,000 Accrued expenses 2,000 Note payable 121311'16 100,000 Common stock 1,000 shares, par $1.00 1,000 Additional paid in capital 74.000 Retained eamings{loss) 12,000 I Total 221,000 I 221,000 I Schedule ZA New Castle Coffee Acquisition Support Appraisal Results The appraisal of the fixed assets resulted in the following fair market values: Land $ 60,000 Building 92,000 Equipment 45,000 ! Fixed Assets Fair Market Value I $ 11,000 I Due Diligence Review As part of the due diligence process, it was determined that New Castle Coffee was not accruing for income taxes. The following balances were indicated. Income tax payable {current liability) $ 2,500 Deferred tax liability {long-term liability) $ 3,800 Schedule 3 'rial Balance of New Castle Coffee as of03131f13 Accounts Debit WWW WTC money market account 3.000 Accounts Receivable 21.000 Allowance for uncollectible accounts Inventory 13.765 Prepaids rent - current 3.750 Land 50,000 Building 85,000 Equipment 48.000 Construction inprogress 16.000 Accumulated Depreciation Debt set up costs. net 4,687 Accounts payable Accrued payroll and benefits Accrued expenses Note payable 12131116 Advance payable - Java Common stock 1,000 shares, par $1.00 Additional paid in capital Retained earnings(|oss) - beginning Sales - coffee Sales - beans Sales -other Allowance for returns - beans 1.000 Allowance for returns - other 400 Cost ofgoods sold - coffee 39.000 Cost of goods sold - beans 10.000 Cost of goods sold - other 3.500 Selling expenses 5-000 Professional fees 4.800 Depreciation - Buildings (30 years) 31 Depreciation - Equipment [10 years) 1,250 Bad debt expense 500 Administrative salaries 12.000 nu.|___nnnn _..______ Credit 2,875 16,231 12.800 5.000 5.673 100.000 8.000 1,000 74,000 12000 1 65,000 25.000 8,000 Schedule 4 Trial Balance of Java the Hut as of 12f31l17 (Beginning of Year Balances - needed for cash flow statement only) Accounts Debit Credit w T T. Rowe money market account 18,600 Accounts Receivable 46,800 Allowance for uncollectible accounts 936 Inventory 51.250 Deferred tax asset 3,000 Land 185,000 Building 155,000 Equipment 98,000 Construction in progress 4,800 Accumulated Depreciation 54,275 Debt set up costs, net 12,000 Advance receivable- Accounts payable 47,250 Accrued payroll and benefits 13.200 Accrued expenses 8,900 Note payable 12731721 175,000 Revolving credit loan (committed to 12,331,320) 27,749 Deferred tax liability (long term) 4,440 Common stock 10.000 sharesI par $10.00 100.000 Additional paid in capital 125.000 Retained Wloss) 18,500 Imm-m 575,2sol Schedule 5 Trial Balance of Java the Hut as of03f31l12 Accounts Debit Credit DNB Checking 1.500 T. Rowe money market account 8.000 Accounts Receivable 43.000 Allowance for uncollectible accounts 950 Inventory 54.024 Deferred tax asset 3.197 Land 135,000 Building 155.000 Equipment 98,000 Construction in progress 25.200 Accumulated Depreciation 53.017 Debt set up costs, net 11.000 Advance reoeivable- NCC 3.000 Other assets - holding 210,000 Accounts payable 40,200 Accrued payroll and benefits 11,000 Accrued expenses 13,196 Note payable 12f31f16 1?5,000 Revolving credit loan (committed to 1231315} 235.421 Deferred tax liability (long term) 41900 Common stock 10,000 shares, par$10.00 100,000 Additional paid in capital 125,000 Retained earnings(loss] - beginning 18,500 Sales - coffee 165,000 Sales - beans 65,400 Sales - other 16,500 Allowance for returns -beans 3-500 Allowance for returns - other 650 Cost of goods sold - coffee 107.250 Cost of goods sold - beans 29,430 Cost of goods sold - other 7,425 Selling expenses 14,800 Professional fees 8,01? Depreciation - Buildings {30 years - straight line) 1,292 Depreciation - Equipment (10 years - straight line) 2.450 Bad debt expense 200 Administrative salaries 26,500 Other SGSIA expenses 9.395 Interest income - money market 40 Interest expense - note payable 3,500 Interest expense - revolving credit 5,319 Interest expense - amortization of debt set up costs 1,000 Income tax provision 10.484 ! Total ml, 1,033,134! Schedule 6 WW lnteroomgany Sales -1Q12 Java the Hut coffee bean sales to New Castle Coffee I $ ]5 599 W Inventory - as of 03/31/12 Coffee bean inventory from Java the Hut sales to New Castle Coffee at 03/31/11. 3.599 I Equity investment - Newark Coffee Earnings Earnings repoeEl 5y NewarR Coffee for te first quarter of 2012 were 1 $ \"1.259