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Problem 1-1 Exercise 1-26 from Text 4th edition (one exercise, not 26) Exercise 1-26 International Financial Reporting Standards Seacrest Company is a U.S.-based company that develops its financial statements under GAAP. The total amount of the company's assets shown on its December 31, 2012, balance sheet was approximately $225 million. The president of Seacrest is considering the possibility of relocating the company to a country that practices accounting under IFRS. The president has hired an international accounting firm to determine what the company's statements would look like if they were prepared under IFRS. One striking difference is that under IFRS the assets shown on the balance sheet would be valued at approximately $275 million. Required a. Would Seacrest's assets really be worth $50 million more if it moves its headquarters? ANS: Seacrest's asset would be worth $50 million, and it also depends on U.S. GAAP or IFRS used. GAAP (Generally Accepted Accounting Principle ) IFRS (International Finances Reported Standard) b. Discuss the underlying conceptual differences between U.S. GAAP and IFRS that cause the difference in the reported asset values. ANS: I would like to say U.S. GAAP is preferring a risk and reward model, like the historical cost. IFRS is preferring a control model, like controlling they current market values. Problem 1-2 Collins Company was started on January 1, 2014, and experienced the following events during its first year of operation. 1. Acquired $105,000 cash from the issue of common stock. 2. Borrowed $140,000 cash from National Bank. 3. Earned $168,000 of cash revenues for performing services. 4. Paid 157,500 $ of cash expenses. 5. Paid a $3,500 cash dividend to the stockholders. 6. Acquired an additional $70,000 cash from the issue of common stock. 7. Paid $35,000 cash to reduce the principal balance of the bank note. 8. Paid $185,500 cash to purchase land. 9. $262,500 REQUIRED Record the preceding transactions in the horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). See "Horizontal Statements Model" file on TritonEd for guidance Problem 2-1 In 2014, Peach Tree billed $245,000 to its customers for services performed. The company collected $94,500 of the amount billed. Peach Tree incurred $56,000 of other operating expenses on account. Peach Tree paid $35,000 of the accounts payable. Peach Tree acquired $192,500 cash from the issue of common stock. The company invested $150,500 cash in the purchase of land. REQUIRED Determined that the market value of the land is 9/22/20168:56 PM C:\\1 UCSD\\MGT 45\\Homework solutions\\PS 1 Fall 2016 keyExercises and Problems Use the preceding information to answer the following questions. (Hint:Identify the six events described in the paragraph and record them in a horizontal statements model before attempting to answer the questions.) a. What amount of revenue will Peach Tree report on the 2014 income statement? b. What amount of cash flow from revenue will Peach Tree report on the statement of cash flows? c. What is the net income for the period? d. What is the net cash flow from operating activities for the period? e. Why is the amount of net income different from the net cash flow from operating activities for the period? f. What is the amount of net cash flow from investing activities? g. What is the amount of net cash flow from financing activities? h. What amounts of total assets, liabilities, and equity will Peach Tree report on the year-end balance sheet? Problem 2-2 1 Acquired $122,500 cash from the issue of common stock. 2 Provided services for $28,000 cash. 3 Provided $77,000 of services on account. 4 Collected $49,000 cash from the account receivable created in Event 3. 5 Paid $6,300 cash to purchase supplies. 6 Received $15,400 cash in advance for services to be performed in the future. 7 Performed 100.0% of the services agreed to in Event 6. 8 Paid $42,000 cash for salaries expense. 9 Incurred $9,800 of other operating expenses on account. REQUIRED Record the preceding transactions in the horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). See "Horizontal Statements Model" file on TritonEd for guidance. Problem 3-1 The following information is available for two different types of businesses for the 2014 accounting period. XYZ CPAs is a service business that provides accounting services to small businesses. CC is a merchandising business that sells sports clothing to college students. Data for XYZ CPAs 1. Borrowed $175,000 from the bank to start the business. 2. Provided $122,500 of services to customers and collected $122,500 cash. 3. Paid salary expense of $87,500 Data for CC 1. Borrowed $175,000 from the bank to start the business. 2. Purchased $112,000 inventory for cash. 3. Inventory costing $64,400 was sold for $105,000 cash. 4. Paid $14,700 cash for operating expenses. REQUIRED a. Prepare an income statement, a balance sheet, and a statement of cash flows for each of the companies. b. Which of the two businesses would have product costs? Why? c. Why does XYZ CPAs not compute gross margin on its income statement? d. Compare the assets of both companies. What assets do they have in common? What assets are different? Why? (Am oun t in $) Income Statement XY Z CP As CC Revenue: 17 5,0 00 208, 000 Service/ Sales revenue 175 ,00 0 150, 000 Other Income: Profit on sale of inventory 0 58,0 00 Cost of sales: 12 5,0 00 181, 000 Salary expense 125 ,00 0 0 0 160, 000 Operating expenses 0 21,0 00 Gross Profit 50, 00 0 27,0 00 Purchase of inventory ( A m o u n t i n $ ) Balance Sheet X Y Z C P A C s C Liabilities: Loan from Bank Gross Profit 2 5 0 , 0 0 0 2 5 0 , 0 0 0 5 2 0 7 , , 0 0 0 0 0 0 TOTAL 3 0 0 , 0 0 0 2 7 7 , 0 0 0 Assets: Inventory 6 8 , 0 0 0 0 Cash 3 0 0 , 0 0 0 2 1 9 , 0 0 0 TOTAL 3 0 0 , 0 0 0 2 8 7 , 0 0 0 In the case of CC, MORE INFORMATION is required and due to the same, Balance Sheet is not tallying. Cash flow Statement Cash flow from Operating activities Cash received from customers Cash paid for: Inventory purchases Operating expenses NET CASH FLOW FROM OPERATIONS Cash flow from Investing activities Sale of assets Purchase of assets NET CASH FLOW FROM INVESTING ACTIVITIES Cash flow from Financing activities Bank overdraft NET CASH FLOW FROM FINANCING ACTIVITIES NET INCREASE IN CASH Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year b) The busineses of CC would have product costs it is in the business of selling sports clothing to college students. XYZ CPAs would not have product cost since it is involved in the business of providing accounting sevices. c) XYZ CPAs cannot compute gross margin on its income statment because it is engaged in the business of providing accounting services computed on the value of services since it is calculated as the Selling Price of an item less the Cost of goods sold. It can be reported on a per-unit basis. d) CASH is the asset which is companies (XYZ CPAs and CC) when their assets are compared. This is because both the companies had taken borrowed money from bank amounting to $250,000. INVENTORY is the asset which is companies because they are engaged in different businesses. XYZ CPAs is engaged in rendering accounting services for which no inventory is required, therefore there is Nil inventory in its books. However, CCwhich is selling students would be required to inventory since it is engaged in the business of sale. Problem 3-2 On January 1, 2014, Stan started a small flower merchandising business that he named Stan's Flowers. The company experienced the following events during the first year of operation. 1. Started the business by issuing common stock for $175,000 cash. 2. Paid $138,250 cash to purchase inventory. 3. Sold merchandise that cost $70,000 for $157,500 on account. 4. Collected $140,000 cash from accounts receivable. 5. Paid $35,000 for operating expenses. REQUIRED 1. Organize ledger accounts under the horizontal model. 9/22/20168:56 PM C:\\1 UCSD\\MGT 45\\Homework solutions\\PS 1 Fall 2016 keyExercises and Problems 2. Prepare an income statement, a balance sheet, and a statement of cash flows. 3. Since Stan sold inventory for 157,500 $ he will be able to recover more than half of the 175,000$ he invested in the stock. Do you agree with this statement? Why or why not