Project Design The project is designed to reinforce acquisition and consolidation Accounting skills under situations you may encounter in practice. Additionally, the project requires statements, including a relatively complex statement of cash flows. Background You recently accepted the controller position for Java the Hut, a regional coffee chain. The owner informs you that a complete financial statement package will be required as p ("covenants"). Prior to your arrival, the company had one accountant and relied heavily on the auditors in the controller position, the expectation is that you will assume the preparation of financial statements On your first day of work on April 1, 2018, the Java the Hut accountant informs you that there w of 2018 that she was unsure of the appropriate accounting. Consequently, she recorded the ca temporary holding account. The good news is that the Java the Hut accountant maintained exce series of supporting schedules for you. ::,,. The project reflects a "real-life" challenge in that you are responsible for accounting issues m case, an acquisition was completed on 1/1 and you are now responsible for acquisition accounti first three months, or first quarter. Project Requirements Eliminate Other Assets - Holding account balance on Java the Hut Ledgers 1. Prepare the appropriate journal entries to recognize the first quarter transactions, currently reported in Other Assets - Holding in the balance sheet of Java the Hu The goal of the journal entries is to eliminate the balance in the Other Asset - Holding account with recognition. Prepare Acquisition Journal Entry to reflect fair values of New Castle Coffee on 1/1 2. Prepare the acquisition accounting analysis of New Castle Coffee using the information in Schedule 2 and Schedule 2A 3. Prepare 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 3 for Acquisition Values Because the project uses a situation you may encounter in practice, the reported results of New C include any adjustments for the acquisition. Remember that the accounting department of New acquisition never occurred until new values are established. In practice, this is often a number o appropriate accounting. s. Using only the Balance Sheet Amounts in Schedule 3, calculate new balances by using adding/subtracting to Schedule 3 amounts. Only the Cash Account through Retained Earnings are required to be adjusted For example: Land Schedule 3 Reported Increase in Acquisition Value Schedule 3 Adjusted $50,000 10,000 $60,000 Recognize subsidiary earnings on Java the Hut (Parent) Ledgers 6. On Java's books, prepare the appropriate journal entries to recognize the first quarter accoun in Schedule 3) and Newark Coffee earnings (Schedule 6) below. Prepare Consolidating Worksheets for the Income Statement and Balance Sheet 7. Prepare journal entries to recognize the intercompany transactions and eliminations identified in Schedule 6. 8. Prepare consolidating worksheets for the income statement (first quarter of 2018) and for the balance sheet (as of March 31, 2018). Y Y Y Consolidating worksheets should utilize spreadsheet software Prepare Consolidated Financial Statements for the Bank Reporting Package Income Statement & Balance Sheet 9. Prepare Y Income Statement for the first quarter of 2018 (Multi-Step Format - See Format in Y in Schedule 7) Statement of Cash Flows 10. Prepare Y Use the financial statements in Number 8 or 9 as the basis to prepare the statement of cash flow. Y Preparation Reference & Guidelines - Financial Statements Y Schedule 7 referenced below includes a consolidating income statement and balance sheet w appropriate accounts for your financial statements, except for those accounts that are eliminated in Y Y should be used. Schedules Attached Schedule 1 Schedule 2 Schedule 2A Schedule 3 Schedule 4 * Schedule 5 Schedule 6 Schedule 7 Other assets - holding analysis Trial Balance of New Castle Coffee as of 01/01/17. New Castle Coffee Acquisition Support Trial Balance of New Castle Coffee as of 03/31/17. Trial Balance of Java the Hut as of 12/31/16. Trial Balance of Java the Hut as of 03/31/17. Intercompany Transactions and subsidiary earni Worksheet Example * Needed for cash flow statement only. + Any supporting calculations should be included. All adjustments included in the steps to this point should be included It is recommended that you utilizethe consolidating worksheet for cons fina stat for the ban reporting requirement outlined Balance Sheet as of March 31, 2018 (Classified Format - See Format cons Stat of Cas Flo usin the indirect method for Regarding capital expenditures, the change in the Construction in Progress ( The Statement of Cash Flow should use the format covered in our class exam Remember, financial statements headings and presentation format Income Statement& Balance Sheet worksheet formats we will cover in class rting requirement outlined in the Background section above: indirect method for the first quarter of 2018. onstruction in Progress ("CIP') should be assumed to equal capital expenditures. covered in our class examples. Schedule 1 Java the Hut Account Analysis Other Assets - Holding Account Analysis Acquisition of New Castle Coffee on 1/1/07 Stock acquisition of 1,000 shares outstanding (Par Value $1.00) Percent of shares outstanding 100% Purchase price at settlement $ 125,000 Professional fees incurred $ 12,000 Debt set-up (revolving credit renegotiation $ 6,000 Acquisition of New Castle Coffee on 1/1/07 Equity investment in Newark Coffee Activity Purchase of 40% interest of shares outstanding 1/1 Dividends received on 3/1 in cash Equity investment in Newark Coffee Activity Other Assets - Holding Account Analysis 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 143,000 $ $ 44,000 (2,000) $ 42,000 $ 185,000 Schedule 2 Trial Balance of New Castle Coffee as of 01/01/07 Accounts WTC Checking WTC money market account Accounts Receivable Allowance for uncollectible accounts Inventory Prepaids rent - current Land Building Equipment Accumulated Depreciation Debt set up costs, net Accounts payable Accrued payroll and benefits Accrued expenses Note payable 12/31/07 Common stock 1,000 shares, par $1.00 Additional paid in capital Retained earnings(loss) Total Debit 1,000 4,000 15,000 Credit 2,000 8,000 5,000 50,000 85,000 48,000 15,000 5,000 12,000 3,000 2,000 100,000 1,000 74,000 12,000 221,000 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 221,000 Schedule 2A New Castle Coffee Acquisition Support Appraisal Results The appraisal of the fixed assets resulted in the following fair market values: Land Building Equipment $ 60,000 92,000 45,000 Fixed Assets Fair Market Value $ 197,000 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 Deferred tax liability (long-term) $ $ 2,500 3,800 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 Schedule 3 Trial Balance of New Castle Coffee as of 03/31/07 Accounts WTC Checking WTC money market account Accounts Receivable Allowance for uncollectible accounts Inventory Prepaids rent - current Land Building Equipment Construction in progress Accumulated Depreciation Debt set up costs, net Accounts payable Accrued payroll and benefits Accrued expenses Note payable 2008 Advance payable - Java Common stock 1,000 shares, par $1.00 Additional paid in capital Retained earnings(loss) - beginning Retained earnings(loss) - current year Sales - coffee Sales - beans Sales - other Allowance for returns - beans Allowance for returns - other Cost of goods sold - coffee Cost of goods sold - beans Cost of goods sold - other Selling expenses Professional fees Depreciation - Buildings (30 years) Depreciation - Equipment (10 years) Bad debt expense Administrative salaries Other SG&A expenses Interest income - money market Interest expense Amortization of debt set up Income tax provision Total Debit 1,500 3,000 21,000 Credit 2,875 13,765 3,750 50,000 85,000 48,000 16,000 16,281 4,687 12,800 6,000 5,673 100,000 8,000 1,000 74,000 12,000 65,000 25,000 8,000 1,000 400 39,000 10,000 3,600 6,000 4,800 31 1,250 600 12,000 4,000 15 2,000 313 4,948 336,644 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 336,644 - Schedule 4 Trial Balance of Java the Hut as of 12/31/06 (Beginning of Year Balance - needed for cash flow statement only) Accounts DNB Checking T. Rowe money market account Accounts Receivable Allowance for uncollectible accounts Inventory Deferred tax asset Land Building Equipment Construction in progress Accumulated Depreciation Debt set up costs, net Advance receivableAccounts payable Accrued payroll and benefits Accrued expenses Note payable - Due 12/31/10 Revolving credit loan Deferred tax liability (long term) Common stock 10,000 shares, par $10.00 Additional paid in capital Retained earnings(loss) Total Debit 800 18,600 46,800 Credit 936 51,250 3,000 185,000 155,000 98,000 4,800 54,275 12,000 47,250 13,200 8,900 175,000 27,749 4,440 100,000 125,000 18,500 575,250 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 575,250 - Schedule 5 Trial Balance of Java the Hut as of 03/31/07 Accounts DNB Checking T. Rowe money market account Accounts Receivable Allowance for uncollectible accounts Inventory Deferred tax asset Land Building Equipment Construction in progress Accumulated Depreciation Debt set up costs, net Advance receivable- NCC Other assets - holding Accounts payable Accrued payroll and benefits Accrued expenses Note payable - Due 12/31/10 Revolving credit loan (committed to 12/31/09) Deferred tax liability (long term) Common stock 10,000 shares, par $10.00 Additional paid in capital Retained earnings(loss) - beginning Retained earnings(loss) - current year Sales - coffee Sales - beans Sales - other Allowance for returns - beans Allowance for returns - other Cost of goods sold - coffee Cost of goods sold - beans Cost of goods sold - other Selling expenses Professional fees Depreciation - Buildings (30 years - straight line) Depreciation - Equipment (10 years - straight line) Bad debt expense Administrative salaries Other SG&A expenses Interest income - money market Interest expense - note Interest expense - revolving credit Amortization of debt set up Income tax provision Total 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 Debit 1,500 8,000 48,000 Credit 960 54,024 3,197 185,000 155,000 98,000 25,200 58,017 11,000 8,000 185,000 48,200 11,000 13,196 175,000 223,852 4,900 100,000 125,000 18,500 105,000 65,400 16,500 3,500 650 68,250 29,430 7,425 14,800 8,017 1,292 2,450 200 26,500 9,396 40 3,500 5,037 1,000 2,197 965,565 965,565 - Schedule 6 Intercompany Transactions Intercompany sales - 1Q07 Java the Hut coffee bean sales to New Castle Coffee $ 15,500 Intercompany Inventory - as of 03/31/07 Coffee bean inventory from Java the Hut sales to New Castle Coffee at 03/31/06. $ 3,500 Equipment transfer An expresso maker was transferred from Java the Hut to New Castle Coffee on 1/1/07 for $6,000 in the form of a Advance Receivable on Java's books and an Advance Payable on New Castle Coffee Books. Asset information on Java the Hut's books on the date of transfer is below. Cost $ 5,000 Accumulated Depreciation (500) Net book value $ 4,500 The Java the Hut accountant informs you that no journal entry has been processed for the transfer. Equity investment - Newark Coffee Earnings reported by Newark Coffee for the first quarter of 2007 were 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 $ 10,250 Wilmington College BAC 401 Advanced Accounting Project Fall 2007 861985c64c843d5eddcf03b0e977ce4926665551.xlsx 07/02/2020 18:54:19 14