Project Design

Theprojectisdesignedtoreinforceacquisitionand consolidation

Accounting skills under situations you may encounter in practice. Additionally, the project requires you to prepare a full set of consolidated financial statements, including a relatively complex statement of cash flows.

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. Preparetheappropriatejournalentriestorecognizethefirstquarter

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. PreparetheacquisitionaccountinganalysisofNewCastleCoffee using

theinformationin Schedule2 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 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.

Prepare Consolidating Worksheets 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).

Y All adjustments included in the steps to this point should be included

Y It is recommended that youutilize the consolidating worksheet formats we will cover in class

YConsolidatingworksheetsshouldutilize spreadsheet software

Prepare Consolidated Financial Statements for the Bank Reporting Package

Income Statement & Balance Sheet

9. Prepare consolidated financial statements for the bank reporting requirement outlined in the Background section above:

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

Y Balance Sheetas ofMarch31,2018(ClassifiedFormat-See Format

inSchedule 7)

Statement of Cash Flows

10. Prepare consolidated Statement of Cash Flow using the indirect method forthe first quarter of 2018.

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

thestatement of cash flow.

Y Regardingcapitalexpenditures,thechangeinthe Constructionin 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.

Y TheStatementofCashFlowshouldusetheformatcovered inour class examples.

Y Remember,financialstatementsheadingsandpresentationformat

shouldbe used.

Schedules Attached

Schedule 1

Schedule 2 Schedule 2A Schedule 3

Schedule4 *

Schedule 5

Schedule 6

Schedule 7

Otherassets -holding analysis

Trial Balance of New Castle Coffee as of 01/01/17. New Castle Coffee AcquisitionSupport

Trial Balance of New Castle Coffee as of 03/31/17. Trial Balance ofJava theHutas of 12/31/16.

TrialBalanceofJavatheHutasof03/31/17. Intercompany Transactions and subsidiary earnings 1Q18 Consolidating Income Statement & Balance Sheet

Worksheet Example

* Needed for cash flow statement only.

Group Guidelines& Due Date

:.-, Groups of 2-3 areencouraged.Ifyou prefer towork as an individual, that is alsoacceptable.

:.-,Time will providedat the end ofour classestowork on the project,

including review of calculations and results with Bob.

>"' The project is due at the beginning of the last class (Exam III).

>"' The projectshouldbe printed.Emailswill not be accepted unless there are specialcircumstanceslike an illness orfamily emergency.

Project Turn-In Checklist

>"'Pleaseassembleyourprojectinthefollowing order:

o Consolidated Income Statement

o ConsolidatedBalance Sheet

oConsolidatedStatement of Cash Flows

o Consolidating Worksheets supporting the Consolidated Income Statementand Balance Sheet

o Journal entries clearing theOtherAsset Account on Java's

books

o Java journal entries to recognize subsidiary earnings and

dividends as required

o Schedule of adjustments required for New Castle Coffee ("NCC") (Schedule 3) and Java (Schedule 5) trial balances

oOther, optional

Schedule 1

Java the Hut Account Analysis

Other Assets - Holding Account Analysis as of 3/31/18

Acquisition of New Castle Coffee on 1/1/18

Stock acquisition of 1,000 shares outstanding (Par Value $1.00)

Percent of shares outstanding

100%

Purchase price at settlement Professional fees incurred

Debt set-up fees (revolving credit agreement) Acquisition of New Castle Coffee on 1/1/18

$ 150,000

$ 12,000

$ 6,000

1ss,ooo I

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

lOther Assets - Holding Account Analysis as of 3/31/18

$ 44,000

$ (2,000)

I$ 42,000 I

I$ 210,000I

Schedule 2

Trial Balance ofNew Castle Coffee as of 01/01/18

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

AccumulatedDepreciation 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 12/31/16 100,000

Common stock 1,000 shares, par $1.00 1,000

Additional paid in capital 74,000

Retained eamings{loss)

I Total 221,000 I 12,000

221,000 I

Schedule 2A

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,ooo I

Due Diligence Review

As part of the due diligence process, itwas determined that New Castle Coffee was not accruing for income taxes. The following balances were indicated.

Income tax payable {current liability) Deferred tax liability {long-term liability)

$ 2,500

$ 3,800

I

I Total 336,6441 336,6441

Schedule 4

Trial Balance of Java the Hut as of 12/31/17

(Beginning of Year Balances - needed for cash flow statement only)

Accounts Debit Credit

DNB Checking 800

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

AccumulatedDepreciation 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 12/31/21 175,000

Revolving credit loan (committed to 12/31/20) 27,749

Deferred tax liability (long term) 4,440

Common stock 10,000 shares, par $10.00 100,000

Additional paid in capital 125,000

Retained eamings(loss) 18,500

ITotal 575,250 575,250 I

! Total

1,038,134 ! 1,038,134 !

BAG 401 Project 12 9/24/2012 2:43 PM

Schedule 6

lntercompanyTransactions

lntercompany Sales -1Q12

Java the Hut coffee bean sales to New Castle Coffee $ 1s,soo

lntercompany Inventory - as of 03/31/12

Coffee bean inventory from Java the Hut sales to

New Castle Coffee at 03/31/11. 3,soo

Equity investment - Newark Coffee Earnings Earnings reported by Newark Coffee for the first

quarterof 2012 were 1 $ 10,2so I

BAC 401 Project 12 9/24/2012 2:44 PM

Wilmington University

BAC 401 Advanced Accounting Project ConsolidatingWorksheet Example

Java

Inter-Co

Schedule 71

IConsolidating Income Statement Net Sales

Cost of Goods Sold [ Gross Profit

the Hut

NCC

Elim's Consolidated

Selling, General& Administrative

I Operating Earnings Interest Expense, net

Equity earnings - NCC Coffee Equity earnings- Newark Coffee

Earnings Before Income Taxes Income tax expense (benefit)

Net Income

Wilmington University

BAC 401 Advanced Accounting Project ConsolidatingWorksheet Example

Java

Inter-Co

Schedule 71

IConsolidating Balance Sheet

the Hut

NCC

Elim's Consolidated

Assets

Current Assets

Cash & Cash Equivalents Accounts Receivable, net Inventories

Deferred Tax Asset Prepaid Rent

Current Assets

Plant, Property & Equipment At Cost

Accumulated Depreciation

Net

Other Assets

Debt set up costs, net Advance receivable- NCC Goodwill

Investment - New Castle Coffee Investment Newark Coffee JV

( Other Assets

[ TOTAL ASSETS

Wilmington University

BAC 401 Advanced Accounting Project ConsolidatingWorksheet Example

Java

Inter-Co

Schedule 71

Liabilities & Equity

Current Liabilities Accounts payable

Accrued payroll and benefits Accrued expenses

Accured Income taxes payable

the Hut

NCC

Elim's Consolidated

I Current Liabilities I

Long-Term Liabilities

Revolving credit loan (committed to 12/31/15) Note payable 12/31/16

Note payable 12/31/16

Deferred tax liability (long term)

Advance Payable Java ( Long-Term Liabilities

Total Liabilities Stockholders' Equity

Common stock 10,000 shares, par $10.00

Additional paid in capital

Retained eamings(loss) beginning Current period earnings

( Stockholders' Equity

Liabilities & Stockholders' Equity