Q.

Prepare the entries in excel, to be attached to the case.

Case 9-2 L01 PCo. is looking for some additional financing in order to renovate one of the company's manufacturing plants. It is having difficulty getting new debt financing because its debt-to-equity ratio is higher than the 3:1 limit stated in its bank covenant. It is unable to attract an equity partner because the sole owner of P Co. has set equity partner condi- tions that make it practically impossible to find a new equity investor. 547 CHAPTER 9 Other Consolidation Reporting Issues were recorded historical.com the form of the manufacturing facil The company is mash-hit musical receiving advance As at June 22. Yes in interest-bearing advance ticket sal company will ha duction costs of Part of the problem results from the use of historical cost accounting. If the company's assets were te fair value. the debt-to-equity ratio wld be much lower In order to get around the requirements for his accounting, the CFO for P Co. came up with the following plan. On September 2. Year 5. P Co. will sell its manufacturing facility to SPE for $1,500,000 in the form non interest-bearing note receivable, SPE will be set up for the sole purpose of renovating the manufacturin Ty. No other activities may be carried out by SPE without the approval of P Co. Mr. Renovator, an unrelated will invest $1.000.000 in cash to cover the estimated cost of the renovation and will be the sole owner of SPE January 1. Year 6. after the renovation is complete and one day after P Co.'s year-end, SPE will sell the manuf turing facility back to P Co, at $2,600,000 and will be wound up. P will finance the repurchase with a $1.100 bank loan and by offsetting the remaining $1.500,000 against the note receivable from SPE from the original of the manufacturing facility to SPE. By selling the unrenovated facility and repurchasing the renovated facility P Co. hopes to reflect the facility at its fair value, borrow the money to finance the renovation, and improve its debt. to-equity position The existing and pro forma balance sheets (in 000s) and debt-to-equity ratios for P Co, and SPE are presented below in condensed form: unrelated party PFC has ret: motion, to prom PFC's activities ciated with the and promotion PC. Sep. 1/5 PC. Dec 31/5 $ 1,500 P Co. Jan. 1/6 SPE Dec. 31/5 PFC has these treasury US$25 milli for the same due. PFC cc Note receivable from SPE Manufacturing facility Other assets $2,250 $ 225 2,025 $2,250 2.025 $2,600 2.025 $4,625 $ 3.525 S2.250 $ 1,800 Note payable to P Co. Other liabilities Common shares Retained earnings $ 1.800 $2,900 dicated loar PFC SE cash flow profits, the income (i company On 30 420 $2,250 4:1 1.695 $ 3.525 1.04:1 1,695 $4,625 1.68:1 52.250 Debt-to-equity ratio The CFO would like you to prepare a memo in which you discuss the accounting issues related to these posed transactions Odyssey a carryi net incc has no Read Case 9-2 on page 547 Additional information to the case: You are an accountant with the firm of MCSK, CPAs. P Co. has been a client for many years and often utilizes the firm for advice on accounting issues. The CFO of P Co. has contacted your firm to discuss any accounting issues related to the proposed transactions. Mathew Knoll, the partner has asked you to do the GAAP research required to determine if there are any issues that will be encountered. Mathew has clarified with the CFO that Mr. Renovator will receive a $100,000 dividend when the SPE is wound up, along with the return of the capital originally invested in the SPE. Mathew also mentions that P Co. is open to any alternative methods of accomplishing its goal of managing its debt to equity ratio and obtaining bank financing. The bank of P Co. requires GAAP compliant statements in determining the debt covenants. P Co. applies IFRS. Attempt the entries that would appear on P Co books to record the transactions. Then attempt the entries on SPE books to record the transaction. This will help you to work through the facts of the case and what the intercompany entries are. Tax effects can be ignored Develop a preliminary outline, you will share your outline and entries with your group. Case 9-2 L01 PCo. is looking for some additional financing in order to renovate one of the company's manufacturing plants. It is having difficulty getting new debt financing because its debt-to-equity ratio is higher than the 3:1 limit stated in its bank covenant. It is unable to attract an equity partner because the sole owner of P Co. has set equity partner condi- tions that make it practically impossible to find a new equity investor. 547 CHAPTER 9 Other Consolidation Reporting Issues were recorded historical.com the form of the manufacturing facil The company is mash-hit musical receiving advance As at June 22. Yes in interest-bearing advance ticket sal company will ha duction costs of Part of the problem results from the use of historical cost accounting. If the company's assets were te fair value. the debt-to-equity ratio wld be much lower In order to get around the requirements for his accounting, the CFO for P Co. came up with the following plan. On September 2. Year 5. P Co. will sell its manufacturing facility to SPE for $1,500,000 in the form non interest-bearing note receivable, SPE will be set up for the sole purpose of renovating the manufacturin Ty. No other activities may be carried out by SPE without the approval of P Co. Mr. Renovator, an unrelated will invest $1.000.000 in cash to cover the estimated cost of the renovation and will be the sole owner of SPE January 1. Year 6. after the renovation is complete and one day after P Co.'s year-end, SPE will sell the manuf turing facility back to P Co, at $2,600,000 and will be wound up. P will finance the repurchase with a $1.100 bank loan and by offsetting the remaining $1.500,000 against the note receivable from SPE from the original of the manufacturing facility to SPE. By selling the unrenovated facility and repurchasing the renovated facility P Co. hopes to reflect the facility at its fair value, borrow the money to finance the renovation, and improve its debt. to-equity position The existing and pro forma balance sheets (in 000s) and debt-to-equity ratios for P Co, and SPE are presented below in condensed form: unrelated party PFC has ret: motion, to prom PFC's activities ciated with the and promotion PC. Sep. 1/5 PC. Dec 31/5 $ 1,500 P Co. Jan. 1/6 SPE Dec. 31/5 PFC has these treasury US$25 milli for the same due. PFC cc Note receivable from SPE Manufacturing facility Other assets $2,250 $ 225 2,025 $2,250 2.025 $2,600 2.025 $4,625 $ 3.525 S2.250 $ 1,800 Note payable to P Co. Other liabilities Common shares Retained earnings $ 1.800 $2,900 dicated loar PFC SE cash flow profits, the income (i company On 30 420 $2,250 4:1 1.695 $ 3.525 1.04:1 1,695 $4,625 1.68:1 52.250 Debt-to-equity ratio The CFO would like you to prepare a memo in which you discuss the accounting issues related to these posed transactions Odyssey a carryi net incc has no Read Case 9-2 on page 547 Additional information to the case: You are an accountant with the firm of MCSK, CPAs. P Co. has been a client for many years and often utilizes the firm for advice on accounting issues. The CFO of P Co. has contacted your firm to discuss any accounting issues related to the proposed transactions. Mathew Knoll, the partner has asked you to do the GAAP research required to determine if there are any issues that will be encountered. Mathew has clarified with the CFO that Mr. Renovator will receive a $100,000 dividend when the SPE is wound up, along with the return of the capital originally invested in the SPE. Mathew also mentions that P Co. is open to any alternative methods of accomplishing its goal of managing its debt to equity ratio and obtaining bank financing. The bank of P Co. requires GAAP compliant statements in determining the debt covenants. P Co. applies IFRS. Attempt the entries that would appear on P Co books to record the transactions. Then attempt the entries on SPE books to record the transaction. This will help you to work through the facts of the case and what the intercompany entries are. Tax effects can be ignored Develop a preliminary outline, you will share your outline and entries with your group