Mitten Manufacturing Ltd

Generally, mergers occur for the purpose of improving pecuniary accomplishment or sh arholders making the likelihood of this potential merger ideal. Angela has offered to cheat ML to John for the admit value of equity, based on the 2014 year. MUMS pecuniary Statements are in accordance with FIRS. John has asked for our help as professional bank flyerants with the unswerving of Label and Liana ALP (L&L) to assist in determining an estimate of the purchase price. In roll to do so we must(prenominal)(prenominal) beginning(a) address the ex pictureation issues with Mils authorized financial statements.It should be noned that Mils financial statements were prepared for intrinsic purposes and oblige not been audited. John volition want Mils financial statements to be accurate before agreeing to Angels suggested purchase price so that he is not overpaying. He leave similarly want accurate financial statements to accurately determine Mils debt/equity symmetry, going c oncern, and other key ratios/factors. Angela may be submited towards keeping her current balance sheet amount as they most likely overvalue additions and nethervalue liabilities, making the sale of her self-possession a better deal for her, but not necessarily a better deal for John.As Johns accountants we must go on this conservatively in order to ensure that he is not overpaying for the company, foc development primarily on the book value of equity which is to be the addressing price. Analysis and Recommendations disoblige $500,000 passing play ML experienced a want of $500,000 during the year which could be imput sufficient to problems with operations or Accounts Receivable collection. This may baffle encouraged Angela to bias the numbers to make ML hang better to potential buyers. This issue should be kept in mind when reviewing the following(a) issues.While this is a one-time event, workings groovy, inventory turnover, and debt ratios should be aimed when determ ining the companys rising sustainability. This loss depart slump or has decreased copeholders equity by $500,000. The loss may be a positive for John as he will be able to carry forward the loss to a positive web income in the next twenty years, which can potentially reduce Mils future taxable income. Should John decide to carry forward this loss, the diary initiation should kick like the following 1) Dry. Deferred tax addition 500,000 Cry.Income tax usefulness Issue How to account for the new call for agreement crownwork require direct take up beneath FIRS, one of quad classification criteria must be met in order to be lassie as a roof lead 1) Reasonably assured that self-command will conveyancing to lessee at end of lease term 2) Lessee gets substantially all stinting benefits from using the leased asset over the lease term 3) lesser recovers substantially all investment, and earns a rate of return 4) waged asset is specialized and can only be employ by lessee gibe to the terms of Mils new lease agreement 1) Yes, under the assumption that the pile Purchase Option of $4,500 will be exercised 2) No, lessee only uses 50% of sparing life not considered substantial as on that point is still 50% of its life left for economic benefits to be aimed 3) Yes, because the IV of Minimum Lease Payments (where 1=9%, N=5, and is exist to $88,000, which is 100% of the IV of the asset at January 1 , 2014 4) NINA.Information was not provided to answer this The lease meets both the first and third classification criteria Capital Leases must record the asset and liability, disparagement of the asset, and interest expense following the resultantive interest method Under FIRS, one will account for a lease as in operation(p) if the risk and benefits of ownership of the leased asset are not transferred to the lessee If a lease does not meet any of the criteria necessary for a Capital Lease, indeed it will be ported as an Operating Lease Operating Leases are accounted for as a rental expense After considering the two alternatives, it is clear that the new lease agreement must be preserve in Mils books as a Capital Lease. This is due to two of the four Capital Lease classification criteria being met, which do not get out for the company to record it as an Operating Lease. The following daybook entries should crap been entered throughout 2014 01/01/14 1) Dry. Lease Equipment contract 88,000 88,000 2) or. Lease Obligation Cry. Lease 24,066. 26 Cry. funds 12/31/14 3) Dry. Interest outlay 3,057. 02 4) Dry. Amortization depreciate Cry. Accumulated Amortization 3,057. 02 Cry.Interest payable 4,400 While at that place are more incentives to classifying a lease as in operation(p) such as tax incentives, higher return on asset, and better solvency ratios, the lease must be classified as a Capital Lease so as to stay in accordance with FIRS. However, a Capital Lease does provide a company with a higher operating notes flow, and re duces Net Income, which potentially reduces income taxes. A lower Net Income will result in a lower shareholders equity. Issue Entries to reflect changes in the plan asset and liability for current year FIRS ASPS FIRS requires that the same dissolve rate is used for plan asset and liability and the immediate intelligence approach must be used. at that placefore, using the Projected Benefit Obligation method, and using a 10% discount rate, the Plan liability would be $ 694,969 + 35,000 + 69,497 40,000 = $759,466 And the Plan Asset, using the 10% actual return on plan assets, would be $ 525,000 + 52,500 = $537,500 Making the outlined Benefit Obligation $ 537,500 759,466 ($221,966) The Pension Expense $ 35,000 52,500 = $ 51 ,997 And the Net Defined Benefit Liability (169,969) = ($ 51 ,997) ASPS allows for all the immediate recognition approach or the deferral and amortization approach ASPS also allows for the expected return on plan assets to be varied from the discount rate u sed for the Accrued Benefit Obligation No calculations are necessary for the ASPS alternative of this issue, as they would not be in accordance with FIRS with which ML must follow. Therefore, in accordance with FIRS, we will account for the changes in the plan asset and liability as express above.Please note that the Accrued Benefit Obligation (ABA) will be referred to as the Defined Benefit Obligation (DB), s we are working under FIRS preferably than ASPS. Following the restriction that the same discount rate (1 0% in this case) be used for both plan asset and liability, the following journal entries should be make to account for the changes for the current year 12/31/14 1) Dry. Pension Expense Cry. Net Defined Benefit Liability 51,997 51 ,997 This add in Net Defined Liability will decrease Shareholders Equity. Issue Depreciation of Capital Assets The depreciation of large(p) assets must be taken out of the provide for income taxes included in the financial statements for the current period.This depreciation is to be included in taxable income, not accounting income and will incorrectly state Mils provision for income taxes if not removed. The CA mensuration needed to be removed is equal to x 30% $1 this amount will be deducted from the taxable income. The removal of $1 from the provision for income taxes will increase meshwork income, subsequently increasing shareholders equity. Issue How to account for the Super Shopper Account Receivable Estimate Unconvertible Receivables opus Off Accounts Receivable There are two methods to estimate untransmutable receivables 1) Balance Sheet method uses gone collection experiences to estimate unexchangeable amounts.ML could estimate the amount required for gross profit margin for Doubtful Accounts as a percentage of the balance in Accounts Receivable. Using an aged receivables analysis, ML could work out a percentage of estimated unconvertible Accounts Receivables accounts over 90 days old. The journal i ntroduction would carriage similar to the following Dry. severity Debts Expense Cry. pay for Doubtful Accounts xx 2) Income Statement manner estimates cost of bad debts as a percentage of Sales. Mils journal entry using this method would assure the same as the Balance Sheet Method journal entry. If ML determines Super Shoppers account specifically to be unconvertible, they may use the Allowance Method for writing off accounts.The following journal entry would be made Dry. Allowance for Doubtful Cry. Accounts Receivable -? Super Shopper Should the payment be received after the make unnecessary off, the account can be reinstated using the following journal entries 1) Dry. Accounts Receivable 2) Dry. Cash Cry. Accounts Receivable If the amount is immaterial, ML may also use the Direct Write Off Method, where no allowance account is used. The journal entry would be as follows or. seriously Debt Expense Due to the age of Accounts Receivable -? Super Shopper (90 days old) and the financial difficulties that Super Shopper is currently facing, it is unlikely that the account will be give off and should there for be written off.ML should follow the Allowance Method of writing off journal entries stated above to record the write off of the Accounts Receivable. This method would be preferred as it allows for the account to be restated should Super Shopper pay off their debt. The Direct Write -? Off Method would not suffice for this account as the amount of $200,000 is not considered immaterial. This Bad Debt Expense needs to be considered as it will impact Mils assets, and an increase in bad debts is a decrease in the value of the riotous (shareholders equity) of the firm for John. This world power not be as substantial to consider should ML drop already had a bad debt reserve, meaning that the net income would not have been so greatly affected.Issue How to account for the Tech outerwear Lawsuit do pillowcase as a provision Recognize typeface as a contin gent liability Under FIRS, ML should get along the typeface as a provision if 1) The company has a present jural obligation as a result of a past event 2) It is rabble more likely than not that an effluence of resources will be required to settee the obligation 3) A received estimate can be made of the amount of the obligation If the lawsuit meets these conditions, it should be know in the financial statements Under FIRS, ML should recognize the lawsuit as a contingent liability if either 1) There is a possible legal obligation as a result of a past event, which will be confirmed on the position of an uncertain future event, not within the reporting individuals control or 2) There is a legal obligation from past events, which is not accepted as it is to probable that an outflow of resources will be required to settle the obligation or a reliable estimate cannot be made of the amount of the obligation If the lawsuit meets these conditions, it should be disclosed in the not es of the financial statements. The notes should include the following 1) Estimate of its financial effect 2) Uncertainties related to the amount and timing of any outflow of resources 3) Possibility of any an outflow of resources The lawsuit by Tech Outerwear for patent infringement has not been decent assessed by Mils lawyers yet, and therefore they have not determined the likelihood of losing the suit. This cultivation allows us to determine that at this time the lawsuit should be recognize as a contingent liability in accordance with FIRS, as we are unable to meet the conditions to recognize it as a provision on the financial statements.This lawsuit meets the criteria that there is a possible legal obligation that cannot be confirmed until Mils lawyers assess the lawsuit, and the probability of the outflow of resources and a reliable estimate of the obligation cannot be made. The numbers ($200,000 to $700,000) on past lawsuit settlements are not reliable information. The requ ired disclosed notes stated above should be included in he financial statements. ascertain the probability of the lawsuit and the estimated loss should be completed as shortly as possible, as a loss could result in a going concern policy. This information will be very important to John as the company has already experienced a loss of $500,000 during the year. This note has no effect on equity only when the lawsuit is official will it have an effect on equity.Issue Retractable preferred Shares ML also has $50,000 of retractable preferred shares included in their capital stock. These shares a retractable if there is a change in the ownership of cuisines. This will be of concern to John, as the $500,000 loss incurred during the year does not leave the company with the funds available to pay the shareholders should they decide to sell their shares John must consider day to day cash requirements for the companys expenditures that are not included in current liabilities. While it was not stated, which might have been done on purpose by ML, it is unclear if dividends were declared during the year for the preferred shares, which may affect Johns decision greatly.Cash dividends should not have been declared unless the current and future uncial position justify it the current loss of $500,000 does not suggest that they should have declared any. Cash dividends would have reduced shareholders equity. If stock dividends were distributed, then there would have been no effect on the balance of shareholders equity. On the other hand, non -? payment of dividends can also affect the company as the preferred shareholders may choose to sell their shares if they stop receiving dividends receiving dividends is usually what attracts investors to preferred stock. John should examine the debt/equity ratio to determine if these referred shares were issued because the ratio became too high and they wanted the company to look more desirable to investors and buyers.Issue Accounting f or Employee commonplace Options Recognizing stock options While Compensatory contain Option plans (COOP) do not involve a transfer of cash when first issued, they still must be recognizes in the financial statements and mensural at fair value Coops are usually given instead of salary or a bonus, and the economic value lies in the future future gains when the options are exercised The honorarium Expense will be recognized as the services are being provided by the employees. Therefore, measure pay expense is calculated on the day the options are granted and is equal to the fair value of the options. The first journal entry for Mils stock options should look like the following 1 2/31 /14 1) Dry. Compensation Expense XX,XX Cry. Contributed intemperance Stock Options XX,XX If/when the options are exercised, ML should record the entry as such XX/XX/1 5 2) or. Cash XX,XX Dry. Contributed Surplus Stock Options CALYX Cry.Common Shares XX,XX If the options expire by the end of the t hree years, then the journal entries for the remaining balance should be the following 3) Dry. Contributed Surplus Stock Options Contributed Surplus Expired Stock Options XX,XX cry. XX,XX Mils disclosures on the stock options should include the following 1) Accounting policy 2) Description of plan 3) Details on numbers and values Of options issued, exercised, and expired 4) Assumptions and methods used to determine fair values 5) Total Compensation Expense and Contributed Surplus The recognition of these stock options is required under both ASPS and FIRS, and ML has no option but to record them as such.The first journal entry that records the total Compensation Expense and Contributed Surplus must be made in order for ML to have accurate financial statements. The following journal entries are to be used in the future when options are exercised or expired. As no just information on dates and values were provided, the reporting individual is not able to provide completely finished journal entries. The Compensation Expense will lower the net income, which will subsequently lower shareholders equity. As well, if there is a large amount of option redemptions, this will cause the share price to quickly drop. Investors who sell their shares during this time will incur capital losses, and these losses may be carried forward to reduce tax liabilities.