US GAAP ASSIGNMENT- JUNE 2019

US GAAP Assignment June 2019

You are the Chief Accountant for Tech Solutions, a company specializing in the provision of computer

hardware and bespoke software solutions. Tech Solutions uses US GAAP for its financial reporting. You

have been given the task of preparing the first draft financial statements for the year-ended 31

December 2019 using the information below.

Requirement:

Using this information, prepare the statement of financial position and the income statement for the

year. You are not required to consider comparative information as part of this exercise. You should

assume that brought-forward retained earnings are the balancing figure in the draft.

Note that credit will be given if your workings demonstrate your understanding of US GAAP, even if

the answers themselves are wrong. No marks can be awarded for incorrect answers without any

supporting workings. However, you are not required to prepare detailed disclosure notes. Neither are

you required to prepare the EPS figures or any tax implications at this draft stage.

All figures quoted are in Euros.

Revenue

Computer hardware Product A: Cash received in-year for this 20.7m, of which 3.5m relates to unpaid

amounts carried over from the previous year. Unpaid for 2019 sales at the end of the year 4.8m.

Computer hardware Product B: List price value of sales 40m, against which bulk-buying discounts of

5% have been assigned. 3.5m of these amounts remain unpaid at the end of the year.

Computer hardware Product C: 38m shipped and paid for during the year, of which 2m were

subsequently returned due to their being faulty. Tech Solutions accepts that these products were

indeed faulty. These rejected goods may be replaced or a full refund given at the customer’s

discretion. The customer has intimated that it will probably ask for a refund though it has not yet

formally requested this.

Bespoke project A: a customer-funded project to undertake research and development into a new

product line, followed by large-scale production of the product developed. The total value of the

project is 75m, split 50/50 between the research and development phase and the production phase.

An advanced payment of 10m has been received for this though no work on either phase has started

at the year-end.

Bespoke project B: a customer-funded project to undertake research and development into a new

product line, followed by large-scale production of the product developed. The total value of the

project is 45m. This is allocated 45/55 to the research and production phases. At the year-end, the

R&D phase is completed to the customer’s satisfaction. However, the production phase has not yet

started. The customer has so far paid 16m for the work done.

Bespoke project C: a customer-funded project to undertake research and development into a new

product line, followed by large-scale production of the product developed. The total value of the

project is 24m. There is no allocation of value between the R&D and production phases in the contract.

However, Tech Solutions original estimate was that R&D costs would be 8m and production costs 5m.

There is though now an expected cost over-run of 2m on the R&D costs whilst production cost

estimates remain unchanged. Tech Solutions estimates that 60% of the R&D work is complete and this

has been signed off by the customer. No final products have been completed yet. The customer has

paid 5m at the year-end for the work done.

Interest receivable and payable

Tech Solutions has invested during the year in some bonds for which it should receive 5% p.a. on its

total investment of 3m. These amounts remain outstanding at the year-end.

It has also borrowed monies on two loans. One is for 8m and the other for 4m. Interest is payable at

6 p.a. on these. Both loans are repayable in more than one year. All interest relating to the first (8m)

loan has been paid during the year. However, none has been paid at all on the other (4m) loan due to

a dispute over the terms of the loans and there has been no interest paid for that related to this for

the previous year either (this was a full-year amount of interest).

Cash and cash equivalents

There are 0.6m of cash floats spread around Tech Solutions’ various sites. However, a year-end check revealed that 0.1m of this cannot be accounted for. The company has a bank account with 7.8m in it at the year-end. Property, Plant and Equipment Tech Solutions has brought-forward balances of 30m on its property: the value of land accounts for 10m of this and 20m relates to the property element. You have looked at the brought-forward balances and have confirmed to your satisfaction that these assets have been accounted for in line with US GAAP. The Finance Director now wishes to revalue these assets as the market value of them has increased significantly. They are now valued at 60m. These assets are depreciated on a straight- line basis over 30 years. So far, 10 years’ worth of depreciation has been attributed to these assets. Tech Solutions has motor vehicles with a brought-forward NBV of 1.5m. This is depreciated on a

reducing balance basis at 20% p.a. Included in this category is an item which was subject to an

impairment review in the previous year’s financial statements. New information now suggests that

the impairment was over-estimated and should be partially reversed with an adjustment of 0.2m

applicable.

Tech Solutions has plant with a brought-forward NBV of 5m. it depreciates this based on its usage. The

plant is expected to produce 20,000 units from this plant over the remainder of its life. During the year

just ended, 4,500 units were produced by it. One item, with a NBV of 1.2m (after allowing for this

year’s depreciation) has been subject to an impairment review at the year-end and is overvalued by

0.3m.

Intangible assets

Tech Solutions acquired some software during the year for use in its business. The cost was 10m plus

irrecoverable duties of 2m and the asset is expected to last for 12 years. It is company policy to charge

a full year of amortization in the year of acquisition.

The company has also spent significant sums on advertising. 5m has been spent on general advertising.

A further 3m has been spent on direct approach advertising to a specific and potentially high-value

customer; all amounts have been paid in full during the year. In both cases the Finance Director is

confident that all the costs will be recovered through future sales over the next five years and wishes

to capitalize all the costs involved. Company policy is that no amortization will be charged on these

items until the following year.

Wages and salaries

Tech Solutions has paid wages and salaries to the value of 47m during the year. Of this, 5.8m relates

to unpaid amounts brought-forward as unpaid from the previous year. 3.8m for the final month’s

salaries have not yet been paid as at the current year-end. Unused holiday pay of 2.8m has been

calculated as outstanding at the year-end. This is based on an average of 5 unused days per employee.

Based on past experience it has been estimated that 3.48 days of this will be used in the following

year. Any remaining days that are unused at the end of the following period will be lost.

Based on previous practice bonuses of 2.5m are expected to be paid calculated using this year’s

results. However, these will not will be paid until the following year.

Provisions

During the year, Tech Solutions was taken to court for an alleged breach of contract. Legal advice is

that the company has a 40% chance of losing the case and that payments may range between 10m

and 30m. In a separate case, Tech Solutions is being sued with an estimated 85% chance of losing the

case, with a range of outcomes between 20m and 25m. In each case, the payment is expected to take

place in three years’ time. Tech Solutions’ cost of capital is 10%.

A bad debt provision should be created against the sales of products A-C (i.e. not including the bespoke

contracts in place). This should be calculated at 5% of sales during the year as this is a very volatile

market. At the end of the previous year, the provision stood at 3m. Of this amount, 2.7m was utilized

during the year. Any remaining amounts are no longer required.

Other Expenditure

Tech Solutions also has the following expenditure items during the year:

Electricity and other fuel: total bills received during the year 3.9m. This includes 0.2m for the previous

year, for which an accrual of 0.3m had been created. An amount of 0.8m which remained unpaid at

the end of the year. The amounts outstanding for payment are not disputed.

There were also short-term rental costs to pay, amounting to 1.8m, of which 0.6m was outstanding

for payment at the end of the year. Part of the rented property was sublet to another business by Tech

Solutions. The amounts due for this came to 0.4m in the year, of which 0.2m had not yet been paid to

the organisation at the end of the year.

Self-funded research

Tech Solutions has undertaken 1.5m of research in the year. 0.3m of this is for research undertaken

by a third-party which has not yet been paid for at the year-end. In addition, 0.2m from the previous

year which was then treated as research is now classified as development. The Finance Director wishes

now to capitalize this. In addition, the company has incurred costs of 1.8m on development in the

year, of which 0.5m remains unpaid at the year-end. The Finance Director wishes to capitalize these

amounts.

Leases

The following leases are in place. Taking into account ASC 842, the following transactions should be

considered. The Finance Director wants to take account of all available exemptions relating to this.

Lease A – previously treated as a finance lease. The brought forward amount left against the asset is

12m: this has not been included in the PPE values mentioned earlier. This is being depreciated at 10%

p.a. The liability amount for this brought forward is 13.8m. Payments of 1.8m were due in the year, of

which 0.2m relates to the financing element. 0.5m remained unpaid at the end of the year: this is all

due for payment in the next year, along with a further 1m of the non-financing elements of the lease

payment.

Lease B – a new lease which would have been treated as a conventional operating lease under ASC 840. The lease will run for three years and there will be a charge of 5m p.a. for the leasing element of the asset. The straight-line interest charge amounts to 0.5m p.a. Of the 5.5m due in the current year, everything has been paid. Half the remaining lease liability (I.e. the non-financing element) is due for payment in the next financial year. Lease C – an asset leased for 6 months, with a charge of 0.8m. All this amount remains unpaid at the end of the year. Lease D - A lease of 1m p.a. for six years which has been taken out during the year. As in their opinion this is a relatively low value lease the Finance Director does not want to capitalize it. All amounts due are paid during the year. In addition to the finance charges, income payments of 0.8m per year are due. Materials

Tech Solutions has made payments for materials worth 18m during the year. 4m relates to goods delivered during the previous financial year and properly accrued for. Payments outstanding for the current year amount to 3.5m and in addition there are payments of 2m from the previous year that have not yet been made. All these outstanding amounts are due for payment in the next financial year.

Shares

Tech Solutions has 200,000 ordinary shares in issue which have been sold at the nominal price of 15

euros per share. In addition, 10,000 non-convertible preference shares have been authorized at a

nominal value of 250 euros each. 9,000 have been issued for 300 euros each.

Other issues

Tech Solutions has an employer-funded pension fund which started the year with a balance of 8.5m.

There was a pension provision of 2.8m to record the entity’s liability to cover future shortfalls: this

had been dealt with through Other Comprehensive Income – the only previous entry in this category.

An actuarial revaluation has now been performed which shows that there has been a gain on this of

0.5m. The entity has also been the beneficiary of a foreign currency gain, the first time this has

happened. This amounted to a gain of 0.3m.