AACT1115 Accounting

You have been hired as a Financial Consultant by Heavy Equipment and Machinery Inc. (HEMI).  HEMI is a private corporation that has finished its first year of operations.  HEMI’s owners plan to list the business on the Toronto Stock Exchange  (TSE) in the next 5 years; accordingly, are keen to have their financial statements reflect the business in the best light possible using the IFRS Accounting Standards.  HEMI’s operations are considered to be similar to Wajax Corporation listed on the TSE.   In addition to the questions outlined below, the Accountant has provided you with the following two files:

· An Excel spreadsheet with information from the HEMI’s accounting records and HEMI’s Statement of Income created by formulas.

· Selected Wajax Corporation’s publicly available financial information.

Your consulting assignment requires you to complete the following:

1. Answer the Accountant’s questions outlined below (including any necessary adjusting journal entries).

2. Post the adjusting journal entries that you have identified in Step #1 to the Excel trial balance spreadsheet.

3. Enter Wajax Corporation’s 2018 Statement of Income beside HEMI’s 2019 Statement of Income and enter the formulas to prepare common size Statements of Income for HEMI and Wajax Corporation.

4. Prepare a one-page report analyzing HEMI’s financial information against Wajax Corporation.

1. HEMI has a perpetual inventory system with purchases and sales being recorded by its computerized inventory system using the weighted average cost method.  HEMI has purchased and placed heavy equipment transmissions at Suncor in Fort McMurray on consignment.  Suncor benefits from having the spare part readily available and HEMI saves on storage costs.  Accountant has been asked by HEMI’s management to provide a profitability report for the consignment arrangement with Suncor.  The Accountant extracted the sales ($20,500,000) and cost of sales ($18,504,180) numbers from HEMI’s accounting system.  The Accountant wants you to:

a. Compute the gross profit using the first-in-first out (FIFO) method of costing inventory and the following purchase and sale information (show your calculations):

b. Explain why the gross profit is higher under one method when compared to the other method.

2. HEMI’s management is cost conscious and does not spend money unless the benefits exceed the amount spent.  Accountant understands that physical inventory count is good internal control practice; however, he wants you to explain the benefit of a physical inventory count when HEMI has a perpetual inventory system and the inventory is physically protected.

3. Accountant wants you to evaluate the following major transactions and provide adjusting journal entries, if necessary.  For each item, explain why you are (or are not) adjusting HEMI’s current account balances and provide supporting calculations for adjustments:

a. On December 21, HEMI ordered 25 transmissions for a total cost of $15,000,000 which were shipped on December 27 with the terms FOB Destination.  This inventory was not received at year-end and has not been recorded in HEMI’s accounting records.

b. There is a product in inventory that cost HEMI $11,000,000 which management has indicated will be sold close to its cost.  Management is estimating selling price to be $12,000,000 and HEMI will have to pay the transportation costs of approximately $2,000,000 on behalf of its customer(s).

1. HEMI purchased land and building for $280,000,000 on September 1, 2019.  Accountant recorded this amount in the Land general ledger account because he did not know how to allocate the costs between land and building.  Your research indicates that similar land could be purchased for $80,000,000 and the building was appraised at 240,000,000 for insurance purposes.  HEMI’s management purchased the building knowing that it needed improvements of $3,000,000 to make it usable for HEMI’s needs.  Accountant recorded these improvements in the Repairs and Maintenance expense general ledger account.  Management expects to sell the land for $200,000,000 and building for 20,000,000 at the end of its useful life of 20 years.  HEMI’s management want to use the cost method of valuing capital assets in order to save on the costs of appraising capital assets. The Accountant wants you to:

a. Allocate the $280,000,000 cost between land and building (show your calculations).  Provide an adjusting journal entry to transfer the building costs to the proper account.

b. Recommend, with justification, the appropriate accounting treatment for the $3,000,000 of building improvement costs.  Provide an adjusting journal entry, if any, to properly account for the building improvement costs.

c. Recommend, with justification, the appropriate depreciation method for building.  Compute the depreciation expense for the year-ended December 31, 2019 showing your calculations.  Provide a depreciation expense adjusting journal entry.