Reference no: EM132770963

Question 1 - Assume that Smaldino Company bills merchandise to Branch X at cost and that Branch X maintains an accounting records and prepares financial statements. Both the home office and the branch use the perpetual inventory system. Equipment used at the branch is carried in the home office accounting records. Certain expenses, such as advertising and insurance, are incurred by the home office on behalf of the branch and are billed on the branch. Transactions and events during the first year (Year 1) of operations of Branch X are summarized below:

i. Cash of $1,000 was forwarded by the home office to Branch X.

ii. Merchandise with a cost of $60,000 was shipped by the home office to Branch X.

iii. Equipment was acquired by Branch X for $550, to be carried in the home office accounting records. (Other plant assets for Branch X generally are acquired by the home Office.)

iv. Credit sales by Branch X amounted to $80,000; the cost of the merchandise sold was $45,000. v. Collections of trade accounts receivable by Branch X amounted to $62,000.

vi. Payments for operating expenses by Branch X totaled $20,000.

vii. Cash of $37,500 was remitted by Branch X to the home office.

viii. Operating expenses incurred by the home office and charged to Branch X totaled $3,000.

Required - Prepare journal entries in accounting records of the home and the branch.

Question 2 - Lester entered into a ten-year lease of a floor of a building, with an option to extend for a further three years, on 1 July 2011. Lease payment are $50,000 per year in advance during the initial term and $55,000 per year during the optional period, all payable at The beginning of each year. The interest rate implicit in the lease was not readily determinable at the commencement of the lease; Lester's incremental borrowing rate at that date was 5% per annum. At this date, the management of Lester determined that the company was not reasonably certain to exercise the extension option. On 30 June 2017, Lester acquired Wester and determined that it required two floors in the same building suitable for the increased workforce of the combined companies as this will result in costsaving synergies. Wester had been leasing space in another building however on its acquisition, Wester exercised an option to terminate this lease. On the same date, Lester entered into an eight-year lease of another floor in the building it currently occupies. Lester's incremental borrowing rate at 30 June 2017 is 6% per annum.

Required -

i) Explain the accounting treatment of the original lease entered into by Lester.

ii) ABC plc had 50,000,000 ordinary shares in issue. On 1 October 2017 ABC Plc made a rights issue of 1 for every 5 shares held at a price of $1. Ex-rights price was $1.30. The earnings for the year ended 31 December 2016 and 31 December 2017 were $12,000,000 and $12,500,000 respectively. Calculate the EPS for the year ended 31 December 2016 and 31 December 2017?