Reference no: EM132856968

Financial Accounting

Part I: Long-term revenue recognition

Taisei Corporation won the contract to build the Aquatics Centre for the 2020-2021 Olympics. Assume the following about this long-term contract: The Olympic Development Authority agreed to pay Taisei £400 million for this construction, which is expected to be completed on Dec 31, 2019. Taisei estimates the total cost to be £240 million. The Olympic Development Authority will make the following cash payments to Taisei: £100 million in 2016, £100 million in 2017, £100 million in 2018, and £100 million in 2019. Taisei started to work on the contract on January 1, 2016 (first day of its 2016 fiscal year) and it incurred £80 million of actual costs in 2016 and £60 million of actual costs in 2017. Before Taisei recognized revenue for 2017, it revised its total cost estimate to £260 million, but the actual costs for 2018 and 2019 eventually amounted to £130 million. The contract was completed at the end of 2019 as scheduled. Taisei uses the percentage-of-completion method to recognize revenues from long-term contracts. Ignore taxes.

1. How much revenue can Taisei recognize from the Olympic Aquatics Centre contract in 2016?

2. How much revenue can Taisei recognize from the Olympic Aquatics Centre contract in 2017?

3. How much revenue can Taisei recognize from the Olympic Aquatics Centre contract in total?

4. Had Taisei used the completed contract method (instead of the percentage-of-completion method as stated in the earlier instructions), how much more (or less) total net income (ignoring taxes) would it have reported over the whole contract period?

Part II: Accruals and Earnings Management

The net income of Lamek Photography plc decreased significantly during 2016. Rose Carpenter, owner of the company, anticipates that the company will need a bank loan in 2017. Late in 2016, Carpenter instructed Tekin Almond, the accountant and a friend of yours, to record a £8,000 sale of portraits to the Carpenter family, even though the photos will not be shot until February 2017. Carpenter also told Almond not to make any entries on December 31, 2016 for the following transactions:

Salaries owed to employees who worked  in 2016....................... £12,000

Prepaid rent that expired in 2016................................................. £1,000

1. Compute the effect of this alternative transaction structure on the Lamek's reported net income for 2016. Are earnings understated or overstated (and by how much)?

2. Why did Carpenter take these actions? Provide a short discussion of the parties that are helped by and those that are harmed by Carpenter's actions.

3. As a personal friend of Tekin's, what would be your advice to him?

Part III: Inventory - Kimberly-Clark

See the attached 2007 financial statements (and footnotes) for Kimberly-Clark (KC). Identify the notes that relate to Inventory (notes 1 and 18). For simplicity, assume that all inventories that are described as ‘The Lower of cost on the FIFO Method, weighted average cost method or market' are on the FIFO basis.

All figures in millions as per accounts.

1. What was the cost of goods sold in 2007?

2. KC uses multiple cost flow assumptions to value its inventories. What are these cost flow assumptions?

3. What percentage of the book value of inventories at the end of 2007 was valued on a FIFO basis?

4. Estimate the cost of goods finished in 2007. Ignore the LIFO reserve, that is, use the inventory value for finished goods as it is reported in the footnote at the beginning and the end of the year.

5. Again, ignoring the LIFO reserve and using your answer to Question 4, estimate the total of additions to the work in process inventory account in 2007.

6. Ignoring the LIFO reserve and assuming KC purchased raw materials and supplies costing $4,500 million in 2007, estimate:

(i) the cost of raw materials and supplies transferred to production departments in 2007;
(ii) payments to suppliers in 2007, assuming all Accounts Payable relate to inventory purchases

7. If KC had used FIFO to value all its inventories (instead of a mix of LIFO and FIFO), what would have been the value of total inventories at the end of 2007?

8. Estimate COGS in 2007 if KC had used FIFO to value all its inventories.

Part IV: Receivables

Use the financial statement excerpts for MOL Hungarian Oil and Gas PLC for the year ending 31 December, 2015 and the information below to answer the following questions. Please note that you should use the "Consolidated" financial statement numbers for all questions.

1) What fraction of the outstanding receivables does the company expect not to collect as at December 31, 2015?

2) How much bad debt expense did MOL record in the fiscal year ending 1 December 2015?

3) As at 31 December 2015, what is the total amount in relation to "legal claims" that MOL expects to pay? Where would this be included in MOL's statement of financial position (balance sheet)? Be specific about the accounts and amounts included.

4) Suppose on January 10 2016, MOL got information that the amount of legal claims it may need to pay out is higher by HUF 1792 Million. How will MOL record this information? What will be the impact on the P&L for 2016?

5) How much did MOL set aside in the fiscal year ending 31 December 2015 to tackle environmental issues? How much did they pay out for these environmental issues during the year? How did the payout affect the P&L?

6) How much did MOL's provision related to field abandonment change during the fiscal year ending 31 December 2015 due to "unwinding of the discount"? Explain what "unwinding of the discount" means in this context.

Part V: Long-Term Assets

Please find excerpts of Coca-Cola's annual report below. Use the information contained in those excerpts, as well as the assumptions listed below to answer the following questions.

Assumptions:
• No impairments of property, plant and equipment have been recorded over the years.
• The item "Significant (gains)/losses on sales of assets- net" includes gains and losses on sales of assets other than property, plant and equipment.
• All acquisitions of property, plant and equipment were paid for in cash and all sales of property, plant and equipment were collected in cash.
• Please ignore "Depreciation for leasehold improvements" in answering the questions below.
• Please ignore any effects that the acquisition or disposal of other companies may have had in property, plant and equipment. Also ignore the effects of any foreign currency exchange rate movements.

1. What is the net book value of property, plant and equipment at the end of fiscal year 2013?

2. Coca-Cola sold some property, plant and equipment during fiscal year 2013. How much cash did Coca-Cola collect from that sale?

3. What was the original acquisition cost of the property, plant and equipment sold during fiscal year 2013?

4. Did Coca-Cola realize a gain or a loss in the sale? Please quantify.

5. Assume that new accounting rules would require all leases to be accounted for as Capital leases. What will be the impact of the new lease accounting rules on Coca-Cola's assets and liabilities? You do not need to quantify your answer.

6. If you visit the World of Coca-Cola in Atlanta, you will find a vault containing the secret recipe for Coca-Cola. Where is the value of that recipe included in Coca-Cola's financial statements?

Attachment:- Financial Accounting.rar