Universal Comics Limited (Universal) is a publisher of purely Canadian comic books and owns the exclusive rights to all its characters. Universal’s newest character released two years ago, Ridgeback Man, a local private investigator with heightened canine abilities, has been well received by comic book fans in the Toronto region. The current founder and owner Lan Stee has been offered a once in a lifetime opportunity to be the COO, Chief Operation Officer, of DeeCarvel Comics, the world’s largest comic book publisher. As a result, Mr. Stee felt it was time to sell Universal and in late August 2019, reached a tentative sales agreement with Fran Miller, one of Universal’s pioneer creators. This ensured that Universal would continue to prosper as a Canadian company and stay with the people that believed in the company. The agreed final selling price would be 4 times retained earnings at the end of December 31, 2019. A tentative agreement was signed stating the final sales date of April 1, 2020 after all financial statements have been reviewed. In early March Ms. Miller received the 2019 financial statements. Upon her review she was very concerned about how a number of items had been accounted for and wanted to back out of the final deal. To make sure her decision was based on a sound analysis Ms. Miller has hired you to prepare a report on how to account for the issues she is concerned with. Ms. Miller thinks that as a result of these accounting issues she isn’t paying a fair and reasonable price for the company. Ms. Miller would like you to provide clear explanations and support in your analysis so that she will be able to explain her concerns to Mr. Stee.
1. Universal’s December 31, 2019 ending retained earnings was calculated as follows: Opening retained earnings $ 203,000 Add: Net Income $ 65,000 Less: Dividends $ 0 Ending retained earnings $ 268,000
2. In late December 2019 Universal made a large shipment of Ridgeback Man comics to an eastern Canada comic book chain. Universal had been in contract negotiations with the customer for some time and the final agreement was an important step in its planned expansion into eastern Canada. The customer has an excellent credit rating and payment for the shipment was received in full, on time, on January 10, 2020. Because Ridgeback Man primarily solved his cases in the city of Toronto, being able to reach a new fan base in eastern Canada would be critical to taking the comic national and subsequently international. Given the uncertainty of success, Universal offered a full refund any time up to July 30, 2020, to the comic book chain. Universal recognized the revenue for the sale when the comics were shipped, as is its policy. Total revenues realized were $100,000 with a gross margin of $25,000.
3. In 2018 Universal released a new female superhero called Misty Waters with the ability to manipulate water. The comics were not well received and as a result the comic was discontinued. Currently, there are $18,000 remaining in the inventory of the comics that have not been sold since the end of 2018. Mr. Stee believes that in 10 to 15 years these comics will become a collector’s item so he has kept them in inventory. Furthermore, the creators have considered a marriage between Misty Waters with Ridgeback Man which might renew interest in the character. 4. Ms. Miller learned that in January 2020 one of Universal’s investments, Com Co., suffered a catastrophic fire that may put the company out of business. The company had also forgotten to renew its insurance policy. Universal’s management thinks it’s very likely that their investment of $10,000 for 100 shares will have little to no value moving forward. Universal has not adjusted the financial statements for the event but there is a note describing the event and its impact. 5. The company’s flagship store was located in a slower part of the city when it first opened. With the success of Ridgeback Man more and more fans have been making the drive to the store. The first run issue has recently sold at auction for $1,000 which was unheard of for a niche comic. As a result, Mr. Stee felt that the company-owned store and a paved lot would have a longer useful life, resulting in a decrease of depreciation by $6,000 annually. He added to the notes that the increase in useful life was due to the increasing traffic and popularity and therefore any plans to relocate to the downtown core in the near future have been scrapped.
Required Provide the report requested by Fran Miller and ensure you address her needs.
Solution is provided for individual cases
Opening Balance of Retained Earning is $ 203000
Net Earnings for the period 2019 is $ 65000
Dividend Distributed is $ 0
Retained Earning for 2019 is $ 268000
As per IFRS company has to account for the dividend distributed once it is declared, however the standard is silent on whether the company has to compulsorily distribute the dividend every year hence it is interpreted as it is at the option of the management either to reinvest the profit back in to the company or distribute them in the form of dividend to the shareholder, but once it is declared is has to be accounted for in the same accounting period.
Assuming the Management of Universal Comics Limited has not declared the dividend for the period 2019 same cannot be form an issue as per sales agreement between Ms Miller and Mr Stee.
Universal company enter in to a sales contract during the month of december 2019 for a gross revenue of $100000 and a profit margine of $ 25000
An element of sales contract includes a full refund in case of the comic fails to show expansion in eastern canada before 30th July 2020.
Revenue should only be recognised only if all the performance obligation are satisfied which were agreed upon in the sales contract or agreement
Issue and Conclusion-
Whether the revenue of $ 100000 should be recognised during the period 2019?
As per the sales contract obligation is completed is not completed up untill 30th July 2020 or the sales of the comics is completed in eastern canada
Based on information provided neither is completed and the revenue for the same should be derecognised
and the retained earning should be reduced by $ 25000
Inventory (comics of Misty Waters) is accounted for $18000 with a market value of $ 0 for the period 2019
Accounting Rule & Conclusion-
Inventory should be valued as Cost or realisable value, which ever is low
in this case the inventory should have been valued at realisable value or market value which is nil as the same is discountinued irrescpective of the same being a collectable item after 10 - 15 years.
hence the value of the same should be reduce from Total revenue of the company and accordingly profitt margine should be deducted from the retained earnings.
Investment in Com co. for a $ 10000 for 100 shares
In Jan 2020 Com co. has sufferefd a catastropic loss that has put the companys future in question
Accounting Rule & Conclusion-
As per IFRS an entity shall not prepare its Financial statement on a going concern basis if manager determines after the end of reporting period either to liqidate the entity or to cease the trading or it has no realistic alternative to do so.
In this case Com Co. has suffered a catastropic loss and is not able to continue its operation and assuming the Financial statement of Com Co. is perpared as per not a going concern basis the effects of the same should have been givien in the books of univerdsal limited, by proving for s loss of $ 10000 during 2019.
There hs been a change in Amount of deperation by a reduction in the same for an amount of $ 6000 PA
The change in depriciation is based on the change in assumption of usefull life of an asset
There can be a change in Depriciation method if there is a resonable change in the assumption of useful life of an asset.
In this comic book store is a niche industry, management change in assumption of usefull life based on a single isolated case in unresonable.
and hence the change in depriciation amount is incorrect and accordingly the depriciation of $ 6000 should be charges to the periods earning.
Accordingly Fran Millers should adujst the retaineed earnings for the point 2 to 5 for the consideration of sale agreement, if mr stee dose not consider the same Fran millers should back out from the agreement.
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