6Case studies
Case 1: Depreciation and advance payments
Carpenter Karl Dach needs a new van. The van will be delivered on 18 January 20X1, payable within 1 week at a 1%discount or within 4 weeks net. Karl Dach does not use the discount, so the van costs €28,800 net. For transfer and registration, the dealer charges €400 net. The useful life is estimated at 5 years. The reselling value after 5 years for the used vehicle is estimated roughly at €3,000.
- Calculate the depreciation and prepare the depreciation schedule according to the straight-line (linear) method. Assume that Karl uses all usual options!
- At the beginning of 20X2, Karl Dach upgrades the car with a navigation system for €2,000. What effect does this have on the depreciation schedule?
- Continuation of 2: Assume that, due to new emission regulations, the market value of a comparable (used) vehicle decreases to €6,000 on 31 December 20X2. Which value must be recognized in the balance sheet on 31 December 20X2 and what are the values on the following closing dates? Why?
- Continuation of 3: At the beginning of December 2016, Karl Dach receives an offer from a car dealer from Eastern Europe to buy the car for €16,000. To reinforce his offer, the dealer pays €8,000 in advance in mid-December. Karl agrees and the deal is finalized in January. How is the advance payment recognized in the balance sheet? At what value is the car recognized in the balance sheet on 31 December 2016?
Case 2: Accounting policy of Victoria AG
Victoria AG is a mid-sized company that is specialized in the production of industrial components. The company faced high revenue decreases in 20X1 but does not want to report a loss because of an upcoming rating. Therefore, any accounting options or margins of estimation/judgement should be used in the form of a progressive/aggressive accounting policy to report the highest net result possible. Explain your accounting of the following transactions of Victoria AG, and name the relevant legal regulations according to the Commercial Code and if necessary the balance sheet item.
1. Based on the bad revenue situation, the finished products in stock increased significantly compared to the previous year. The following data for the products in stock are known:
–Material for production: €20,000.
–Storage costs for material: €2,000.
–Hourly wages of production workers: €40,000.
–Overtime premiums of production workers: €5,000.
–Depreciation on production machines: €8,000.
–Voluntary pension benefits for administration employees: €14,000.
–Storage costs of finished products: €6,000.
–Costs of company day care centre: €10,000.
–Costs of research department: €12,000.
–Idle time costs due to continuous low orders: €16,000.
2. Victoria AG has acquired the operating business of Bastian GmbH for €250,000; legal and economic integration are completed. The book value of net assets at acquisition time was €100,000. The inventories are recognized at €20,000, which is €10,000 below market value. The warehouse is fully depreciated, whereas the market value amounts to €80,000. Does this result in goodwill?
3. Victoria AG has owned a 30% share of Jonas AG for 3 years. The shares are recognized at their acquisition costs of €200,000. The net profit of Jonas AG was constant at €30,000 during that time, so an increase in the near future cannot be expected. The relevant discount rate is 6%.
4. In 20X1 a new patent for an innovative production process is developed and registered. The direct costs attributable to the patent are €40,000, and the proportionate indirect costs of the research and development department amount to €60,000.
5. The crude oil stock developed as follows in 20X1:
Tab. 6.1: Case 2 5. Development of crude oil stock.
| Crude oil in barrels | €/barrel | |
| Opening balance | 100,000 | 48 |
| Purchase 5 May 20X1 | 100,000 | 56 |
| Purchase 7 July 20X1 | 300,000 | 68 |
| Purchase 9 Sept. 20X1 | 200,000 | 62 |
| Total use | 400,000 |
Calculate the value of the use of oil and of the closing balance according to LIFO and periodic average. Which method should be used based on the intention behind the accounting policy?
What values are acceptable in the balance sheet if the replacement costs on closing date are
(a) €66.30/barrel or
(b) €60/barrel.
6. Victoria AG has machinery that was not maintained properly because of a bad liquidity situation. On closing date, it is not foreseeable when the maintenance will be done. Cost estimates range from €60,000 to €100,000.
7. On 1 January 20X1, a long-term loan with a volume of €500,000 was taken out. Outpayment 95%, term 10 years, nominal interest 5%, full repayment at the end.
Case 3: Accounting policy of Bits and Pieces GmbH
Bits and Pieces GmbH is a company that produces and sells gift items. The head of accounting, Mr. C. Orrect, is preparing the financial statements as of 31 December 20X1 in March 20X2.
Explain the recognition and measurement under the Commercial Code for the following transactions of Bits and Pieces GmbH. Name the relevant legal regulations and whether there are any options or margins of estimation/judgement. Options and margins of estimation should be used in such a way that the net profit is the lowest possible.
- Mr. C. Orrect discovered in December 20X1 that the roof of the production building was leaking; he reported the leak immediately to the executive board. The cheaper estimate of repair costs was €11,900 (including VAT), the more expensive €23,800 (including VAT). The executive board decides that maintenance will be done the following year; the exact schedule is open.
- Based on the good financial and profitability situation, C. Orrect acquired during 20X1 500 shares of a listed blue chip company for a total of €20,000; this is considered a long-term investment. On the closing date the quoted share price is €30, but financial analysts are very positive about the future development of the company and its share price.
- The procurement department received merchandise valued at US$10,000 from an American supplier on 1 December 20X1. C. Orrect recognizes the goods on the same day at an exchange rate of US$1=€0.6.Theexecutiveboardwants to use the supplier’s entire credit of 6 weeks. On closing date the exchange rate is US$1 = €0.8.
- At the beginning of 20X1, a new production machine was acquired for €48,000 and recognized in the balance sheet item “machines”. So far it has not been depreciated because there are no experience values for this kind of machine. The head of production estimates a useful life of 10 to 15 years, assuming constant and continuous usage.
- According to the information of the machine’s manufacturer, a general overhaul will be necessary in 4 years. The costs for this measure in year 20X4 will probably be €20,000.
- Bits and Pieces GmbH signed a sales contract with Light and Sound GmbH on 12 October 20X1 to produce and deliver a light organ (delivery date 30 March 20X2, price €60,000). The start of production is scheduled for January 20X2. The head of accounting, C. Orrect, was on holiday when the offer was calculated and signed, and he realizes now that his apprentice forgot to include the wages for the production workers in the calculation. The direct costs for material and production already amount to €70,000; in addition, indirect costs can be attributed to the light organ: €3,000 for material and €2,000 for production.
- For a new warehouse, a monthly rent of €5,000 is charged from 1 December 20X1 onwards. So far, no rent has been paid because of minor defects that the landlord must fix. Nevertheless, the building is used. The rental contract states that the rent must be paid 3 months in advance.
Case 4: Accounting for inventories
Bob Coal is managing director of Drilling Equipment Trading GmbH and supplies production companies with twist drills and diamond abrasive blocks. In autumn, he buys from an insolvent company first-class twist drills for €100,000 and diamond abrasive blocks for €200,000.
1. In March of the following year he prepares his financial statements.
–The price on the twist drills has increased, so he has good arguments that the acquired drills could have been sold by 31 December for at least €120,000.
–Crises in Russia and Africa have led to huge price pressures for diamond abrasive blocks. The value of the blocks drops to €98,000 on 31 December, in February of the following year their market value is only €88,000. Bob Coal keeps the blocks because he thinks the prices will recover sometime in the future.
At which values must the products be recognized under the Commercial Code on 31 December? Why? Would it be different under German tax law? Is there any effect on the income statement?
2. Continuation of question 1: In the following summer, the price for the diamond abrasive blocks rises again to €150,000 and stays there until the end of the year. Nevertheless, Bob Coal does not want to sell below his acquisition costs. How are the abrasive blocks recognized in the following financial statements and why? Is there an effect in the income statement (only Commercial Code)?
Case 5: Accounting for intangible assets
The champagne winery Wochenheim AG has developed a new technology for producing champagne that is free of alcohol; the new technology should be used from the beginning of 20X1 until the end of 20X5. The technology was registered as a patent at the end of 20X0. In the context of the innovation, the following costs (in Euros) were incurred:
| – | Personnel expenses, research department: | 500,000 |
| – | Operating expenses, research department (e.g. material): | 200,000 |
| – | Personnel expenses, development department | 750,000 |
| – | Operating expenses, development department (e.g. material): | 300,000 |
The R&D-Department worked only on this technology.
The company is a large corporation; its effective tax rate is 30%.
(a)What accounting options exist for this new technology in the commercial balance sheet as of 31 December 20X0? Explain the different options briefly and journalize possible entries.
(b)What accounting options exist for this new technology in the tax balance sheet as of 31 December 20X0? Explain the different options briefly and journalize possible entries.
(c)What must be considered in this context for the commercial balance sheet as of 31 December 20X0 in addition? Explain briefly possible consequences and journalize possible entries.
Case 6: Accounting policy
Explain and argue for the following transactions if there exist any legal or factual accounting options or margins of judgement. Show as well how the use of any options or margins of judgement can influence the net result or the equity ratio:
(a) Acquisition costs
(b) Provisions
(c) Impairment of non-current financial assets
(d) Measurement simplifications for current assets
Case 7: Consolidated financial statements (1)
The Wine & Champagne Group consists of a parent company, Riesling AG, located in Deidesheim in Rhineland-Palatia, and Distribution GmbH located in Pforzheim.
The parent company (PC) recognized, apart from the shares in affiliated companies of €300,000, other assets of €700,000. The PC has a capital structure of 50% equity and 50% liabilities.
The subsidiary (SUB) recognizes equity of €80,000 and liabilities of €320,000. Its assets include a piece of land with a book value of €100,000 (fair value at acquisition by the PC of €200,000).
(a) What consolidation methods do you know?
(b) Prepare the balance sheets of the PC and the SUB.
(c) Prepare the consolidated balance sheet and journalize the necessary entries.
Case 8: Consolidated financial statements (2)
Snow AG has acquired the shares of Ski GmbH on 31 December 20X1 for €2 million, which will enable the company not only to offer ski clothing but also ski equipment. The purchase price was paid on 31 December 20X1.
Preliminary balance sheet of Snow AG of 31 December 20X1 prior to acquisition of Ski GmbH:
Tab. 6.2: Case 8 – balance sheet of Snow AG prior to acquisition.
Balance sheet of Ski GmbH from 31 December 20X1:
Tab. 6.3: Case 8 – balance sheet Ski GmbH.
Additional information about the financial statements of Ski GmbH:
–The non-current assets include a fully depreciated machine that the company will continue to use; its reproduction value amounts to €200,000 on the acquisition date.
–Equity includes the full net profit of €80,000 for the business year 20X1.
–Provisions: pension provisions of €100,000 have not been recognized yet.
–Ski GmbH sells its products largely under the brand name „Solo“, which the company had created itself. Industry experts estimate the brand‘s value at €500,000.
Questions:
(a) Prepare consolidated financial statements and do the capital consolidation (equity) consolidation. What are the corresponding journal entries?
(b) In which case is a purchase price allocation in the individual financial statements necessary?