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Intermediate Accounting CASE
Intermediate Accounting CASE
Intermediate Accounting
Name of Student :
Roll No :
E 3.1
Hoda Inc. owns 25% of the common shares ofWillard Corp. The other 75% of the shares are
owned by the Willard family. Hoda acquired the shares eight years ago through a financing
transaction. Each year, Hoda has received a dividend from Willard.Willard has been in business
for 60 years and continues to have strong operations and cash flows. Hoda must determine the
fair value of this investment at its year end. Since there is no market on which theshares are
traded, Hoda must use a discounted cash flow model to determine fair value. Hoda management
intends to hold the shares for five more years, at which time they will sell the sharesto the
Willard family under an existing agreement for $1 million. There is no uncertainty in this
amount.Management expects to receive dividends of $80,000 for each of the five years, although
there is a 20% chance that dividends could be $50,000 each year. The risk-free rate is 4% and the
Q 1) Identify some of the items Hoda will need to consider in determining the fair value of the
investment.
Take an estimate of the expected cashflows from the investment you had made.
Select a discounting rate, based on the cost of financing the investment or the
Then discount the forecasted cashflows back to the present day, using a financial
Discount Rate
Cash Flows
Q 2) Calculate the fair value of the investment in Willard using the traditional approach
PV1 Table
PV2Table
Q 3) Calculate the fair value of the investment using the expected cash flow approach.
Ans.
No.of years =5
Rate of Interest = 4%
To Find
PMT = To Determine
Expected %
Therefore
Fair Value = $1000000
No. of years = 5
I/Y = 4% (0.04)
PMT = $74000
PV = Calculated using financial calculator
Fair value of the investment for the expected cash flow is = $1151361.96
Intermediate Accounting 6
Q 4) In this case, which discounted cash flow model is the best? Why?
Ans .Discounted cash flow (DCF) method is used to estimate the value of an investment on the
basis of its expected future cash flows. DCF analysis tries to calculate the value of an investment
for today, on the basis of some projections to show how much money it will generate in
the future. This is applicable in the cases where one needs to make changes to their businesses,
NPV is a technique for converting each of these projected annual cash flow amounts into today-
equivalent amounts so that each year’s projected cash flows can be calculated and can be
compared.
In our case we are given very accurate assumptions relating to the profits which the company
E 2.11
Ans. A conceptual framework is an analytical tool. It can be applied in different areas of work
where anbig picture of the scenario is required. The main reason for developing a conceptual
framework are that gives a framework for setting accounting standards, a basis for resolving
accounting disputes and fundamental principles which then do not have to be repeated in
Moreover, the way in which the utility of the outcomes of the management accounting process
can be tested. Conceptual Framework is a criteria which can be used to assess the value of the
processes and work technologies used in management accounting and capabilities necessarily
(b) For each of the situations above, list the foundational principle or qualitative
Ans) The list of all the foundational principle for each of the above mentioned case are listed
below
Case 1) The treasurer of Sweet Grapes Corp. would like to prepare financial statements only
during downturns in the company's wine production, which occur periodically when the grape
crop fails. He states that it is at such times that the statements could be most easily prepared. The
company would never allow more than 30 months to pass without statements being prepared.
Observation
Timeliness – User should get information when they needed to make decision.
Intermediate Accounting 8
Case 2) Tower Manufacturing Ltd. decided to manufacture its own widgets because it would be
cheaper than buying them from an outside supplier. In an attempt to make its statements
comparable with those of its competitors, Tower charged its inventory account for what it felt the
widgets would have cost if they had been purchased from an outside supplier. (Do not use the
Observation:-
Verifiability – Historical cost is considered as a fact where as others are considered as opinions
Case 3) Cargo Discount Centres buys its merchandise by the truckload and train carload. Cargo
does notinclude any transportation costs in calculating the cost of its ending inventory. Such costs,
Observation:-
Matching Principle / Comparability – Must match revenues and expenses so that reporting
Case 4) Quick & Healthy, a fast-food company, sells franchises for $100,000, accepting a $5,000
down paymentand a 25-year note for the remainder. Quick & Healthy promises to assist in site
selection,building, and management training for three years. Quick & Healthy records the full
Observation:-
Case 5) Kalil Corp. faces a possible government expropriation (that is, takeover) of its foreign
facilities andpossible losses on amounts that are owed by various customers who are almost
bankrupt. The companypresident has decided that these possibilities should not be noted on the
financial statements because Kalil still hopes that these events will not take place.
Observation:-
Full disclosure
Case 6) Maurice Norris, owner of Rare Bookstore Inc., bought a computer for his own use. He
paid for the computer by writing a cheque on the bookstore chequing account and charged the
Office Equipment
account.
Observation:-
Case 7) Brock Inc. decides that it will be selling its subsidiary, Breck Inc., in a few years. Brock
Observation:-
Observation:-
Matching Principle.
Intermediate Accounting 10
Case 9) A large lawsuit has been filed against Mahoney Corp. Mahoney has recorded a loss and
related estimated liability that is equal to the maximum possible amount that it feels it might lose.
Mahoney is confident, however, that either it will win the suit or it will owe a much smaller
amount.
Observation:-
Matching Principle.
P 3.2 M&B Tooling Ltd. is assessing two available options for the purchase of new equipment
with a negotiated cash price of $100,000. The manufacturer is willing to accept a down payment
of 20% of the purchase price and an instalment note for the balance. The note would require
quarterly fixed principal payments (plus interest) starting October 1, 2020,for a period of two
years. M&B has a proposal from its bank for an instalment loan for two years that requires a
fixed blended monthly payment (including both principal and interest) starting August 1, 2020.
The loan would be for 80% of the equipment's purchase price. The current market rate of interest
is 8%. Both contracts have an interest rate of 8%
A) Is there any measurement uncertainty in determining which option is best for
M&B? Which discounted cash flow approach should be used in the comparison of
the two alternatives?
No, there is no measurement uncertainty in determining which option is best for M&B
Tooling Ltd,
The traditional discounted cash flow approach should be used to compare the two
available alternatives.
B) Calculate the amount of the payments required of M&B under each alternative. Use
either a financial calculator or Excel functions
Intermediate Accounting 11
Solution:
Calculation of Total payments and total under both alternatives
Alternative 1st : Qualterly fixed principal and instalments payments
PAYMENT
ALTERNATIVE 1st 89600
ALTERNATIVE 2nd 86832
EXCESS PAYMENTS 2768
C) Besides interest costs, what other considerations should M&B use in making a
choice between the two alternatives?
1) Hidden Cost
2) Present Value factor
3) Processing Cost
4) Prepayment fees
5) Late payment fees