08.

ACCOUNTING
INNOVATIVE

Dr.Wiwiek M.Daryanto, SE-Ak, MM,CMA

 Educational Background
Accountant (1981), cum-laude, UGM
Registered Indonesian Accountant:D.2794
Master of Management (1988), College of
Economics and Management, University of the
Philippines
Doctor of Philosophy (2004), IPB
Certified Management Accountant (2000),
Australia

HP: 0811-89-42-73 Phone: 021-8616982

Email:wiwiek.daryanto@ipmi.ac.id

2
CHAPTER :9

3
 The Structure of Balance Sheet

Asset
Current Asset $

Non Current Asset:

Long-term Investment $
Fixed Asset $
Intangible Asset $
Other Asset $

4
 The Structure of Balance Sheet

Liabilities/Debt
Current Liabilities $
Long-term Debt $

Owners Equity
Preferred Stock. $
Common Stock $
Additional Paid-in Capital $
Retained Earnings $ 5
 The Structure of Income Statement

Sales Rp xx
(-) Cost of Goods Sold - Rp xx

GROSS PROFIT Rp xx

(-) Operating Expenses:

Marketing and General Administration - Rp xx

Net Operating Income (NOI) Rp xx

(+/-) Other Income & Other Expenses Rp xx

6
 The Structure of Income Statement (Cont.)
PROFIT/LOSSES BEFORE EXTRA ORDINARY ITEMS Rpxx

(+/-) Extra Ordinary Items Rpxx

(+/-) The Effect of Accounting Principles Changes Rpxx

EARNING BEFORE TAXES (EBT) Rpxx

(-) Corporate Tax Rpxx

NET INCOME/NET LOSSES Rpxx

7
 Statement of Retained Earnings

Retained Earnings, Beg. Rpxx

(+/-) Profit/Losses for the Year Rpxx

Available for Dividend Rpxx

(-) Dividend Rpxx

Retained Earnings, End. Rpxx

8
 CASH FLOW
Depreciation WORK IN
PROCESS
Labor Cost

FINISHED
GOODS Credit Sales
G & A & Sales Cost
FIXED ASSET

MATERIALS
UPAH,
(Netto)

Accounts

RAW
BIAYA ADM. Receivables
+ PENJUALAN

Cash Sales
A/R Collections

Buy Fixed Assets Purchases

Sales of Fixed Asset

Borrow
LIABILITY CASH OWNER
Repayment
of Loan 9
 CASH FLOW REPORT

Cash, Begining Rp. xx

+/- : Cash Flow from:

I. Operating Activity Rp. xx

II. Financing Activity Rp. xx

III. Investing Activity Rp. xx

Sum of: I + II + III Rp. xx

Cash, Ending Rp. xx

10
 Gross Cash Flows Net Cash Flows
Cash Received Cash Paid for Cash Flow from
Operating
Activities
from Sales of - Operating Goods = Operating
Goods & Services & Services Activities
+ or -
Cash Received Cash Paid for Cash Flow from
Investing from Sales of Acquisition of Investing
Activities Investments & - Investments & = Activities
Property Items Property Items

+ or -
Cash Received Cash Paid for
from Issues of Dividends & Cash Flow from
Financing Debt & Capital Reacquisition of Financing
Activities
- =
Stock Debt & Capital Activities
Stock
=
Net Change in
Cash for the
Period
11
Sources of Financing

Creditor

Liability

Company-
ABC

Company’s Asset Owners’Equity

Owner
(Investor)

12
 Megashe Engineering Company (MEC)
Megashe Engineering Company was founded
by two partners. Meredith Gale and Shelley
Yeaton, shortly after they had graduated
from engineering school. Within five years the
partners had built a thriving business,
primarily through the development of a
product line of measuring instruments based
on the laser principle. Success brought with it
the need for new permanent capital
(LTD+OE)=INVESTED CAPITAL. After careful
calculation, the partners placed the amount
of this need at $ 1.2 million. This would
replace a term loan that was about to mature
and provide for plant expansion and related
working capital.
13
At first, they sought a wealthy investor, or
group of investor, who would provide the
$1.2 million in return for an interest in the
partnership. They soon discovered, however,
that although some inverstors were
interested in participating in new
ventures,none of them was willing to
participate as partner in an industrial
company because of the risks to their
personal fortunes that were inherent in such
an arrangement. Gale and Yeaton therefore
planned to incorporate the Megashye
Engineering Company in which they would
own all the stock.
G&Y -INVESTOR $1.2M (RISK+ROI)

14
After further investigation, they learned that Arbor
Capital Corporation, a venture capital firm, might be
interested in providing permanent financing. In
thinking about what they should propose to Arbor,
their first idea was that Arbor would be asked to
provide $1.2 million, of which $1.1 million would be a
long-term loan. For the other $100,000, Arbor would
receive 10 percent of the Megashye common stock as
a “sweetener”. If Arbor would pay $100,000 for 10
percent of the stock, this would mean that the 90
percent that would be owned by Gale and Yeaton
would have a value of $900,000. Although this was
considerably higher than Megashye’s net assets, they
thought that this amount was appropriate in view of
the profitability of the product line that they had
successfully developed.

15
A little calculation convinced them, however,
that this idea (hereafter, proposal A) was
too risky. The resulting ratio of debt to
equity would be greater than 100 percent,
which was considered unsound for an
industrial company.

DER = LTD/OE= 100%

>100% OF DER = HIGH RISK

16
Their next idea was to change the
debt/equity ratio by using preferred stock in
lieu of most of the debt. Specifically, they
thought of a package consisting of $200,000
debt, $900,000 preferred stock, and
$100,000 common stock (proposal B). They
learned, however, that Arbor Capital
Corporation was not interested in accepting
preferred stock, even at a dividend that
exceeded the interest rate on debt.
Thereupon, they approached Arbor with a
proposal of $600,000 debt and $600,000
equity, Arbor would receive 6/15 (i.e.,40
percent) of the common stock.

17
The Arbor representative was considerably
interested in the Arbor ordinarily did not
participate in a major financing of a relatively
new company unless it obtained at least 50
percent equity as part of the deal. They were
interested only in a proposal for $300,000 debt
and $900,000 for half of the equity (proposal D).
They debt/equity ratio in this proposal was
attractive, but Gale and Yeaton were not happy
about sharing control of the company equally
with an outside party.

Savingi=6%; PPh=20%=Tax Income

Interest after tax = 6%(1-20%)= 4.8%
18
Before proceeding further, they decided to
see if they could locate another venture
capital investor who might be interested in
one of the other proposal. In calculating the
implication of these proposals, Gale and
Yeaton assumed an interest cost of debt of
12 percent, which seemed to be the rate for
companies similar to Megashye, and a
dividend rate for preferred stock of 14
percent. They assumed, as a best guess, that
Megashye would earn $300,000 a year after
income tax and before interest costs
and the tax savings thereon. They
included their own common stock equity at
$900,000.
interest exp>EBT< tax < (Tax savings)
19
They also have pessimistic calculations based on
income of $100,000 (instead of $300,000) per
year and optimistic calculations based on income
of $500,000 a year. They realized, of course, that
the $100,000 pessimistic calculations were not
necessarily the minimum amount of income ; it
was posible that the company would lose money.
On the other hand, $500,000 was about the
maximum amount of income that could be
financed with the $1.2 million. The applicable
income tax rate was 34 percent.

Interest cost after tax=12%(1-34%)=7.9%

20
 Questions
1. For each the four proposals, calculate the return
on common shereholders’ equity (=net income
after preferred dividends : common shareholders’
equity) that would be earned under each of the
three income assumptions. Round calculations to
the nearest $1,000 and 1/10 percent.
2. Calculate the pretax earnings and return on its
$1.2 million investment to Arbor Capital
Corporations under each of the four proposals.
Assume that Arbor receive a dividend equal to its
portion of common stock ownership times
Megashy’s net income after preferred dividends (if
any) ; assume a “negative dividend” if Megashye
has a net loss. 21
3. Were the partners correct in rejecting proposals
A and B.
4. Comment on the likelihold that Megashye
Engineering Company could find a more
attractive financing proposal than proposal D.
5. Assume that proposal D is accepted, that the
net asset (total assets minus liabilities) of the
partnership are $700,000, and that upon
incorporation 180,000 shares of $1 par value
stock are issued, 90,000 to the original
partners and 90,000 to Arbors. Give journal
entries for two ways of recording these
transactions, on recognizing goodwill and the
other not recognizing goodwill. Which way is
preferable?

22
 Megashe Engineering
Company
Proposal (000 Rp) A B C D
Long Term Debt 1,100,000 200,000 600,000 300,000
Preferred Stock 0 900,000 0 0
Com. Stock (ACC) 100,000 100,000 600,000 900,000
---------------------------------------------------------------------------------------------------
Total ACC’s Invest 1,200,000 1,200,000 1,200,000 1,200,000
Com. Stock (G&Y) 900,000 900,000 900,000 900,000
----------------------------------------------------------------------------------------------------
Total Investment 2,100,000 2,100,000 2,100,000 2,100,000

Total Owner Equi. 1,000,000 1,900,000 1,500,000 1,800,000

Total Com. Stock 1,000,000 1,000,000 1,500,000 1,800,000

D.E.R 110.0% 10.5% 40.0% 16.7%

23
 Megashe Engineering
Company

Answer No.1.
Optimistic
Proposal (000 $) A B C D
EBI & Tax Saving 500,000 500,000 500,000 500,000
Interest Exp., 12 % (132,000) (24,000) (72,000) (36,000)
Tax Saving34% 44,880 8,160 24,480 12,240
--------------------------------------------------------------------------------
Net Income (NI) 412,880 484,160 452,482 476,240
Pref. Stock Div., 14 % 0 126,000 0 0
--------------------------------------------------------------------------------
NI after Pref. Dividends 412,880 358,160 452,480 476,240
Return on Com Stock(%) 41.3% 35.816% 30.2% 26,5%
----------------------------------------------------------------------------------------------------------------
Com.Stock Div. (ACC) 41,288 35,816 180,992 238,120
Com.Stock Div. (G&Y) 371,592 322,344 271,488 238,120

24
 Megashe Engineering
Company

Moderat
Proposal (000 Rp) A B C D

EBI & Tax Saving 300,000 300,000 300,000 300,000

Interest Exp., 12 % (132,000) (24,000) (72,000) (36,000)
Tax Savings 44,880 8,160 24,480 12,240
----------------------------------------------------------------------
Net Income (NI) 212,880 284,160 252,482 276,240
Pref. Stock Div., 14 % 0 126,000 0 0
----------------------------------------------------------------------
NI after Pref. Dividends 212,880 158,160 252,480 276,240
Return on Com. Stock 21.3% 15.8% 16.8% 15.3%

Com.Stock Div. (BOC) 21,288 15,816 100,99 138,120

Com.Stock Div. (A&T) 191,592 142,344 151,488 138,120

25
 Megashe Engineering
Company

Pessimistic Assumption

Proposal (000 Rp) A B C D

---------------------------------------------------------------------------------------------------
EBI & Tax Saving 100,000 100,000 100,000 100,000
Interest Exp., 12 % (132,000) (24,000) (72,000) (36,000)
Tax Savings 44,880 8,160 24,480 12,240
------------------------------------------------------------------------------------------------------
Net Income (NI) 12,880 84,160 52,482 76,240
Pref. Stock Div., 14 % 0 126,000 0 0
------------------------------------------------------------------------------------------------------
NI after Pref. Dividends 12,880 (41,840) 52,480 76,240
Return on Com. Stock 1.3% (4.2%) 3.5% 4.2%
-----------------------------------------------------------------------------------------------------------------------------
Com.Stock Div. (BOC) 1,288 (4,184) 20,992 38,120
Com.Stock Div. (A&T) 11,592 (37,656) 31,488 38,120

26
 Megashe Engineering
Company

ANSWER NO. 2

Optimistic Assumption

Proposal (000 Rp) A B C D

Interest on LTD, 12% 132,000 24,000 72,000 36,000

Pref. Stock Div. 14% 0 126,000 0 0
Com. Stock Div. 41,288 35,816 180,992 238,120
----------------------------------------------------------------------
Total Pretax Earnings 173,288 185,816 252,992 274,120

R.O.I (1.2M) 14.4% 15.5% 21.1% 22.8%

PBDR = 20%

27
 MEGASHE ENG.CO (MEC)
PARTNERSHIPS GY 5 YEARS
NEEDS PERMANENT CAPITAL =
INVESTED CAPITAL = LTD +
OE=$1.2M
REPAY LOAN & EXPANSION
INVESTOR ROI?
HIGH RISKS PARTNERSHIPSCORP.
(EXAMPLE OF MERGER)
28
INVESTOR;
ARBOR CAPITAL CORPORATIONROI?
GALE & YEATON (G&Y)PROPOSAL
STOCKS:
1. COMMON STOCK (POWERFULL)
2. PREFERRED STOCK (Stated
Dividend; Cummulative , but NO
VOICE= no voting)
29
 A. 1STDAY B/S MEC
LIABILITY + OE
LTD $1.1Mi=12%
OE:
COMMON STOCK. $1M
(0.9 OF G&Y; 0.1 OF ACC)
TOTAL LTD + OE $2.1M

30
 ACC’S DECISION FOR A
REJECTED; DUE TO:
1. DER = 110%  HIGH RISKS
2. MINORITY OWNERSHIPS
(SWEETENER)

31
 B. 1STDAY B/S OF MEC
L +OE
LTD. $0.2M i=12%
OE:
PREFERRED STOCK $0.9Mdiv=14%
COMMON STOCK $ 1 MdivCS?Q1
(0.1ACC; 0.9 G&Y)
TOTAL OE. $ 1.9M
TOTAL L+OE. $2.1 M
32
 NOTES:
INTEREST OF LTD = i = 8%
DIVIDEND OF PS = 10%
DIVIDEND OF COMMON STOCK = ??
CORP TAX = 34%
Saving money i=6% before tax
After tax interest= 6%(1-20%)=4.8%
PPh = 20%
33
INTEREST EXP =12 %
TAX = 34%
Effective interest rate = 12%(1-34%)=
7.9%
Source of fund from the
ownerexpected return=20%ROI
DIVIDEND IS NOT EXPENSES

34
 ACC’S DECISION-B
REJECTED, DUE TO:
1. MINORITY OWNERSHIPS

ALTHOUGH DER = 10.5 %

35
 C. 1ST DAY B/S OF MEC
L+OE
LTD. $0.6Mi=12%
OE
CS. $1.5M
(0.6=GY; 0.4 =ACC)
T LTD + OE. $2.1M

REJECTED BY ACCMINORITY OWN

36
 ACC’S DECISION
REJECTED BY ACC, DUE TO:
1. MINORITY OWNERSHIPS
ALTHOUGH DER = 40%

37
 D. 1ST DAY B/S OF MEC
L + OE
LTD. $0.3M
OE:
COMMON STOCK. $1.8M (0.5-0.5)
T L + OE. $2.1 M

REJECTED BY GY
38
 D ACCEPTED
CONTRIBUTION OF ACC: $1.2 M
($0.3 M = LTD ; $0.9 M IS CS)
50% = 90,000 SHARES OF CS @$1 PAR
90,000 SHARES = $ 0.9 M
THEREFORE, MKT PRICE= $10
APIC PER SHARE = $9

39
CONTRIBUTION G&Y = PARTNERSHIPS
BEFORE MERGER = ASSETS –
LIABILITY = $ 0.7 M
CS =50% =$0.9M
GOODWILL $0.9M - $ 0.7M= $0.2 M

40
HOW IS THE 1ST DAY B/S OF
MEC?

41
 ASSETS
CASH. $1.2M
NET ASSETS. $0.7M
GOODWILL. $0.2M
TOTAL ASSETS. $2.1M

42
 LIABILITY + OE
LONG TERM DEBT. $0.3M
OWNERS’ EQUITY:
CS, 180,000 SHARES@$1 PAR $180K
APIC. $1,620K
TOTAL OE. $1.8M
TOTAL L+OE. $2.1 M

43
 PROFITABILITY OF MEC
“PROFIT”
OPTIMISTIC. $0.5M (REV. - OPEX)
MODERATE. $ 0.3M
PESSIMISTIC. $0.1M

Country risks; Political risks; Economic

risks
i exp>  EBT<  Tax (34%)<
44
 INCOME STATEMENT
REVENUE 100
OPEX. 40
E B TAX. 60
TAX, 20%. 12
EAT 48

45
 i= interest exp tax
deductible
Interest Bef. Tax =8%
Tax = 34 %
Interest After Tax =
8% (1-34%) = 5.28%
Proposal A:
Int exp = 8%x $1.1 M =  bef tax
Int exp> EBT <  TAX < (T SAVING)
46
 CASE 9-1 XYTECH C0MPANY
20X0 PARTNERSHIPS
LONG TERM DEBT + OE =INV.CAP.
A&CL = ASSETS + CL

47
 20X0
JANUARY 10
A&CL $300K
ABLE ,CAP $100K
BAKER,CAP. $100K.
CABOT, CAP $100K
(TO SET UP A PARTNERSHIPS)

48
 20X0
APRIL 1
A&CL. $100K
LTD. $100 K
DEC 31.
A, CAP. $18K
B,CAP. $18K
C, CAP. $18K
A&CL. $54K
49
 20X1
A.APRIL 26
A&CL. $50K
A&CL. $50K
(……..STD)
B.NO JOURNAL, PERSONAL TRANSACTION
DEC 31
A&CL. $12K
A,CAP. $6K
C, CAP. $6K
50
ST. OF INVESTED CAP DEC 31,
20X1
LTD $100K
OE:
A, CAPITAL $129K
C, CAPITAL. $129K
TOTAL OE. $258K
T. INV.CAP. $358K

51
 20X2
A.JANUARY 1: INCORPORATED
A,CAP. $129K
C,CAP.$129K
COMMON STOCK,$100PAR $10K
ADD’L PAID IN CAP. $248K
NOTE: 100 SHARES OUTSANDING
B.MARCH 21
A&CL. $50K
LTD. $50K
(….ADD’L LTD) 52
 20X2
DEC 31, 20X2
A&CL. $26K
RETAINED EARNINGS $26K
(…..NI OF 20X2)

53
 20X3
NOV.
AFTER STOCK SPLIT UP:
NO OF SHARES OUTS = 100K
PAR VALUE/CS = $0.10=$10K/100K
31 DEC
A&CL. $43K
R/E. $43
(…..NI 20X3)
EARNING PER SHARE=EPS=$0.43
= NI/NO. OF OUTSANDING SHARES 54
 20X4
NET PROCEEDS = $7.20/SHARE
(100K X $7.75)-$55K = $720K

A&CL. $720K
CS, $0.10 PAR. $10K
APIC. $710K
(PRIMARY MARKET)
DEC 31
A&CL. $68K
R/E. $68K 55
 ST. OF INV CAP.31-12-2020X4
LTD. $150K
OWNER’S EQUITY:
CS, $0.10 PAR. $20K (200K SHARES)
APIC. $958K
R/E. $137K
T.OE. $1,115K
T. INVESTED CAPITAL. $1,265K

56
 20X5
A. A&CL. $500K
BONDS PAYABLE. $500K

B. LTD $150K
A&CL. $150K

C. A&CL. $85K
R/E. $85K

57
 20X6
A. APRIL : NO JOURNAL, SECONDARY
MARKET
B. A&CL. $111K
R/E. $111K
(…NI)

C.DEC 31
R/E. $30K
A&CL. $30K ANNOUNCEMENT
58
ST. OF INV CAP DEC 31, 20X6
BONDS PAYABLE. $500K
OE:
CS, $0.10 PAR. $20K
APIC. $958K
R/E. $303K
T. OE. $1,281K
T. INVESTED CAPITAL $1,781K

59
 20X7
A. JULY 1
TREASURY STOCK $200K
A&CL $200K
B. A&CL. $152K
R/E. $152K
C.R/E. $36K
A&CL. $36K
D. EPS=$152K/(180K+6/12X20K)=
$152K/190K=$0.80 WEIGHTED
AVERAGE
60
 20X7
1/1 – JUNE 30 = 200 K SHARES
JULY 1 – DEC 31 = 180 K SHARES
380 K X 6/12=190K

FULL YEAR OUTS = 180 K

½ YR OUTS = ½ X 20 K = 10K
TPTAL OUTS = 190 K
61
 20X8
A. JANUARY
A&CL. $200K
PREFERRED STOCK $200K
B. A&CL. $ 186K
R/E. $186K
C. R/E. $65K
A&CL. $65K
($20K FOR PS; 45K FOR CS)

62
 20X8
BASIC EPS OF CS=($186K-$20K)/180
K= $0.92
FULLY DILUTED EPS=
$186K/(180K+8K)=$0.99

63
 20X9
A. A&CL. $252K
R/E. $252K
B. R/E $20K
A&CL. $20K
C. R/E $153K
TREASURY STOCK $153K

VALUE OF STOCK DIVIDEND=

180K X 5% X $17 = $ 153K
64
 20X9

BASIC EPS = $232K/180K=$1.29

FULLY DILUTED EPS=

$252K / 188K = $ 1.34

65
ST.OF INVESTED CAP DEC
31,20X9
BONDS PAYABLE. $500K
OE:
PS. $200K
CS,$0.10 PAR $20K
APIC. $958K
LESS: TREASURY STOK $47K
R/E. $619K
T. OE $1,750K
TOTAL INVESTED CAP. $2,250K 66
 20X9
DEBT/CAPITALIZATION=
($500K/$2,250K) X 100% = 22%
LOW RISKS COMPANY

HOME-WORK PROBLEM 9-7

67