tricklehammer inc ti is a private company incorporated 20 years ago 287897

Aug 29, 2021 | Uncategorized

TRICKLEHAMMER INC.

Tricklehammer Inc.(TI) is a private company incorporated 20 years ago dedicated to the construction of commercial property and selling tools related to the construction business. They have experienced financial difficulties over the past year, and need to obtain additional financing. They estimate a small profit before taxes of $23,000 in 2009, based on a preliminary draft of their financial statements prepared by the administrative staff. Due to the uncertainties of their financial position, creditors have insisted on covenants to maintain their debt to equity ratio at or below 2:1. Dividends are not allowed to be paid to shareholders until the loans have been repaid. Management has a bonus based on net income.

In the past the objective of the private company has been tax minimization. However as soon as their financial position improves they would like to have a public share offering.

It is January 2010. TI’s fiscal year end is December 31, 2009. The President of TI Bud Tricklehammer, an old school friend and the son of the company’s founder, has provided you (CGA) with the following accounting issues facing the company for 2009. “Hey, I am just a bricks and mortar man”, he said, shaking you warmly by the hand, “you college kids know how to cope with the new global environment with all these new fangled rules that they keep throwing at us. Peter, my head clerk, is very hard working and intelligent, but he just cannot keep up with all the changes that have taken place in the past few years. Aunt Agatha helps as much as she can. In fact she has given me an interest free loan of $200,000 to help us along. I would have to pay the banks at least 5%. But she is facing a tightening of her financial position, and I will have to return her money in a year or two.” He would like you to prepare a report outlining alternative accounting policies and your recommendations.

The following information has been collected by you:

  1. TI does not accrue warranty expenses for their products. Based on the two year warranties given by the company you estimate that the company will have to pay $80,000 in warranties, split evenly over the next two years. The warranty liability was at the same level at the beginning of 2009.
  1. TI issued $100,000 in $5 preferred shares on January 1, 2009. The 1,000 preferred shares must be redeemed, or bought back, at their $100 stated value per share, in 2010. The dividends are cumulative. If there are any dividends in arrears they must be paid before the redemption date. No dividends have been declared in 2009.

  1. To conserve cash, an arrangement was made at the end of 2009 to exchange 4,000 common shares in TI for equipment from their supplier. The book value of the equipment was $200,000 and the listed selling price was $350,000. Similar equipment is sold for $300,000 if cash is paid. Common shares were last issued at $150 per share. TI recorded this share issue at $600,000, using the $150 price of the last issue.
  1. TI uses the taxes payable method (tax expense = tax paid) of accounting for income taxes, not the future taxes asset liability method.
  1. Again, to conserve cash, TI has reduced salaries to top management staff and issued stock options as compensation in 2009. TI provides only note disclosure of the stock options, which have been valued by options pricing models at $120,000, and vest at the end of 2010. The options may be exercised during 2011 2012.
  1. At the end of 2009 TI bought back some of their own shares with a capital gain of $40,000. These shares are expected to be reissued when employee stock option plans are exercised. The gain from the repurchase has been included in other income.
  1. In 2009 TI issued $200,000 in bonds with detachable warrants to make them more marketable. Every $1,000 bond has 5 warrants, each of which can be used to purchase one common share at a strike price of $160 per share during the exercise period 2011. Without the warrants the bonds would be issued at 95. The entire proceeds of the bond sale have been booked as a liability.
  1. The pension is underfunded, although it does meet the provincial legislation for pension funding. The company books the annual fund contribution as pension expense. Actuarial data indicates that the Accrued Benefit Obligation at the beginning and end of 2009 was $800,000 and $850,000 respectively, whereas the value of the Plan Assets was $700,000 and $790,000 respectively.
  1. On January 1, 2008 TI purchased a 3 year insurance policy for $30,000 on its offices and equipment, and expensed the entire amount in that year.
  1. TI has been following the tax rules (CCA) for calculating depreciation expense, but would like to change to the straight line method because it better matches the pattern of benefits obtained from their long lived assets. UCC for the Property Plant and Equipment of the company at the beginning of 2009 was $600,000 and the book value would have been $650,000 if straight line depreciation had been used. In 2009 the depreciation expense and CCA was $60,000 and $50,000 respectively. No purchases of Property Plant and Equipment were made during 2009.
  1. TI has had no collection problems from its clients, and feels that the current 2% of net sales applied to calculate bad debt expense is excessive, thinking that 1% would be more appropriate.
  1. TI leases its specialized cranes, which have zero residual value when the construction project is finished. The leases are classified as operating leases. If they had been classified as capital leases there would be a balance of $120,000 and $130,000 at the beginning and end of 2009 in the leases payable account, and an additional $90,000 and $110,000 in property, plant and equipment on those dates.
  1. TI uses the completed contract method to recognize revenue on its long term contracts. If the percentage of completion method had been used the company would have a taxable timing difference of $180,000 at the beginning of 2009. During 2009 the company had an additional $50,000 of non taxable gross profits, whilst there was a reversal of $10,000 of the timing difference from the previous year.
  1. The company had total assets of $4,500,000 and liabilities of $3,000,000 at the beginning of 2009.
  1. The income tax rate is 35%.

Required: Prepare the requested report, restating the financial statements for 2009 using IFRS rules. Comment on the firm’s performance, and its compliance with the debt covenant. Your discussion should identify recognition, measurement and disclosure issues, citing from the official IFRS rules to justify your recommendations.

Bud is an old buddy, but this is a professional report.