Billy s Beats
Kevin Oblinger
10/31/14
Billy’s Beats Case
Intro Billy’s Beats Inc (Bill’ys) is an SEC registrant manufacturer of musical intraments. Billy’s has recently acquired one company, Little Drummer Boy Inc (Little Drummer), and wholly owns RockOut Inc. Both Little Drummer and RockOut are manufacturers of musical intstraments, making guitars, and drums respectively. Billy’s acquisition of Little Drummer took place in 201X for an outlay of $575 million in cash; an external valuation specialist assessed the fair values of significant acquired assets at $865 million (PP&E), and $145 million (other assets). Billy’s used the previously determined useful lives for PP&E (determined by Little Drummer’s management) of 30 years for plant, and 20 years for equipment respectively. These calculations differ from those used by Billy’s, which come in at 20 years for plant, and 10 years for equipment. In addition, customer lists acquired in the purchase were determined to have a useful life of 15 years. RockOut (Billy’s subsidiary), has grown substantially through acquisitions of five guitar companies in 201X, eight in 201Y, and four in 200Z. Consequently, RockOut has accumulated a customer’s list that has an approximate reported value of $90 million, which accounts for 15 percent of total assets, and 60 percent of total intangible assets. RockOut uses straight-line amortization for these lists over a 25-year useful life (calculated by management), but during 201X, RockOut management has decided to modify the useful life of newly acquired customer lists at a useful life of 15 years. This decision has resulted in a total amortization expense for 12/31/2011 of $3 million. The substantive tests used by the audit team are designed to detect whether any material misstatements in accounting transactions have occurred in regard to completeness, validity, and accuracy of the financial statements that pertain to a specific entity. The following paragraphs will assess whether the audit
10/31/14
Billy’s Beats Case
Intro Billy’s Beats Inc (Bill’ys) is an SEC registrant manufacturer of musical intraments. Billy’s has recently acquired one company, Little Drummer Boy Inc (Little Drummer), and wholly owns RockOut Inc. Both Little Drummer and RockOut are manufacturers of musical intstraments, making guitars, and drums respectively. Billy’s acquisition of Little Drummer took place in 201X for an outlay of $575 million in cash; an external valuation specialist assessed the fair values of significant acquired assets at $865 million (PP&E), and $145 million (other assets). Billy’s used the previously determined useful lives for PP&E (determined by Little Drummer’s management) of 30 years for plant, and 20 years for equipment respectively. These calculations differ from those used by Billy’s, which come in at 20 years for plant, and 10 years for equipment. In addition, customer lists acquired in the purchase were determined to have a useful life of 15 years. RockOut (Billy’s subsidiary), has grown substantially through acquisitions of five guitar companies in 201X, eight in 201Y, and four in 200Z. Consequently, RockOut has accumulated a customer’s list that has an approximate reported value of $90 million, which accounts for 15 percent of total assets, and 60 percent of total intangible assets. RockOut uses straight-line amortization for these lists over a 25-year useful life (calculated by management), but during 201X, RockOut management has decided to modify the useful life of newly acquired customer lists at a useful life of 15 years. This decision has resulted in a total amortization expense for 12/31/2011 of $3 million. The substantive tests used by the audit team are designed to detect whether any material misstatements in accounting transactions have occurred in regard to completeness, validity, and accuracy of the financial statements that pertain to a specific entity. The following paragraphs will assess whether the audit