Int Med Acc2 Assignment

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GROUP ASSIGNMENT
2012

Submitted by:
Harjinder Deol

Submitted by:
Irtiza Noor
Gaurav Singh
Rohit Bhardwaj
Victor Zhang

8/15/2012

Introduction
Darcy Limited (DL) is a manufacturer of equipment for the oil and gas industry. They are a subsidiary of Micah Holdings Limited (MHL). Their earning has improved over the last two years and the purpose of this report is to highlight if DL is a company worthy of being bought out, and what are some of the areas of concern. Below, we have discussed my in depth findings about the company. Exchange Rate & Accounts Receivable

ASPE accounting standards suggest recording the transactions as they happen. DL recorded a transaction during the year which was done in US dollars. At the time of the transaction, exchange rate was different than at the end of the year. The value of the transaction in the financial statements is $7,620. At the end of the year, the exchange rate had changed to US $1 = CDN $1.12. Therefore, the USD transaction is worth CDN $220 more than it was at that time of the year when it was recorded. (1, Appendix A) As per Darcy Limited Balance Sheet, the Accounts receivable for the year 2007 is $18,720, of which $270 has already been taken into account as allowance for doubtful accounts. “Allowance for doubtful accounts is a contra current asset account associated with Accounts Receivable” ("allowance for doubtful,"). The actual amount of Accounts receivable is $18,641.50, and the calculation is shown in 4, Appendix A. Most of the companies have a yearly percentage setup where they allocate some balance of accounts receivable into the allowance for doubtful accounts. Darcy Limited uses 5% of Accounts receivable as allowance for doubtful accounts. Based on the 5% of Accounts Receivable balance, the allowance for doubtful account credit should be $568.50 (3, Appendix A). This number does not match with the $270 provided by DL on their Balance Sheet for the allowance. It is important to know that we are not taking into account the US $7000 transaction where Darcy limited sold inventory to a foreign government. The reason behind this is that both Michel Lessard and Darcy Limited agree that the risk on this transaction turning into bad debt is extremely low. Also, we are taking into account that DL had recorded the transaction at $7,620 whereas at yearend the exchange rate had changed, and now we have to account for $7,840. We are also going to realize gain of $220 (7840-7620) on the Income statement. The 5% allocation used by DL for the allowance for the doubtful account is much higher than what DL incurred in the year 2006, and 2007. Our recommendation is that DL could reduce the percentage of Allowance for doubtful accounts to 1% of Accounts receivable based on their past 2 year record. For Income statement, we will only use the actual amount of bad debt that was incurred by the company. Property plan and equipment & Amortization

This is to be considered as a disclosure as it has no effect on the financial statements. ASPE only allows onetime re-evaluation of assets at a time when company is switching from GAAP to ASPE. Other than that, changing the value of the assets is not allowed under ASPE. Although, it is important to know that the value of the land at this time is $10,500 which is 150% of the original $7,000 ($7,000 x 150% = $10,500).The replacement cost of the rest of the property, plant and equipment is valued at 120% of the net book value. This simply means that the DL equipment costs 120% of their net book value in the market, meaning, we can sell this equipment for $11,520 (5, Appendix A). Also, replacement costs affect the insurance costs for the asset, so it is important to know these values for future purposes. Capital Assets are being amortized over 4-8 years, but we do not know which asset is being amortized at what pace. Because of this, we do not know what the depreciation cost of the new equipment which was bought in the year...
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