Tammy’s Toy Shop Case Solution & Answer

Tammy’s Toy Shop

Problem no. 5:

Based on the data the company have changed its bad debt ratio from 4 pc to 3 pc, reason being their increase in profits this year. According to the IFRS standards it is not a right approach because the bad debt’s ratio could not be recognized by company’s current year profits.

Problem no. 6:

The company stopped making its DVD players because of the decline in its popularity. The cost of the machine used to make this item is $550,000 as per the books with accumulated depreciation of about $200,000. It is estimated that the fair value of the machine would be $50,000. According to IFRS there should be recognition of impairment loss if the carrying value of the asset is lower than its recoverable value. The carrying amount of the asset equals to its cost less its accumulated depreciation (i.e. $350,000). Whereas, the recoverable values equals the   lower of fair value minus cost to sell and the assets value in use. Hence the loss of impairment would be $300,000.

Journal entries would be

Problem no. 7:

The company got in a contract for five years with the company named DIY Depot. The contracted amounted for about $1 million out of which the company requested for 50% upfront amount. The company recorded that upfront amount of $500,000 as revenue which rather is an unearned revenue for the period of five years for the company. According to IFRS this amount should be treated as a liability and recognized when earned.

Problem no. 8:

Tammy’s Toy Shop (TTS) has an investment opportunity to acquire 30% equity of Madison Manufacturing (MM). Its purchase price being $450,000. MM has reported assets of $4,550,000 and liabilities of $3,300,000. The net book value of the assets is $630,000 and FMV of $825,000. It has inventory with $20,000 fair value minus its book value. The reported capital assets have the life of 6 years. Based on the equity method the investment would be recorded as follows initially.

F.V of Assets = $ 4,550,000 + ($ 825,000 – $ 630,000) – $ 20,000 = $ 4,725,000

F.V of Liabilities = $ 3,300,000

Shareholders’ equity = $ 1,425,000

With 30% shares, $ 1,425,000 * 30% = $ 427,500

Investment cost = $ 450,000

Journal entries would be like follows

Conclusion and Recommendation

Based on the analysis it could be said that the SE has reported many mistakes in its bookkeeping hence Tammy should not consider investing in this company because it might lead her to lose her capital…..

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