Tammy’s Toy Shop Case Study Solution
Overview:
The following report is solely for Ms Tammy; we have no responsibility to any other party except for Ms Tammy. This report is prepared in order to evaluate the potential investment of Tammy in SE, the main objective ofMs Tammy from the investment in SE is to fulfil her financial needs after her retirement. However, it is very unlikely that Ms Tammy would fulfil her financial needs from the investment as the SE hasn’t paid any dividends in the last fifty years. In order to accomplish her financial needs, she has to sell her investment, or she can force the management of SE to pay enough dividend which will cover her living expenses. By analysing the information provided, it can be said that Eduardo and SE appear to be trustworthy except for some facts which were provided in the report. Ms Tammy can trust the Eduardo and SE based on the assessment of information provided as there are no significant discrepancies in the information provided.
- The reduction in the profit margins is justified because the general economic environment has been deteriorated in the past ten years, the inflation was increasing which is affecting the level of spending on entertainment items such as toys and games.
- The income margins of SE has been increased in the year 2017 primarily due to the increased marketing expenditure. This seems to be suspicious as the increased marketing expenditure could have adverse impacts on the profitability in the short-term, the income levels could be increased in the long-term. Further information is needed regarding the time of marketing expenditures.
- According to IAS 16 Property plant and equipment, an entity should have to record the purchased non-current assets at the consideration that is paid rather than the fair value of the non-current assets. SE have correctly recorded the acquisition of the non-current Furthermore, the depreciation should have to charge from the date at which the assets are ready for use. Depreciation expense of $24,286 should have to be charged in the year assuming that the assets are being acquired at the start of the year.
- Usually, where the entity has less than 20% holdings of another entity, it should have to be classified as an acquisition of financial asset as per IFRS 9 Financial Instruments. But it can be said that SE can exercise significant influence on ATG as SE have nominated three directors out of 10 in the board of directors. Furthermore, SE is also a major customer of ATG also depicts that SE can exercise significant influence on ATG. SE should have to apply equity accounting about the acquisition of ATG according to IAS 28 Investment in associate. The dividend income is understated, the dividend should have to be recorded as the dividend paid by associate multiplied by the percentage of holdings, and this will give a total dividend of $20,900.
- The bond payable should be shown in the non-current liabilities when there is more than one year left in the maturity of the bonds, and if the bonds are repayable within one year, they have to be shown in current liabilities. Equity investment should have to be shown in non-current assets if TTS wants to hold the investments for long-term, all the gains and losses on the equity investments should have to be taken to PnL immediately. The equity investments have raised by $40,000 in value which should have to be taken to PnL, and on the balance sheet, it should have to be presented at $380,000.
- According to IAS 16, property plant and equipment, acquired an asset in the exchange of asset transaction, the acquired assets should have to be recorded at its fair value. If the fair value of the asset cannot be measured reliably, and the acquired asset should have to be recorded at the fair value of the asset given up. SE has correctly recorded that gain of $78,000 because the fair value of new machine cannot me measured reliably, the new machine should have to be recorded by $480,000 while the old machine should have to be derecognized from the accounts by $402,000. Balancing figure of $78,000 has been correctly recorded as again on disposal................
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