case study – acct302 acct201

Onpecant Company is a specialized food distribution company for outdoor
events. Its headquarters is located in the United States, and it conducts its
business activities worldwide. The company ships food, beverages, and
decorations from one country to another for the purpose of hosting private
events. The company offers German sausages, pretzels, and traditional German
costumes as part of Oktoberfest events in the United States. It also provides
Mexican food, horchata drinks, sombrero hats, and other traditional varieties to
Japanese hotels that wish to host Cinco de Mayo celebrations.
The company has achieved tremendous success, particularly by focusing on the
participation in cultural traditions due to their low production costs. The
company purchases food, beverages, and decorations from approved suppliers
in countries with those cultural traditions and rents storage and shipping spaces
from major airlines. Most of the company’s expenses are attributed to the labor
force they employ. The company hires experts in languages, traditions, and
local customs. Onpecant Company does not bear any risk associated with
hosting events since the specialized suppliers are responsible for hosting those
events, and the company receives its dues regardless of the success of the
event.
The company’s employees take pride in their work and make every effort to
assist suppliers from around the world in planning and executing successful
events that will become local traditions and customs. This ensures the
company’s continuous presence in those markets to provide its services.
Unfortunately, the company has recently faced challenges during the recent
economic crisis, including venue closures and shipping difficulties. However,
the company was able to leverage its current network of relationships and
continued its operations by adjusting its services. Instead of focusing on largescale events, the company provided party packs for individuals and outdoor
decorations, allowing the company to adapt and continue its operations.
Through this idea, organizing a number of small events at economical prices
enabled the company to meet its employees’ salaries and wages. With the
ongoing economic contraction, the company was able to offer some fantastic
opportunities to customers who were looking to host parties and other activities
to revitalize communities or promote their products.
The company’s finance department faced exceptional circumstances at the end
of the previous year, with a surplus of liquidity but a lack of available
investment opportunities. After lengthy consultations, the team at Onpecant
Company decided that the best option was to purchase inventory from some
suppliers, particularly a company called “Xito Real” based in Mexico City.
Xito Real provides most of the food and costumes used by Onpecant Company
in organizing its famous Cinco de Mayo event. Xito’s shares plummeted
noticeably during the economic downturn, and the finance team at Onpecant
saw an opportunity to support their primary supplier and ensure Xito Real’s
continued provision of its services to Onpecant. Through this action, Onpecant
Company became the majority shareholder in Xito Real, in addition to the
company’s founder, who owned 25% of its shares.
During the economic recession, the finance leadership of Onpecant Company
held daily meetings to address cash needs, financing options, reporting
requirements, and investment opportunities. Mr. Azul, the Chief Financial
Officer, supported by Mr. Pislaw, the Financial Controller, and Mr. Kennedy,
the Finance Manager, chaired those meetings.
The other team members were invited based on the circumstances, but today’s
meeting only included the three leaders. They needed to make some decisions
regarding their recent investment in Xito Real, and Mr. Azul felt that the
meeting would be more effective with just the leadership team.
As they entered the boardroom for the meeting, Mr. Azul greeted Mr. Pislaw,
saying, “Good evening, Pislaw. How are you?” Pislaw responded in a light
German accent, “I’m fine, thank you.” Pislaw was born in Munich and migrated
to the United States with his family at the age of eleven. His accent may be
somewhat difficult to understand, but it was somewhat understandable.
Towards the end of the day, when Pislaw felt tired, he asked Kennedy, “How
are you?” Kennedy replied, saying, “I’m fine, I just hope this meeting ends
soon.” Kennedy moved from Ivory Coast to the United States in his childhood,
so he didn’t have any language-related issues. Pislaw wondered, “Really!
Why?” Kennedy responded, “Because I feel this meeting is not productive, and
you know that very well.”
Kennedy sat down and looked out the window, saying, “I know the purpose of
this meeting is to discuss generally accepted accounting principles as we
prepare our annual financial statements.” Kennedy raised his hand and
continued, “I know you are excited about this discussion, but I think most of us
find it boring. “Pislaw laughed and sat on his chair with a great view of a
nearby lake, saying, “You’re dealing with people who don’t know how to have
fun. This will be a great meeting.” Kennedy responded, “Of course, it will be a
great meeting.”
As Azul entered the room, Kennedy and Pislaw stood up. Azul was born in
South Texas and spoke with a strong southern accent, despite being raised by
Mexican parents and speaking fluent Spanish. Azul spoke, saying, “We’ll have
a great time this afternoon. I mean, who doesn’t want to know how to share
good news with our investors?”
Kennedy sighed and said, “Can’t you at least pretend to be knowledgeable in
finance?” Azul laughed and replied, “I’m the financial manager, Kennedy. I
can’t lean towards accounting or finance, I have to work on both sides. So, I’m
excited to be here. Let’s start our meeting.” Azul sat down among his
colleagues in the conference room and said, “I’ll try to keep it brief because
some of you have unreasonable biases.” Kennedy sighed and said, “We’re
nearing the end of the year, and there will be many meetings.” Azul asked,
“How are our records?” Pislaw responded with a hint of annoyance, “They’re
excellent, considering the global developments around us. The situation is
much better than last year. The price increases have affected us, so our profit
margins haven’t been as good as they were before the economic contraction.
Nevertheless, we’re in a good position, and I believe we’ll meet the experts’
expectations.”
Table 1: Financial Statements of Unbekant Company
Table 1a: Multi-Step Income Statement for the year ended December 31, 2022
Kennedy chuckled and sarcastically said, “Great, it seems like everything is fine, and
we will achieve our goals, and we will all be happy, and with that, our meeting
.concludes.” Azul became irritated and scolded Kennedy for his sarcastic tone
Kennedy apologized, saying, “Alright, what’s the matter?” Azul replied, “I think we
need to make a decision regarding our investments in Excito Company.” Pislaw
frowned and asked, “Why? Do you want to buy more shares? Or do you want to sell
“.some? I don’t even know the current price of the goods in our inventory
Azul responded, “No, I’m happy with our stake.” Kennedy interjected, saying, “Then
what are we deciding about?” Azul explained, “I want us to make a decision about
how to handle those stocks for accounting purposes.” Pislaw said, “So, you’re talking
about investing in stocks, and we use the fair value method, and I believe that’s the
only option available to us because Excito Company’s stocks have been publicly
“.traded, and it’s easy to know their prices
Azul objected, saying, “That’s not the only option available to us. We can also use the
equity method for the company’s capital stock.” Pislaw wondered, “Why didn’t we
consider such an option?” Azul replied, “Do you know the current price per share in
Excito Company?” Pislaw answered, “I know it has fluctuated in the past few weeks,
and that’s why I believe, like Kennedy, that you might be considering adjusting our
stakes.” Azul responded, “I don’t want to buy more; we need the money to be used for
other purchases.”
Table 1B: Balance sheet statement as of December 31, 2022 AD
Pislaw responded, “If we decide to use the equity method for the company’s capital
stock, it won’t have significant changes in its value. Therefore, it won’t have a
noticeable impact on our financial reports. What I mean is that our dividend per share
will meet the experts’ expectations regardless of any recent changes in Excito
“.Company’s stock price
Azul nodded and said, “Even if there isn’t a major difference between the current
situation and the year-end, what would be the solution if something unexpected
happens this week or if auditors discover issues that need to be corrected in our
financial resources? Would it be appropriate to use the equity method for stocks? I
believe this method can have an impact on the income that is easier to predict
“.compared to market prices
Kennedy wondered, “What are you talking about? I don’t remember much about the
equity method from my accounting classes in college, but I think you can only use it
if you have at least a 20% ownership in the publicly traded stocks, and we don’t have
“.that percentage yet
Please note that the provided translation is a rough approximation and may not be
completely accurate.
Table 1C: Statement of cash flows for the year ending December 31, 2022
Pislaw objected, saying, “Wait, I think Azul is partly correct. There may be a case for
using the equity method for stocks. I haven’t reviewed the rules in a long time since
we don’t have any other investing entities, but I believe the Financial Accounting
Standards Board (FASB) has stated that the use of Generally Accepted Accounting
Principles (GAAP) can have a significant impact on the investor company when
transitioning to the equity method. They assume that you’ll have a substantial impact
“.once you acquire at least 20% of the outstanding shares
“!Kennedy interjected, “But we don’t currently own 20% of the publicly traded stocks
Azul responded, “Yes, but we are the second-largest shareholder in the company, and
“.the founder doesn’t have a controlling stake in terms of voting rights
“.Kennedy argued, “But we don’t have a seat on the board
To which Pislaw replied with a sigh, “They haven’t offered us a seat on the board, and
“.we’re not fond of the conditions they impose
Kennedy nodded, saying, “Yes, didn’t they inform us that we cannot purchase
“?additional shares for 12 months or something similar
Azul added, “That indicates they are afraid of us acquiring too many shares and
“.exerting a strong influence on their company
Pislaw added, “We are one of their largest clients, which indicates the magnitude of
“.our influence
Kennedy questioned, “I don’t know, it seems like we’re pressuring them with this
approach. But what is the purpose of all this? Is it just to transition from market-based
adjustments to profit-based adjustments for the investing entity? That doesn’t seem
like a sufficient reason to cause such a commotion. Furthermore, we’re not even sure
about the rule we’re discussing, as our information is limited to the fact that generally
accepted accounting principles may require us to have a 20% ownership in the
outstanding shares. Therefore, we need to find a way to reach an appropriate
solution.”
Table 2: Investment in Exetorial Company
Pislaw agreed with Kennedy’s suggestion, saying, “Alright, that’s a valid point. We
cannot base our decision solely on possibilities. The decision must be grounded in
generally accepted accounting principles, as expected by our investors and sought by
auditors. I agree that the most stable forecast would be preferable, especially
considering the challenging year ahead. We should avoid getting into arguments
“.with auditors
Azul nodded and said, “And that requires us to delve deeper, re-read the rules,
examine the records, and consider a proposal that provides better information for
“.the investing entity and other relevant parties
Pislaw responded, “Exactly. We need to research more extensively and reconsider
our approach. We should explore options and recommendations to provide a more
“.informed decision to our investors
Kennedy sighed and said, “I’m sure you all believe that the equity method is the best
option overall. But Pislaw and the accounting team can conduct the necessary
“.calculations and perform further research for us
Azul agreed, saying, “Alright, that’s a good idea. Let’s reconvene in two days, and
Pislaw, please come prepared with information about the options and proposed
“.recommendations so that we can make the necessary changes
The team agreed to continue their discussion in two days, allowing Pislaw and the
accounting team to gather more information and present their findings.
Case study exercises:
1-Prepare the necessary adjusting entries for the fair value method for the
investment account of Onbekant in Xieto Real at the end of the fiscal year. Assume
that the financial affairs department of Onbekant has decided to use the fair value
.method for the investment in shares
2-Update the financial statements of Onbekant to include the impact of the fair
.value method adjustment
3-Prepare the necessary adjusting entries for the equity method for the investment
account of Onbekant in Xieto Real at the end of the fiscal year. Assume that the
.financial affairs department of Onbekant has decided to use the equity method
4-Update the financial statements of Onbekant to include the impact of the equity
.method adjustment
5-Identify the applicable financial accounting standards that any company should
use to determine the timing of using the equity method. If you are studying in the
United States, use generally accepted accounting principles (GAAP) available on
websites like FASB.org to assist you in your research. If you are studying outside the
United States, please use the International Financial Reporting Standards (IFRS)
.available on websites like IFRS.org to assist you in your research
Note: You may need to create a free account to access the database in the
International Financial Reporting Standards if you don’t already have a registered
.account
6-After answering the previous questions, determine the correct classification for
Onbekant’s investment in Xieto Real and support your answer with sufficient
evidence to convince the financial affairs team to follow your recommendations.
Reference: