Tammy's Toy Shop - Teaching Notes.docx

Tammy's Toy Shop - Teaching Notes.docx - Memo to Partner Re...

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Memo to: Partner Re: Tammy’s Toy Shop You have asked me to prepare a report to you that can be used to discuss with our client Tammy regarding some of her issues and a potential investment in SE enterprises. I will begin with an analysis of Tammy’s investment objectives: Tammy wishes to enter semi-retirement and is therefore looking for a successful company that will maintain her investment; Tammy is looking for a stream of income for retirement; therefore, she will most likely be looking for a company that will pay her dividends; rather than one where the value comes from growth [as she won’t be able to access the income without selling the shares]; Tammy is also contemplating going public in the near future. As I address the other accounting issues, I will compare the current ASPE framework that TTS uses to the IFRS framework. Analysis of SE Accounting Asset purchase SE failed to record the purchase of their bundled assets correctly and put more of the purchase towards land which does not depreciate. According to the information 51.6% of the purchase price [800/1,550] should be allocated to land; 9.7% to equipment and 38.7% to the building. This would have resulted in the assets being recorded as follows: o Land $567,000 o Equipment $106,720 o Building $425,700 As a result, depreciation is understated by the difference between what should have been set up and what was set up: 6,720 ÷ 7 = 960 and 225,700 ÷ 20 = 11,285. This would reduce their recorded net income by the total of $12,245. Acme Toys SE owns 19% of Acme toys and Games and it appears that SE and Acme have an active purchase/sell agreement. In addition to the 19% ownership, SE also has 3 members on the
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