Statement of Cost of Goods Sold of Samsung Manufacturing Company

Preparation of Statement of Cost of Goods Sold. The records of the Samsung Manufacturing Company for the six months ended June 30, 19B provided the following data:

Inventories                       Dec, 31, 19A              June 30, 19B
Raw materials                       $117,000                   $41,600
Factory supplies                           320                          560
Work in process                      30,400                     51,380
Finished goods                       113,500                  121,300
Other Data:
Direct labor                                        $101,000 

Depreciation — machinery                    $ 3,800
Indirect labor                                           6,900 

Depreciation — factory building ...        1 , 1 00
Power and light                                        3,200 

Tool expenses                                          1,645
Heat                                                        1,750 

Factory supplies purchased                      3,100
Fire insurance                                             600 

Raw materials purchased                     314,000
Superintendence                                    11,200 

Compensation insurance                          1,900

Required: A statement of cost of goods manufactured and sold for the six months with a separate schedule for factory overhead and a calculation of the over- or underapplied factory overhead. The company applies factory overhead based on 35% of direct labor cost.

The expectancy model of motivation.

The expectancy model states that people are motivated to work when they expect to achieve things that they want from their jobs. It implicitly assumes that people make conscious decisions about which behaviors to engage in to satisfy their particular personal needs and goals. 

 

The most important variables in the model are expectancy, which is associated with first-level outcomes; instrumentality, which is associated with second-level outcomes; and valence, which determines the desirability of a given second-level outcome. 

 

According to the model, an individual must believe (expectancy) that effort in some activity will lead to some desired level of performance (first-level outcome), and that this level of performance will lead (instrumentality) to desired rewards (second-level outcomes with a positive valence). 

 

Otherwise, the person will not be motivated to expend the effort needed to perform at the desired level.

Distinction between a sale and a hire-purchase agreement

In hire purchase agreement the goods are delivered to the hire purchaser for his use at the time of the agreement but the owner of the goods agrees to transfer the property in the goods to the hire purchaser only when the hirer pays a certain fixed number of installments of price.

However, Distinction between a sale and a hire-purchase agreement are as follows:

Under the Sale-->Ownership is transferred from the seller to the buyer as soon as the contract is entered into.

Under the Hire-purchase agreement-->Ownership is transferred from the seller to the hire-purchaser only when a certain agreed number of installments are paid.


In the Sale -->The position of the buyer is that of the owner.
In Hire-purchase agreement-->The position of the hire-purchaser is that of the bailee.

In Sale -->The buyer cannot terminate the contract and as such is bound to pay the price of the goods.

In Hire-purchase agreement-->The hire-purchaser has an option to terminate the contract at any stage, and cannot be forced to pay the further instalments.


In Sale -->If the buyer makes the payment in instalments, the amount payable by the buyer to the seller is reduced, for the payment made by the buyer is towards the price of the goods.

In Hire-purchase agreement-->The instalments paid by the hire-purchaser are regarded as hire charges and not as payment towards the price of the goods till option to purchase the goods is exercised.

Exceptions to the rule of limited liability of members

The following are exceptions to the rule of limited liability of members :-1. If a member agrees in writing to be bound by the

alteration of MA / AA requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him.

2. If every member agrees in writing to re-register the company as an unlimited company and the company is re­registered as such, such members will have unlimited liability.

3. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private limited company ) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being constituting the company would be personally liable for the debts of the company contracted during that time.

Capital clause The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum.

Priorities for Unsecured Claims in Insolvency

An order of priority to receive distributions from amounts available to meet unsecured claims has been established by the Act. Each class must be paid in full or provided for before any amount is paid to the next lower class. When the amount is inadequate to pay all claims of a given class, the amount is distributed on a pro rata basis within that class. When the amount is sufficient to pay the claims of all classes, which is highly unlikely, the excess amount is returned to the debtor. The order of priority for allowed unsecured claims is as follows:

Class 1—Expenses to administer the estate. Those who administer the estate should be assured of payment; otherwise, competent attorneys and accountants would not be willing to participate.
Class 2—Debts incurred after the commencement of a case of involuntary bankruptcy but before the order for relief or appointment of a trustee. These items, referred to as “gap” creditors, are granted priority in order to permit the business to carry on its operations during the period of legal proceedings.
Class 3—Wages (salaries or commissions) up to $4,000 per individual, earned within 90 days before the filing of the petition or the cessation of the debtor’s business, whichever occurs first.
Class 4—Unpaid contributions to employee benefit plans, arising from services performed up to 180 days prior to filing the petition, to the extent of $4,000 per employee covered by the plan.
Class 5—Deposits up to $1,800 each for goods or services never received from the debtor.
Class 6—Tax claims of a governmental unit. These taxes are nondischargeable (i.e., they still must be met by the debtor after the termination of the case).
Class 7—Claims of general creditors not granted priority. All remaining unsecured claims fall into this category.

Code states that the court will approve the plan only if the value of the property to be distributed on account of each allowed unsecured claim is not less than the amount that would be paid. It is important to note that although the goal of a liquidation is to discharge the debts, certain debts are not dischargeable. For example, certain taxes, fines, and/or penalties are nondischargeable.

Appointment and Duties of Trustee in Business Liquidation

As soon as possible after issuing the order for relief, the court appoints an interim trustee to take charge until a permanent trustee is selected, and then a meeting of creditors is called. Creditors either may elect a permanent trustee or have the interim trustee serve in that capacity. Proofs of claim are examined by the trustee, who may accept them or, if they are improper, disallow them. To be considered in the settlement, a claim normally must be filed within 90 days after the date set for the first meeting of creditors.
 

The debtor is required to be present at the meeting of creditors in order to be subject to examination by the creditors or the trustee and must cooperate with the trustee in the preparation of an inventory of property, the examination of proofs of claim, and the general administration of the estate. To assist the trustee, a debtor files a statement of affairs, consisting of answers to a series of stated questions about the identity of the debtor’s records and books, transactions, and events affecting the financial condition of the debtor, including any prior bankruptcy proceedings. This legal statement of affairs is not to be confused with the accounting statement of affairs.

Duties of Trustee. 

 The trustee shall:

1. Collect and reduce to money the nonexempt property of the estate.
2. Account for all money and property received, maintaining a record of cash receipts and disbursements.
3. Investigate the financial affairs of the debtor, including a review of the forms filed by the debtor.
4. Examine proofs of claim and disallow any improper claim.
5. Furnish information reasonably requested by a party of interest.
6. Operate the business of the debtor, if any, when so authorized by the court if such operation is in the best interest of the estate and consistent with its orderly liquidation.
7. Pay dividends to creditors as promptly as practicable, with regard for priorities. (The law applies the term “dividend” to any payment made to a creditor.)
8. File reports of progress, with the final report accompanied by a detailed statement of receipts and disbursements.

What are Quasi-Reorganizations?

A corporation may not be insolvent and yet may have accumulated a relatively large deficit as a result of such problems as an excessive investment in plant assets or inventory, or management’s inability to recognize and influence market demands. If management is replaced and if profits result from new policies, most state laws still will not permit declaration of dividends until the deficit is eliminated. The turnabout period and deficit elimination may take so long that the investors’ interest in the company vanishes, and capital acquisition becomes difficult. To overcome such a handicap, the corporation might seek a quasi-reorganization.
 

Quasi-reorganization does not require court action, nor does it require the consent of creditors since creditor interests are not altered. However, the procedure is described in state laws, many of which require a quasi-reorganization to be approved by two-thirds of the stockholders. The accounting literature is not specific regarding the conditions under which a quasi reorganization can occur. However, it was most frequently viewed as an approach which would allow for net assets to be reduced to lower fair values and a deficit in retained earnings to be eliminated. The Securities and Exchange Commission has set forth specific criteria which must be satisfied before a quasi-reorganization is accepted. Furthermore, SEC Staff Accounting Bulletin (SAB) No. 78 does not allow registrants to use this procedure just to eliminate a deficit in retained earnings. Net assets must also be restated, and the net result must be a write-down in value versus a write-up.

The primary purpose of a quasi-reorganization is to eliminate a large deficit and take such action as will permit successful operations in the future. Excessive plant capacity and equipment may be sold, and remaining assets and liabilities will be revalued to reflect their fair values. For example, long-lived assets will be written down to reflect an impairment in their value.2 Such revaluations most often increase the deficit in retained earnings. The deficit remaining after these revaluations must be reduced to zero.

It should be noted that the write-down of the assets increases the deficit, which then will be eliminated by subsequent changes in the capital structure. The deficit is eliminated by charges against the existing paid-in capital in excess of par or stated values. If no such paid-in capital exists, it may be created by altering the capital structure and substituting stock with lower par value or lower stated value for existing shares.

What is Troubled Debt Restructurings?

A troubled debt restructuring is a process whereby creditors grant concessions to the debtor that they would not consider otherwise. However, both the debtor and creditor are faced with a difficult situation, and a restructuring offers the creditor the best opportunity to recover the debt, as compared to non-restructuring alternatives.Troubled debt re-structuring generally take several forms. The most common forms of restructuring, along with the appropriate debtor accounting, are summarized as follows:
 

Transfer of Assets in Full Settlement:
The debtor transfers assets, such as third-party receivables, real estate, and other assets, to the creditors in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt, including related accrued interest, premiums, etc., and the fair value of the transferred assets. The restructuring gain should be classified as an extraordinary item, if material. The difference between the book value of assets transferred to the debtor and their fair value results in a gain or loss, which is not part of the gain on restructuring.

Granting an Equity Interest:
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially.The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.

Granting an Equity Interest:
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.

Combination Restructurings:
A restructuring may involve some combination of the above restructuring features.The accounting for a combination restructuring is the same as discussed above except that first, the carrying basis of the debt should be reduced by the fair market value of assets transferred and/or equity interests granted. This step does not result in the recognition of a gain on restructuring. Second, the remaining carrying basis of the debt is compared against the “modification of terms” portion of the restructuring and accounted for accordingly.

3 blocks of stock: Fair value block, Equity-adjusted cost block,book value block

Fair Value Block
This block includes the shares owned by shareholders of the new control group who were not owners of the shares of the prior company. This block also may include the shares of some shareholders who owned shares of the prior company. In order to include a former shareholder’s shares in the fair value block, one of two conditions must be met:
1. The shareholder’s new residual ownership interest must be greater than the residual ownership interest in the prior company. The shareholder’s new residual ownership interest cannot, however, exceed 5%. The residual ownership interest includes all outstanding common and preferred shares except those shares that have liquidation or redemption features. This is different from the definition of ownership interest that includes only common shares. 

2. If the former shareholder’s residual interest percentage decreased, all the following requirements must be met to record the shares at fair value.
a. The shareholder’s voting interest in common stock must be under 20%.
b. The individual must have supplied less than 20% of the new company’s total capital including debt.2
c. The shareholder’s new residual ownership interest must be less than 5%, and all former owners whose residual ownership interest decreased must have a new residual interest of less than 20%.

There is a limitation on the number of shares included in the fair value block; it is based on the amount of monetary consideration given to owners of the former company. Monetary consideration includes cash, debt, and debt-type securities such as mandatory redeemable preferred stock. If at least 80% of the consideration given to all shareholders (including continuing shareholders) is monetary, there is no limitation on the fair value block. If monetary consideration is under 80% of the total, the fair value block is limited to the monetary consideration percentage times the total common shares outstanding. Thus, for example, if the percentage of shares that would otherwise qualify was 90%, but monetary consideration given for common shares was 70%, the fair value block would be limited to 70% of the outstanding shares. The nonqualifying 20% interest would be assigned book value.

Equity-Adjusted Cost Block
Shares of continuing shareholders who owned shares of the former company are recorded at their simple-equity-adjusted cost unless they meet the above requirements for inclusion in the fair value block. The shareholders whose interest does not qualify for inclusion in the fair value block are termed “continuing shareholders.”

Book Value Block
These are the shares that would otherwise be included in the fair value block but are excluded because of the 80% monetary consideration test. Recall the prior example where 90% of the shares otherwise qualified for the fair value block, but only 70% of the consideration was monetary. The excluded 20% of the shares would be valued at current book value.

What is Fair Value Block?

The most difficult accounting task in a leveraged buyout is to determine the total value available for assignment to the company’s assets and liabilities. The total value is the sum of the value assigned to outstanding shares of common stock. Where there may be three blocks of stock, the three blocks are the fair value block, the equity-adjusted cost block, and the book value block. The number of shares included in Fair Value Block is determined as follows.

Fair Value Block
This block includes the shares owned by shareholders of the new control group who were not owners of the shares of the prior company. This block also may include the shares of some shareholders who owned shares of the prior company. In order to include a former shareholder’s shares in the fair value block, one of two conditions must be met:

1. The shareholder’s new residual ownership interest must be greater than the residual ownershipinterest in the prior company. The shareholder’s new residual ownership interest cannot, however, exceed 5%. The residual ownership interest includes all outstanding common and preferred shares except those shares that have liquidation or redemption features. This is different from the definition of ownership interest that includes only common shares.

2. If the former shareholder’s residual interest percentage decreased, all the following requirements must be met to record the shares at fair value.
a. The shareholder’s voting interest in common stock must be under 20%.
b. The individual must have supplied less than 20% of the new company’s total capital including debt.2
c. The shareholder’s new residual ownership interest must be less than 5%, and all former owners whose residual ownership interest decreased must have a new residual interest of less than 20%.

There is a limitation on the number of shares included in the fair value block; it is based on the amount of monetary consideration given to owners of the former company. Monetary consideration includes cash, debt, and debt-type securities such as mandatory redeemable preferred stock. If at least 80% of the consideration given to all shareholders (including continuing shareholders) is monetary, there is no limitation on the fair value block. If monetary consideration is under 80% of the total, the fair value block is limited to the monetary consideration percentage times the total common shares outstanding. Thus, for example, if the percentage of shares that would otherwise qualify was 90%, but monetary consideration given for common shares was 70%, the fair value block would be limited to 70% of the outstanding shares. The nonqualifying 20% interest would be assigned book value.