Università Bocconi | Financial Reporting and Analysis (20214)

Question 1 (Investments)

On 1/1/2012, Tarheel Inc. purchased 40% of Bulldog Inc.’s common stock for $50,000 in
cash. At the date of purchase, Bulldog Inc.’s book value of total assets equaled $200,000 and
their book-value of total liabilities equaled $100,000. Bulldog Inc. owned a basketball arena
that with a book value of $50,000 and a fair market value of $60,000. The remaining useful
life of the basketball arena is 10 years. Bulldog’s net income in 2012 was $10,000, and it
distributed $5,000 in cash dividends at the end of 2012. On 1/1/2013, after serious
considerations, Tarheel Inc. reached the conclusion that Bulldog Inc. will underperform in
future years and sold all of its shares as a result. The company received $45,000 in cash for
Bulldog’s shares.

a. Record Tarheel’s journal entries related to the purchase transaction on 1/1/2012.

b. How much goodwill was created as a result of the purchase transaction?
c. Record all of Tarheel’s journal entries related to its investment in Bulldog during 2012,
subsequent to purchase.
d. What is the balance of the investment in Bulldog on Tarheel’s balance sheet on
12/31/2012?
e. Record Tarheel’s journal entries related to the sale of the Bulldog shares on 1/1/2013.
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 2 (Revenue Recognition)

Amsterdam LLC is a management consulting firm with expertise in the public sector. The
firm has recently been awarded a government contract to implement a comprehensive
reorganization of the public healthcare administration. The project has three stages: in phase
one, the strengths and weaknesses of the current system and the requirements for the new
system are assessed and evaluated; in phase two, a detailed plan for a reorganization is
devised based on the findings in phase one; in phase three, the plan is implemented. The
contract specifies that Amsterdam LLC will be paid $4,000,000 upon completion of the first
phase of the project, $5,000,000 upon completion of the second phase, and a final $7,000,000
upon conclusion of the third phase.
Amsterdam LLC tracks its cost by the number of staff hours spent. The firm’s accounting
group has calculated the total cost per staff hour to be $400. Amsterdam LLC begins its work
in 2014. At the end of the year, the firm has spent 6,000 staff hours on the project and
estimates that additional 24,000 hours will be incurred until completion. In 2015, the firm
delivers its phase-one completion report and receives the first installment payment. The
number of staff hours incurred in 2015 is 8,000 and the firm estimates at the end of the year
that another 18,000 hours will be required until completion. In 2016, the firm completes
phase two and receives the agreed-upon payment. During the year, 10,000 staff hours are
spent, and the firm anticipates that 6,000 more hours will be needed to complete the project.
In 2017, Amsterdam LLC completes the final phase and receives the last installment
payment. Another 7,000 staff hours are incurred in 2017.

a. Determine the amounts of revenue, cost of sales, and gross profit that Amsterdam LLC
recognizes in each year. Assume that the firm uses the percentage-of-completion method
and measures progress based on costs incurred.
b. Calculate the net contract asset (accrued revenue) or liability (deferred revenue) at the end
of each year.
c. Assume that the firm had estimated at the end of 2015 that 21,000 hours (instead of
18,000 hours) will be needed to complete the project. All other incurred and estimated
hours remain the same as above. Explain how this change in estimate would affect (i)
profit in 2015, and (ii) the total (aggregate) profit the firm recognizes over the contract
period.
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 3 (Revenue Recognition)

Jessica is the owner of a successful bakery, specializing in mini pistachio cakes, mini honey
cakes and brownies. She sells the mini cakes for $6 and the brownies for $2. Jessica
introduced new gluten-free, sugar-free cupcakes in 2014. To promote the new product, a $1
voucher that can be used for future purchases, valid for one year, was given to all customers
that bought a $5 cupcake. During December 2014, 1,000 cupcakes were sold, and Jessica
includes the related sales proceeds of $5,000 in the bakery’s 2014 income statement. None of
the vouchers related to these cupcakes had been redeemed by the end of 2014. Given the
success of the bakery Jessica expects 90% of the vouchers from these sales to be redeemed in
2015.

a. Explain why Jessica’s recognition of the cupcake revenue in 2014 is inconsistent with
IFRS and US GAAP.
b. Calculate the sales revenue from cupcake sales in 2014 under IFRS and US GAAP
revenue recognition rules and record the related journal entry. Assume that all sales are
for cash.
c. Recalculate the revenue allocation under the alternative assumption that, instead of a
discount of $1, the voucher provides a 50% discount on one item in the customer’s next
purchase. Assume that 20% of the vouchers are expected to be used for Brownies
purchases and 40% for Pistachio Cakes, and that the remaining 40% will go unused.
 Università Bocconi | Financial Reporting and Analysis (20214)

Question 4 (Accounts Receivable)

The information on the next two pages is taken from the disclosures on accounts receivable in
the 2018 financial statements of Cementos Pacasmayo, a cement company from Peru and one
of the country’s largest employers. Answer all of the following questions using the data for
total receivables classified as financial assets, and only those. Be careful to interpret the data
correctly. All amounts are in thousands of Peruvian soles.

a. Record the changes in the allowance for doubtful accounts in 2018, excluding recoveries.
State the income statement impact of each entry.
b. Calculate the probability, given the data provided, that a receivable outstanding at the end
of 2018 will become uncollectible. Do the same calculation for 2017 and compare.
c. Consider the probability of non-collection for past-due receivables only. Explain, with
reference to the data, whether this probability (on average across all past-due balances)
should have increased or decreased from 2017 to 2018. Explain whether and why your
conclusion differs from the change in the default probability for total receivables, as
calculated above. Assume that the company has not changed its accounting policies since
2017.
 Università Bocconi | Financial Reporting and Analysis (20214)

Cementos Pacasmayo S.A.A. and Subsidiaries

Notes to the consolidated financial statements
7. Trade and other receivables
(a) This caption was made up as follows:
Current Non-current
2018 2017 2018 2017
S/(000) S/(000) S/(000) S/(000)
Trade receivables (b) 77,083 81,299 — —
Indemnification from insurance 10,366 9,380 — —
Other receivables from sale of fixed assets 3,967 3,574 923 3,221
Accounts receivable from Parent company 3,209 1,372 — —
and affiliates, note 27
Loans to employees 1,032 1,091 — —
Interests receivables, note 6(c) 164 159 — —
Funds restricted to tax payments 331 73 — —
Other accounts receivable 3,353 2,036 — —
Allowance for expected credit losses (c) (2,295) (1,685) — —
Financial assets classified as receivables (d) 97,210 97,299 923 3,221

Value-added tax credit 2,308 2,177 3,402 3,745

Tax refund receivable 206 42 9,241 9,241
Allowance for expected credit losses (c) — — (9,034) —

Non-financial assets classified as receivables 2,514 2,219 3,609 12,986

99,724 99,518 4,532 16,207

(c) The movement of the allowance for expected credit losses is as follows:
2018 2017 2016
S/(000) S/(000) S/(000)
Opening balance 1,685 781 667
Additions 9,717 1,190 114
Recoveries (62) — —
Write-off (11) (286) —

Ending balance 11,329 1,685 781

As of December 31, 2018, the additions include S/9,034,000 related to the allowance for
expected credit losses for other receivables (see note 23), and S/683,000 related to the
allowance for expected credit losses for trade receivables (S/1,190,000 as of December 31,
2017), which are presented in the sales line of the consolidated statement of profit or loss.
 Università Bocconi | Financial Reporting and Analysis (20214)

(d) The aging analysis of trade and other accounts receivable as of December 31, 2018 and 2017,
is as follows:
Past due but not impaired
Total Neither past due < 30 30-60 61-90 91-120 > 120
nor impaired days days days days days
S/(000) S/(000) S/(000) S/(000) S/(000) S/(000) S/(000)
2018 98,133 29,346 43,441 9,303 3,364 620 12,059
2017 100,520 79,795 7,549 1,612 1,710 453 9,401

See Note 31 on credit risk of trade receivables, which explains how the Group manages and
measures credit quality of trade receivables that are neither past due nor impaired.