ACCT1115 Case Study, Instructor: Zoheb Rupani

Heavy Equipment and Machinery Inc. (HEMI)

Instructions
Students should work individually as this is a practice towards the final exam. Students can then discuss
within respective Groups ultimately submitting one final file via email to the instructor.

Any errors or typos noted in the case must be informed to the instructor, at the earliest.

Group submission must be emailed to zohebr@nait.ca by Friday, 29th July 2022, end of day i.e. 23:59.

Any submissions, or part of submissions, received after the stated due date, will not be marked .

The submission must consist of:

1. This MS Word file with answers to the Accountant’s questions.

2. Excel file with adjusting entries entered resulting in adjusted trial balance and common size
statement of Income for HEMI and Wajax Corporation.
3. A new MS Word file with a one-page report comparing HEMI to its competitor (Wajax
Corporation).

Case Study Information

You have been hired as a Financial Consultant by Heavy Equipment and Machinery Inc. (HEMI). HEMI is
a private corporation that has finished its first year of operations. HEMI’s owners plan to list the
business on the Toronto Stock Exchange (TSE) in the next 5 years; accordingly, are keen to have their
financial statements reflect the business in the best light possible using the IFRS Accounting Standards.
HEMI’s operations are considered to be similar to Wajax Corporation listed on the TSE. In addition to
the questions outlined below, the Accountant has provided you with the following two files:

 An Excel spreadsheet with information from the HEMI’s accounting records and HEMI’s
Statement of Income created by formulas.
 Selected Wajax Corporation’s publicly available financial information.

Your consulting assignment requires you to complete the following:

1. Answer the Accountant’s questions outlined below (including any necessary adjusting journal
entries).
2. Post the adjusting journal entries that you have identified in Step #1 to the Excel trial balance
spreadsheet.
3. Enter Wajax Corporation’s 2018 Statement of Income beside HEMI’s 2019 Statement of Income
and enter the formulas to prepare common size Statements of Income for HEMI and Wajax
Corporation.
4. Prepare a one-page report analyzing HEMI’s financial information against Wajax Corporation.

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 ACCT1115 Case Study, Instructor: Zoheb Rupani
Heavy Equipment and Machinery Inc. (HEMI)

Inventory
1. HEMI has a perpetual inventory system with purchases and sales being recorded by its computerized
inventory system using the weighted average cost method. HEMI has purchased and placed heavy
equipment transmissions at Suncor in Fort McMurray on consignment. Suncor benefits from having
the spare part readily available and HEMI saves on storage costs. Accountant has been asked by
HEMI’s management to provide a profitability report for the consignment arrangement with Suncor.
The Accountant extracted the sales ($20,500,000) and cost of sales ($18,504,180) numbers from
HEMI’s accounting system. The Accountant wants you to:

a. Compute the gross profit using the first-in-first out (FIFO) method of costing inventory and
the following purchase and sale information (show your calculations):

Date Activity Unit Total Cost Total Sales

s Revenues
December 1 Purchase 15 $6,000,000
December 10 Purchase 16 7,200,000
December 11 Sale (Used by Suncor) (20) $8,500,000
December 15 Purchase 16 8,800,000
December 20 Sale (Used by Suncor) (20) 12,000,000

b. Explain why the gross profit is higher under one method when compared to the other
method.

2. HEMI’s management is cost conscious and does not spend money unless the benefits exceed the
amount spent. Accountant understands that physical inventory count is good internal control
practice; however, he wants you to explain the benefit of a physical inventory count when HEMI has
a perpetual inventory system and the inventory is physically protected.

3. Accountant wants you to evaluate the following major transactions and provide adjusting journal
entries, if necessary. For each item, explain why you are (or are not) adjusting HEMI’s current
account balances and provide supporting calculations for adjustments:

a. On December 21, HEMI ordered 25 transmissions for a total cost of $15,000,000 which were
shipped on December 27 with the terms FOB Destination. This inventory was not received
at year-end and has not been recorded in HEMI’s accounting records.

b. There is a product in inventory that cost HEMI $11,000,000 which management has
indicated will be sold close to its cost. Management is estimating selling price to be
$12,000,000 and HEMI will have to pay the transportation costs of approximately
$2,000,000 on behalf of its customer(s).

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 ACCT1115 Case Study, Instructor: Zoheb Rupani
Heavy Equipment and Machinery Inc. (HEMI)
Capital Assets
1. HEMI purchased land and building for $280,000,000 on September 1, 2019. Accountant
recorded this amount in the Land general ledger account because he did not know how to
allocate the costs between land and building. Your research indicates that similar land could be
purchased for $80,000,000 and the building was appraised at 240,000,000 for insurance
purposes. HEMI’s management purchased the building knowing that it needed improvements
of $3,000,000 to make it usable for HEMI’s needs. Accountant recorded these improvements in
the Repairs and Maintenance expense general ledger account. Management expects to sell the
land for $200,000,000 and building for 20,000,000 at the end of its useful life of 20 years.
HEMI’s management want to use the cost method of valuing capital assets in order to save on
the costs of appraising capital assets. The Accountant wants you to:

a. Allocate the $280,000,000 cost between land and building (show your calculations).
Provide an adjusting journal entry to transfer the building costs to the proper account.

b. Recommend, with justification, the appropriate accounting treatment for the

$3,000,000 of building improvement costs. Provide an adjusting journal entry, if any, to
properly account for the building improvement costs.

c. Recommend, with justification, the appropriate depreciation method for building.

Compute the depreciation expense for the year-ended December 31, 2019 showing
your calculations. Provide a depreciation expense adjusting journal entry.

2. HEMI paid $10,000,000 for equipment to crate its inventory for shipping. This amount has been
recorded in the Equipment general ledger account. This equipment is expected to be useful for
500,000 crates at which point it will be taken to a recycling depot. In 2019, the equipment was
used to create 50,000 crates. Accountant wants you to recommend, with justification, the
appropriate depreciation method for the equipment. Compute the depreciation expense for the
year-ended December 31, 2019 showing your calculations. Provide a depreciation expense
adjusting journal entry.

3. Accountant meticulously calculated that $3,000,000 of advertising and promotion costs were
spent to build customer loyalty. This amount has been recorded in the Goodwill general ledger
account. Accountant wants you to recommend, with justification, the appropriate accounting
treatment for costs incurred to build customer loyalty. Provide an adjusting journal entry, if any,
to properly account for costs incurred to build customer loyalty.

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 ACCT1115 Case Study, Instructor: Zoheb Rupani
Heavy Equipment and Machinery Inc. (HEMI)

Current and Long-term Liabilities

1. Yukon territorial government entered into an agreement with HEMI to open a warehouse in
Whitehorse. The agreement required the Yukon territorial government to prepay $10,000,000
for future equipment purchases and to buy all of its equipment from HEMI over the next 5
years. The government also agreed to only use $9,000,000 of the prepayment (i.e., give HEMI a
“breakage” if equipment is supplied from the Whitehorse warehouse). In 2019, HEMI supplied
$1,800,000 of equipment from its Whitehorse warehouse. The Unearned Revenues general
ledger account is at a balance of $8,200,000 ($10,000,000 less $1,800,000). No adjustment has
been made for the “breakage”. Accountant has computed the “breakage” revenue at $200,000
that HEMI can recognize for the year-ended December 31, 2019. Provide an adjusting journal
entry to recognize the breakage revenue.

2. HEMI took out a mortgage of $150,000,000 on September 1, 2019 to purchase the land and
building (noted in the Capital Assets section above). This amount has been recorded in the
Mortgage Payable general ledger account. Accountant has recorded the blended interest and
principal monthly payments in the Interest Expense general ledger account. You have been
provided with the following amortization schedule for the mortgage payable:

Opening Interest Closing

Month balance expense Payment balance
September, 2019 150,000,000 525,000 1,532,976 148,992,024
October, 2019 148,992,024 521,472 1,532,976 147,980,520
November, 2019 147,980,520 517,932 1,532,976 146,965,476
December, 2019 146,965,476 514,379 1,532,976 145,946,879
Total 2,078,783 6,131,904

The Accountant wants you to complete the following:

a. Using the above amortization schedule, calculate the total principal reduction in the
2019 fiscal year (show your calculations).
b. Provide an adjusting journal entry to move the amount you computed in Part (a) above
from Interest Expense to reduction in Mortgage Payable.
c. $12,500,000 of mortgage principal will be paid in the next 12 months. Provide an
adjusting journal entry to move this amount to Current Portion of Mortgage Payable
account.

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 ACCT1115 Case Study, Instructor: Zoheb Rupani
Heavy Equipment and Machinery Inc. (HEMI)

3. On November 4, 2019 HEMI was sued for $50,000,000 in damages because one of its
transmissions was incorrectly installed by Suncor repair technicians which resulted in significant
property damage. HEMI’s lawyers are of the opinion that the lawsuit is without any merit as
the transmission supplied by HEMI was working properly. The problem was with the incorrect
installation of the transmission. HEMI plans to defend itself through the Canadian legal system
which may take as long as 3 years. The Accountant has recorded $40,000,000 in the general
ledger because $10,000,000 of damages will be paid for HEMI’s insurance company. The
Accountant wants you to explain the appropriate accounting treatment for this contingent loss.
Provide an adjusting journal entry, if any, to properly account this contingent loss considering
that the contingent loss is already recorded in the accounting records.

Shareholders’ Equity
1. Preferred shares cash dividends have been declared and paid. Common share dividends have
been declared, but not paid. HEMI is authorized to issue 50,000,000. HEMI issued 12,000,000
common shares on January 2, 2019 (i.e., these were the outstanding shares). HEMI’s common
shares are valued at $21 per share. The Accountant wants you to use (or disregard) any relevant
information in preparing the trial balance.

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