Financial reporting Essay Example
Topic: Financing Reporting
Discuss whether Comoros Ltd is a subsidiary of any of the other entities.
Comoros Ltd is the holding parent company because it has the proportional ownership and control of its subsidiary firms this being Brunei Ltd, Burma Ltd and Bhutan Ltd. Comoros ltd as the holding parent company should hold a higher percentage in shares that the subsidiary firms that give the holding parent company, in this case the Comoros ltd, the full authorization to exercise full control over the subsidiary firms, that is Burnei, Burma and Bhutan Ltd. Comoros Ltd has also the right to exercise and control the appointment of board of directors by the subsidiary companies and thus also influencing their behaviors ’ (Georgesen & Harris 2000).This is evident by the representation of the characteristics which they exhibit. They carry the same voting rights in the general meeting of shareholders at Comoros Ltd which is their holding parent company to appoint two directors so as to oversee the affairs of its parent company on their behalf. Burnei ltd, Burma ltd and Bhutan Ltd are each an individual entity and thus they have limited liability and thus they cannot be personally liable in case of a loss or dissolution at Comoros Ltd. Among other characteristics of subsidiary companies include the fact that they are the last to be considered when it comes to settling debt in case of bankruptcy and have the right to receive the dividends.
Brunei Ltd as per the agreement with Burma Ltd and Bhutan Ltd may choose not to exercise its right to sell the call options but through the statutory basis of voting, the three companies will use their six directors who are representatives of the companies in the voting process. They will vote in favour of Burnei Ltd and thus it will acquire total control as the main subsidiary to the holding parent company (Low 2004).The Burnei ltd in collaboration with Burma ltd and Bhutan ltd can also use cumulative basis of voting whereby they may take all their voting shares from all the companies and split the shares in accordance to the way they want. Burma and Bhutan ltd will thus take all their shares and choose not to vote for their representatives and on the contrary vote for Burnei Ltd only.
Detailed logical response explaining which depreciation rate should be used and to what amount it should be applied.
Depreciation of an asset is the deductable amount that is dependent upon the useful life of an asset and it usually shows the value by which an asset has been used up. It can also include the amortization of the asset with a pre determined useful life or undeterminable economic benefit. Straight-line depreciation method is uniformly calculated throughout the life of a project or asset. When the asset is being sold, as in the case of Jessica Ltd selling off the asset to Amelie Ltd which is its subsidiary, the amount accounted as accumulated depreciation is reversed and it becomes the initial value of the asset and by this all its records are scrapped from the company’s accounts records (Skousen et al. 2004). The straight line depreciation method is mainly used where the pattern regarding its economic life is easily determined.
Jessica Ltd is a subsidiary to Amelie Ltd. Jessica Ltd decides to sell the asset to Amelie ltd. Its original value is $200,000.In straight-line method of depreciation; depreciation is uniform throughout the life of the asset. The disposal value of the asset at the time of sale is $80,000 which is the cost of the asset at the time of sale while depreciation is $ 150,000 and thus the company made a profit of $30,000($150,000+ $80,000-$200,000=$30,000) Profit of $30,000 is what Jessica Ltd earned out of the disposal of the asset up to the time of its sale. The depreciation used was 10% of the cost of the asset so as to arrive at that depreciation amount. Jessica Ltd depreciated the asset for 10yrs (10%x $150,000) = $15,000 and this is the calculation that shows how the number of the useful life of the project was arrived at. ($150,000/$15,000)=10years. 10 years is the time number of years that Jessica Ltd used the asset before they disposed it off (Stansberry 2005).
The projected life of the asset by Amelie Ltd is 5years. ($80,000 x 20%) =$16,000, ($80,000/$16,000) =5years.5years is the estimated useful life of the asset after it was sold to Amelie ltd. The projected life of the asset is 15 years (10+5) =15years.The group accountant, upon evaluation of the consolidated group, should use 10% per annum straight line depreciation method as the depreciation rate and accountant should also use $200,000 for the previous years as the original amount in calculating Jessica ltd’s depreciation(Skousen et al, 2004). Currently due to the sale of the asset, the group accountant should use 20% per annum straight line depreciation method as the depreciation rate with the cost of $80,000.
The depreciable life of the above asset mainly determines the depreciation expense. Depreciation Expense is calculated by dividing the depreciable amount with the estimated useful life of the asset. The rise in depreciation from 10% to 20% rate will affect the economic benefit of the asset from when it starts being used by Amelie Ltd. This is because Amelie ltd has the choice to manipulate the current and the future returns offered by the asset. Jessica Ltd is likely to record the depreciation as a reduction in its revenue on its income statement for recording keeping. The likely causes as to why the depreciation rate shifted from Jessica ltd to Amelie ltd is dependent on a number of factors such as the operational factors in which the asset is tasked into such as number of the shifts the assets is put into, the level of maintenance while at use and also the maintenance when the asset is not being used such as greasing and dusting. There could be also the reason that also leads to the asset to be of great use at Jessica ltd such as the demand of the commodity was high and so the asset service had to be highly maintained for efficiency (Skousen et al. 2004). The asset could also be almost expiring and thus the reduction in its usefulness to Amelie ltd. The depreciation rates that are given should be used to reflect and show the pattern of the asset after the end of every financial year.
Georgesen, J, C & M, H 2000, The balance of power: interpersonal consequences of differential power and expectancies, Personality and Social Psychology Bulletin 26 (10):1239-1257.
Low, C, K 2004, Road map for corporate governance in East Asia, A, Nw, J, Int’l L, & Bus, 25, 165.
Skousen, K, F, Earl K, S & James D, s 2004, Intermediate accounting,15th ed. Mason: South-Western.
Stansberry, G 28th Feb 2005, The do’s & don’ts of depreciation, Rental equipment.
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