Wiley GAAP Policies and Procedures 1) Blockbuster uses a 40 years amortization timetable. This is not appropriate, as the current practice is to relate the amortization period to the nature of the business acquired. In this case, it falls under hi-tech acquisition whose amortization timetable should be 5-7 years. 2) 2 Intangible assets in 1988 $24,754,000.00 Less Intangible assets in 1987 $12,149,000.00 Intangible assets acquired in 1988 $12,605,000.00 Amortization of Intangible Assets Accumulated amortization in 1988 $769,000.00 Accumulated amortization in 1987 $196,000.00 Amortization for 1988 $573,000.00 Intangible assets acquired in 1988 $315,125.00 Amortization on earlier Assets $257,875.00 value of intangible assets $10,315,000.00 5 year amortization on: Earlier Intangible Assets $2,063,000.00 Intangible assets acquired in 1988 $2,521,000.00 Total Amortization $4,584,000.00 Earnings per Share Net Income $15,498,000.00 Less Amortization expense $4,584,000.00 $10,914,000.00 EPS $. 40 Contribution to EPS $. 16 If the 5-year amortization were to be applied to goodwill instead of the 40-year timetable, the company would have to recognize the goodwill in larger amounts.
That would mean net income would decrease hence Earnings per share would also fall. It would also decrease their tax liability as the business would deduct the amortization expenses from the net income. 3) 3 Net Income $15,498,000.00 Less Video Superstore Purchases $4,145,200.00 Adjusted net income $11,352,800.00 EPS $. 42 Contribution to EPS $. 14 Video Superstore purchases contributed $. 14 towards the Earnings per share. If these purchases were to be omitted from the 1988 revenues, Earnings per Share would fall by $. 14 to $. 42.
4) BV depreciates its “base stock” over a period of 36 months, on a straight-line. It makes no provision for salvage value of the “base stock”. 5) 5 Hit Tapes $7,835,750.00 Depreciation $3,134,300.00 Contribution to EPS 0.10 Earnings per share is given by (Net Income-Preferred Dividend) / Average Outstanding Common Stock. Therefore, if the depreciation method were to change to accelerated from straight-line, the business will record a higher value of depreciation expense. The business will have to recognize this higher value up front.
Net Income will therefore decrease due to this depreciation expense. The fall in Net Income will lead to a fall in the Earnings per Share. The contribution to Earnings per Share by the depreciation is $. 10 hence the accelerated depreciation will cause a $. 10 drop in Earnings per share. 6) 6 Sales to Franchisees $28,187,360.00 Cost of sales to Franchisees $21,313,240.00 Net Income From Sales to Franchisees $6,874,120.00 Contribution of EPS by Sales to Franchisees 0.25 Sales to Franchisees accounted for 68% of total sales. That amounted to $28,187,360, which translate to a net income of $6, 74,120. The total contribution of these sales towards Earnings per Share is $. 25 to the Earnings per Share.
Therefore, the sales to Franchisees raised Earnings per Share by $0.25. 7) 7 Area Development Fees $552,000.00 Initial Franchise Fees $2,415,000.00 Income from Franchisees $2,967,000.00 Net Income $15,498,000.00 Less Income from Franchisees $2,967,000.00 Adjusted income $12,531,000.00 EPS 0.467 Contribution to EPS $0.10 Area Development fees and initial franchise fees are a source of revenue for the business. They therefore increase the Net Income for the business. The net contribution of these fees to Earnings per Share is $. 10. Therefore, Earnings per Share will rise by $. 10 due to area development fees and initial franchise fees. 8) 8 EPS as per the Statements $. 58 Less contribution by Amortization $. 16 Less share of contribution to EPS by Video Superstore Purchases $. 14 $. 28 Less contribution by Accelerated Depreciation $. 10 $. 18 Less Contribution by Income from Franchisees $. 10 EPS $. 08 Add back contribution by sales to Franchisees $. 25 EPS $. 33 After making all the adjustments, BV’s Earnings per share is $. 33.
That is after subtracting the Earnings per Share contribution by amortization of goodwill, Video Superstore purchases, accelerated depreciation and Income from Franchisees and then adding back contribution by sales to Franchisees. 9) 9 Adjusted EPS $. 33 Add back contribution by Video Superstore Purchases $. 14 New EPS $. 47 Ignoring adjustments for Question number 3, the earnings per share after all the adjustments would be $. 47.
that is arrived at by adding back the Video superstore purchases to the adjusted Earnings per Share. 10) What would BV's Price/Earnings ratio be, given all of the above adjustments (including #3)? 10 Market Price per Share $33.50 Earnings per Share $. 47 Price/Earnings Ratio 100.96 Price/Earnings ratio is given by: Market price per share / Earnings per Share Therefore, with the adjustments, the Price/Earnings ratio is 100.96. That likely indicates higher growth in the future. It would therefore be a strong indicator to investors. The high P/E ratio will therefore attract investors. References Bragg, S.
M. (2008). Wiley GAAP Policies and Procedures. New York: John Wiley & Sons