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MediaMax – Part 1 (solutions)

MediaMax - Part 1 (solutions): this video will guide you through the solutions to the MediaMax case. Please watch it carefully and ... pause
Hi everyone and welcome back to the introduction to financial accounting course. My name is Amedeo Pugliese. and in this session boy go through the transactions and activities from the media Mike’s company that you should have already engaged with in the previous steps. The idea of this session is reviewing what you have done so that you get additional guidance. In this particular activity for week two we will show the 26 transactions and we’ll try and make a first rough estimate of the trial balance and the performance at the end of the year prior to doing all the accrual based adjustments. Let’s get started. Sandip and two are two friends with a common interest in animation movies. Sandip is a creative designer.
Sue is an IT engineer specialized in animation. They’re both fed up with their current jobs and they join forces to start a new venture. Media makes the mission of the company is supporting young directors in realizing movies in which the animation component is prevailing. Sandip and to decide to invest 280,000 each and provide equity to a new entity. The painting capital is immediately available to media markets on its bank account and on January the 15th. Media Max kicks off its activities. The way in which I will review the 26 transaction is fairly standard and consistent with what you have seen in weeks 1 and 2.
So we start with recording the individual transaction by reporting the transaction or indeed the date and the amounts and items that are involved. Next, we will use a transaction balance which is useful to keep track over and over where when the transactions accumulate over time Transaction to purchase of a long lived asset. On February 10th media Max purchases a machinery worth 128,000. The payment is in the bank transfer. The machinery has an expected useful life of 4 years and its operations start on July the 1st of the same year. So here we have transaction number two. We have an increase in machinery for 128,000 and an increase in bank for the same amount.
In the statement like form we have transactions 1 and 2 affect both the bank that is now worth 432,000 and we see the appearance of machinery connected the transaction to whose overall value is 128,000 on the right hand side of the statement where we see liabilities and equity. We see that equity has kept the same amount. The totals of the left hand side and the right hand side are the same. And equals 560,000
Transaction number three: financing. On March 1st of the first media Max is successful in securing an interest free loan supported by the nation agency for media companies. The amount of debt 75000 to be repaid in three years via biannual installment and the first instalment is due on September the 1st. As of now what we are interested in is transaction number three. There is an increase in bank that corresponds to an increase in
loan interest free both for the same amount: seventy five thousand. When we move down and look at the current transaction balance sorry we see that the value of the bank has gone up by 75,000 and on the right hand side. We know this the appearance of loan next to a transaction number 3. for seventy five thousand transaction.
Number four: from now on I will try and speed up a little bit because you shouldn’t be familiar with the templates and the approach on April the 1st media Max purchases videotaping materials and consumables for thirty seven thousand. Payment is due in 30 days. What is interesting here is that the bank is not affected by the transaction. In fact as you can see in the statement like forum there is no number for next to bank and for the first time we see the appearance of payables for thirty seven thousand transaction type purchase of services media starts renting a new office space downtown.
The deal is such that the cash payment upfront for the next month carries a discount of 15% on the food price. So it is a relatively good bargain. Rental begins on May the 1st and the total cash disbursement is three thousand six hundred. Transaction id number five. There is prepaid rental office that go up by 3600 and the bank will go down by 3600. And this is also reflected in the transaction balance underneath where you see next to bank and item number five and on the same column on the left hand side you see that the prepaid rent has gone up by the same amount. whereas the right hand side of the transaction balance is unchanged.
Transaction number six: on July the 1st media Max negotiates a short term loan for 30000 with a bank. Repayment in year one of the whole capital plus interest on the loan is 8 percent per annum. The amount is transfer than the bank account of media Max net of fees for 600. Please notice that in this case the loan has gone up by 30000. But the bank does not go up by the same amount because the bank withholds fees for 600. It’s very interesting looking at what happens in the statement like form because underneath because you can see that next to the bank item we have been attached the number six.
The fees are a cost which we will handle later on and are on the left hand side. What has on the right hand side there is an increase in loan by 30000. The totals should be equal then in fact they are at 702,000.
Transaction number seven: On July the 1st to the employer’s specialist start using the machinery. Well this is not relevant for accounting purposes and no transaction is recorded because there is no cash no new contract. nothing that sparks the accounting transactions.
Transaction number eight: Salaries are paid out to all staff a bank transfer of twelve thousand is issued on July 10th the transaction I.D. we see that the salaries are recorded for 12000. Salaries are an expense and the bank will go down by 12000. In the statement like form you see that Item number eight features next to the bank item and the salary item on the same left hand side of the trial balance and on the right hand side everything is unchanged. Therefore the totals are identical.
Transaction number nine: Sandip to hire a new chief financial officer in charge of the account and financing for the corporation. This transaction is again not relevant for accounting purposes
Transaction 10: on August 5th a series of bills for the usage of electricity gas and internet are invoiced to media Max. The total cost is 1400 and would be settled within in 14 days. Here again as we have seen in a previous transaction there is no cash disbursement but there is the appearance or the reappearance of payables. In fact you see that on the left hand side of the statement like forum we have bills next to the number 10 for 1400. And here we see that we increase the value of payables from thirty seven thousand to thirty eight thousand four hundred transaction eleven. The invoices related to the bills are now said to be in cash for the full amount.
What happened 14 days after receiving the bills? The media max company settles the bills so the payables will go down and correspondingly the value of bank will go down. So as you can see transaction number eleven features next to the next to the bank item and next to the payables item both on the left and right hand side of the statement like form.
Transaction twelve: one of the owners purchases a new car for 4000 using a her money. Clearly this is Sue replacing her car but this transaction is not relevant for accounting purposes.
Transaction 13: media Max lends ten thousand to one of its employees on September the 1st reimbursement is expected to occur in six months. The interest charged equals its own interest rate which is 8 percent per annum. Here we see that the bank is now lending money so there is a loan to an employee for 10000 that corresponds to a reduction in the value of the bank. And this is reflected both in the recording of the transaction as well as in the statement like form.
On August 10th: Media Max sells services for 120,000. The payment is 20 percent upfront and the rest in 60 days. This is only a bit more complex transaction because you see that on the left hand side you have an increasing bank and receivables respectively for twenty four thousand ninety six thousand. Whereas on the right hand side we have sales of services for one and then 20000. If you look at the table underneath you see that the bank the receivables and the sales services are involved and you notice that because there is a number 14 attached next to them the total value of the left hand side and right hand side columns equals to eight hundred and twenty two thousand.
Transaction 15: on September the 1st media market signs a contract for the sale of consulting and training services to beta. The total value of the contract is seventy two thousand. The training will be delivered proportionally each month in the next 12 months. The payment will occur at the completion of the training in one lump sum. What happens here? This is a kind of peculiar transaction because the services are not offered or delivered yet Nor there is a cash disbursement. So what we recorded here is a credit on the side of media Max so we record the receivables for seventy two thousand and we have on the right hand side the sale training for seventy two thousand.
However we must be careful because later on we will gather additional information on how to handle and now to assess the performance of media max Transaction number 16 on October the 1st media Max purchase is additional equipment for 12000. Payment is one third in cash and the rest in four months. The equipment will be deployed after the end of the year. Here have a look at the transaction. The impact of the equipment goes up by 30000 transaction I.D. number 16 and the bank goes down by 4000 and payables go up by 8,000. And this is reflected into the statement like form underneath again.
Transaction number 17: the release of a new software will form enhance the dubbing in movies is of great interest to media max and they choose to buy the license to use it for 15000. The useful life of the software is three years. The terms of the agreement require that the payment is due on February 15th next year for the full amount the license is operational from September 1st. See how we record this transaction. There is an increase in the value of the license for a software and there is a payable because media max is committing on paying the supplier on February the 15th next year.
If you haven’t look at the table the transaction like form you see that there is an increase in the value of a license software on the left hand side by the number 17 and there is an increase in payables going up from 45,000 to 60,000.
Transaction number 18: following a visit to this Scrovegni Chapel in Padova, Sandip discovers a passion for paintings from the Middle age and buys a painting from Giotto for fifty two thousand. However the painting doesn’t look great in his apartment. This transaction is not relevant for accounting purposes obviously because it is related only to Sandeep as a person as an individual not to the company. Transaction number 19 media Max bids for the provision of services to major international broadcaster. The contract is five years. If successful the total amount of the bid these 300000 spread in five years. Again this transaction is not relevant for accounting purposes.
transaction number 20: on November 12th.Upon completion of a positive first year as you and Sandeep decide to advertise a CEO position the salary would be approximately 65,000 each year. This transaction is again not relevant for accounting purposes although very relevant for the life of the company. But there is no cash disbursement. Therefore we move forward.
Transaction number 21: Sue me met with the CEO of a major broadcaster and media Max will become the main provider of content to this company. The estimated revenue stemming out of this contract are 84,000 in the next year. Again this transaction is not relevant for accounting purposes because it is not much more than a hope to have a new customer. Given that there is no binding contract nothing can be recorded.
Transaction 22: on November the 15th media Max buys part of a building to accommodate the admin team. The value of the transaction is 60000. Payment is on the spot via a bank transfer. There is a fairly straightforward transaction because we see that the building is increased by 60000 or I should say it appears a building and the bank goes down by 60000. As you can see the value of the transaction is the same equaling 917,000. Transaction 23. On December the 27 media market finalizes the purchase of commercial land on which they are planning on building in the new headquarter close to Palo Basso. Transaction 24. Following on transaction number four on May the 1st.
There is a repayment of payables due to the purchase of consumables so transaction 25 payables will go down by thirty seven thousand and the bank will go down by the same amount. Transaction number 26 following on transaction 14 on October the 10th also pays ninety six thousand for the services acquired in August. Therefore Media Max cashes in ninety six thousand that offset the value of receivables for the same amount. Here we are getting to an important turning point because once we take into account all the 26 transactions. This is what you should have found yourself. The total of assets is 995,000. The total of liabilities plus equity equals 995,000.
In addition we required you to estimate performance prior to the end of your adjustment. What if we were to estimate performance prior to the adjustment? If we only took revenues and expenses as recorded throughout the year, we can extract the the following information from the previous slide. Of course we do not take into account bank and loans that the company has generated throughout the year and we will match expenses to revenues. If we did so you will see that there will be a net income that is negative which will be a loss by 217600. This value comes from by comparing the total value of expenses.
Four hundred and nine thousand six hundred with the total value of revenues which is 192,000.
However the key point here is the following: We are recording as an expense all the building, commercial land, license for software, equipment. All these items that have a multi-year period and they have a multi-year useful life and will have to take this into account prior to moving to the next slides.

These last three steps are really one whole activity. Once you have attempted to answer the prior poll (what is the profit/loss) MediaMax realized? you want to make sure to review each and all individual steps leading up to the estimation of income.

MediaMax – Part 1 (solutions): this video will guide you through the solutions to the MediaMax case. Please watch it carefully and … pause

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