Summary of Significant Accounting Policies (Policies) | 3 Months Ended |
Mar. 31, 2014 |
Summary of Significant Accounting Policies [Abstract] | ' |
Basis of Accounting and Presentation | ' |
Basis of Accounting and Presentation |
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The accompanying consolidated financial statements have been prepared on the accrual basis of accounting. The consolidated financial statements as of and for the three months ended March 31, 2014 and 2013 include Wonhe High-Tech, World Win, Kuayu, Shengshihe Consulting and its VIE, Shenzhen Wonhe. All significant intercompany accounts and transactions have been eliminated in consolidation. |
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The unaudited interim consolidated financial statements of the Company as of March 31, 2014 and for the three months ended March 31, 2014 and 2013, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC which apply to interim financial statements. |
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Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K for the fiscal year ended December 31, 2013, previously filed with the SEC. In the opinion of management, the interim information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for future quarters or for the year ending December 31, 2014. |
Variable Interest Entity | ' |
Variable Interest Entity |
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Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a reporting entity if that reporting entity is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a reporting entity, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the reporting entity is the primary beneficiary of the entity. |
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Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The reporting entity’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de facto agents, have the unilateral ability to exercise those rights. Shenzhen Wonhe’s actual stockholders do not hold any kick-out rights that affect the consolidation determination. |
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Through the VIE agreements disclosed in Note 1, the Company is deemed the primary beneficiary of Shenzhen Wonhe and, accordingly, the results of operations of Shenzhen Wonhe have been included in the accompanying consolidated financial statements. Shenzhen Wonhe has no assets that are collateral for or restricted solely to settle its obligations. The creditors of Shenzhen Wonhe do not have recourse to the general credit of Shengshihe Consulting or its parent entities. |
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Principally almost of the assets recorded on the balance sheets of the Company are owned by Shenzhen Wonhe. In addition, all of the unrecognized revenue-producing assets of the Company, such as intellectual property and the assembled workforce, are owned by Shenzhen Wonhe. Likewise, all of the recognized assets of Shenzhen Wonhe are recorded on the Company’s balance sheets, and all of the unrecognized assets of Shenzhen Wonhe are utilized for the benefit of the Company. |
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The following are financial statement amounts and balances of Shenzhen Wonhe that have been included in the accompanying consolidated financial statements. |
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| | March 31, | | | 31-Dec-13 | | | | | |
ASSETS | 2014 | | | | |
| | (Unaudited, | | | | | | | | |
| | In U.S. $) | | | (In U.S. $) | | | | | |
Current assets: | | | | | | | | | | |
Cash | | $ | 34,509,192 | | | $ | 35,007,670 | | | | | |
Inventory | | | 163,991 | | | | 165,407 | | | | | |
Prepaid expenses | | | 65,054 | | | | 65,616 | | | | | |
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Total current assets | | | 34,738,237 | | | | 35,238,693 | | | | | |
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Fixed assets | | | 485,618 | | | | 489,810 | | | | | |
Less: accumulated depreciation | | | (227,815 | ) | | | (209,301 | ) | | | | |
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Fixed assets, net | | | 257,803 | | | | 280,509 | | | | | |
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Other assets: | | | | | | | | | | | | |
Intangible assets | | | 15,139 | | | | 17,451 | | | | | |
Other assets – principally security deposits | | | 27,173 | | | | 27,343 | | | | | |
Prepaid income taxes | | | 2,612,574 | | | | 2,635,124 | | | | | |
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Total other assets | | | 2,654,886 | | | | 2,679,918 | | | | | |
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TOTAL ASSETS | | $ | 37,650,926 | | | $ | 38,199,120 | | | | | |
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LIABILITIES | | | | | | | | | | |
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Current liabilities: | | | | | | | | | | |
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Payable to WFOE(1) | | $ | 19,191,267 | | | $ | 19,191,267 | | | | | |
Due to Wonhe High-Tech International, Inc.(2) | | | 9,864,355 | | | | 9,949,498 | | | | | |
Accounts payable | | | 14,592 | | | | 14,717 | | | | | |
Payroll payable | | | 19,377 | | | | 20,123 | | | | | |
Taxes payable | | | 431 | | | | 561 | | | | | |
Loans from stockholder | | | - | | | | - | | | | | |
Accrued expenses and other payables | | | 177,212 | | | | 178,740 | | | | | |
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Total current liabilities | | | 29,267,234 | | | | 29,354,906 | | | | | |
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TOTAL LIABILITIES | | $ | 29,267,234 | | | $ | 29,354,906 | | | | | |
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| -1 | Payable to WFOE represents amounts due to Shengshihe Consulting under the Exclusive Technical Service and Business Consulting Agreement for consulting services provided to Shenzhen Wonhe in exchange for 95% of Shenzhen Wonhe’s net income and monthly payments of RMB 50,000 (approximately US$8,070). The monthly payments had been paid in full as of March 31, 2014. | | | | | | | | | | |
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| -2 | Payable for issuance of common stock represents cash received by Shenzhen Wonhe in consideration of 14,480,000 common shares issued by Wonhe High-Tech International, Inc. on May 2, 2013 at $0.68 each (total approximately US$9,800,000). | | | | | | | | | | |
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| | For the Three Months Ended | | | | | |
March 31, | | | |
| | 2014 | | | 2013 | | | |
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Sales | | $ | - | | | $ | 9,617,400 | | | | | |
Net income (loss)(3) | | | (222,241 | ) | | | 4,314,388 | | | | | |
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| -3 | Under the Exclusive Technical Service and Business Consulting Agreement, 95% of the net income is to be remitted to WFOE. | | | | | | | | | | |
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| | For the Three Months Ended | | | | | |
March 31, | | | | |
| | 2014 | | | 2013 | | | | | |
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Net cash (used in) provided by operating activities | | $ | (199,988 | ) | | $ | 7,608,147 | | | | | |
Effect of exchange rate changes on cash | | | (298,490 | ) | | | 81,662 | | | | | |
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Net change in cash | | $ | (498,478 | ) | | $ | 7,689,809 | | | | | |
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The Company believes that Shengshihe Consulting’s contractual agreements with Shenzhen Wonhe are in compliance with PRC law and are legally enforceable. The stockholders of Shenzhen Wonhe are also the senior management of the Company and therefore the Company believes that they have no current interest in seeking to act contrary to the contractual arrangements. However, Shenzhen Wonhe and its stockholders may fail to take certain actions required for the Company’s business or to follow the Company’s instructions despite their contractual obligations to do so. Furthermore, if Shenzhen Wonhe or its stockholders do not act in the best interests of the Company under the contractual arrangements and any dispute relating to these contractual arrangements remains unresolved, the Company will have to enforce its rights under these contractual arrangements through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements, which may make it difficult to exert effective control over Shenzhen Wonhe, and its ability to conduct business may be adversely affected. |
Use of Estimates | ' |
Use of Estimates |
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The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. |
Foreign Currency Translations | ' |
Foreign Currency Translation |
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Almost all of the Company’s assets are located in the PRC. The functional currency for the majority of the operations is the Renminbi (“RMB”). For Kuayu, the functional currency for the majority of its operations is the Hong Kong Dollar (“HKD”). The Company uses the US Dollar for financial reporting purposes. The unaudited consolidated financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.” |
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All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of operations and other comprehensive income amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s consolidated financial statements are recorded as other comprehensive income. |
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The exchange rates used to translate amounts in RMB into US dollars for the purposes of preparing the consolidated financial statements are as follows: |
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| | March 31, | | | December 31, | | | March 31, | |
2014 | 2013 | 2013 |
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Balance sheet items, except for stockholders’ equity, as of year end | | | 0.1622 | | | | 0.1636 | | | | 0.1592 | |
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Amounts included in the statements of income, statements of changes in stockholders’ equity and statements of cash flows | | | 0.1634 | | | | N/A | | | | 0.1591 | |
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For the three months ended March 31, 2014 and 2013, foreign currency translation adjustments of $(323,599) and $84,321, respectively, have been reported as other comprehensive income. Other comprehensive income of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17, “Exceptions to Comprehensive Recognition of Deferred Income Taxes,” the Company does not recognize deferred U.S. taxes related to the undistributed earnings of its foreign subsidiaries and, accordingly, recognizes no income tax expense or benefit from foreign currency translation adjustments. |
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Although government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate. |
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The value of the RMB against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US dollar reporting. |
Revenue and Cost Recognition | ' |
Revenue and Cost Recognition |
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The Company receives revenue from sales of electronic products. The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized when the products are delivered and when customer acceptance occurs, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured. |
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Finished goods are delivered from outsourced manufacturers to the Company. Revenue is recognized when the title to the products has been passed to customers, which is the date the products are picked up by the customers at the Company’s location or delivered to the designated locations by Company employees and accepted by the customers and the previously discussed requirements are met. The customers’ acceptance occurs upon inspection at the time of pickup or delivery by signing an acceptance form. Payments received before all of the relevant criteria for revenue recognition are met are recorded as advances from customers. |
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The Company does not provide its customers with the right of return. A 36-month warranty is given to customers for exchange or repair of defective products. The Company’s agreements with its manufacturers allocate responsibility for warranty claims to the Company if the claim is based on a defect in design and to the manufacturer if the claim is based on a defect in fabrication. To date, the Company has experienced no warranty claim based on design defect, and, as a result, the Company does not recognize a warranty liability. |
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The Company follows the guidance set forth by the FASB ASC 605-45-45 to assess whether the Company acts as the principal or agent in the transaction. The determination involves judgment and is based on an evaluation of whether the Company has the substantial risks and rewards of ownership under the terms of the arrangement. Based on the assessment, the Company determined it acts as principal in the transaction and reports revenues on the gross basis. |
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FASB ASC 605-45-45 sets forth eight criteria that support reporting recognition of gross revenue (i.e. principal sales) and three that support reporting net revenue (i.e. agent sales). As applied to the relationship between the Company and its manufacturers, seven of the criteria that support reporting gross revenue are satisfied: |
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| · | Shenzhen Wonhe is the primary obligor in each sale, as it is responsible for fulfillment of customer orders, including the acceptability of the products purchased by the customer. | | | | | | | | | | |
| · | Shenzhen Wonhe has general inventory risk, as it takes title to a product before that product is ordered by or delivered to a customer. | | | | | | | | | | |
| · | Shenzhen Wonhe establishes its own pricing for its products. | | | | | | | | | | |
| · | Shenzhen Wonhe has discretion in supplier selection. | | | | | | | | | | |
| · | Shenzhen Wonhe designed the Home Media Center Model 660 (the “HMC660”) and is responsible for all of its specifications. | | | | | | | | | | |
| · | Shenzhen Wonhe has physical loss inventory risk until the product is delivered to the customer. | | | | | | | | | | |
| · | Shenzhen Wonhe has full credit risk for amounts billed to its customers. | | | | | | | | | | |
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The only criterion supporting recognition of gross revenue that is not satisfied by the relationship between the Company and its manufacturers is: entity changes the product or performs part of the service. Moreover, none of the three criteria supporting recognition of net revenue is present in the Company’s sales transactions. For this reason, the Company records gross revenue with respect to sales by Shenzhen Wonhe. |
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During the last quarter of 2013, the Company discontinued the production of HMC660 pending the introduction of a second generation HMC660, which is being developed in order to meet government purchasing standards in additional provinces, and thus allow the expansion of the market for the second generation HMC660. There were no sales during the quarter ended March 31, 2014. |
Fair Value of Financial Instruments | ' |
Fair Value of Financial Instruments |
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FASB ASC 820, “Fair Value Measurement,” defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. |
Advertising Costs | ' |
Advertising Costs |
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Advertising costs are paid to an advertising agency for market analysis and strategic planning and are charged to operations when incurred. Advertising costs were $98,040 and $65,637 for the three months ended March 31, 2014 and 2013, respectively. |
Research and Development Costs | ' |
Research and Development Costs |
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The Company develops software to be marketed as part of its products, and that is not for internal use. The software is essential to the functionality of the Company’s tangible products. Therefore, the Company accounts for research and development costs incurred in development of its software in accordance with FASB ASC 985-20. |
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Research and development costs are charged to operations when incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. In most instances, the Company’s products are released soon after technological feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally most software development costs have been expensed as incurred. Research and development costs were $23,711 and $60,288 for the three months ended March 31, 2014 and 2013, respectively. |
Cash and Cash Equivalents | ' |
Cash and Cash Equivalents |
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The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents. |
Inventory | ' |
Inventory |
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Inventory, comprised principally of computer components, is valued at the lower of cost or market value. The value of inventories is determined using the first-in, first-out method. |
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The Company estimates an inventory allowance for estimated unmarketable inventories. Inventory amounts are reported net of such allowances. The allowance for slow-moving and obsolete inventory was $180,972 and $182,534 for computer components as of March 31, 2014 and December 31, 2013. |
Prepaid Expenses | ' |
Prepaid Expenses |
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Prepaid expenses primarily consist of the advanced payments for advertisement and software development. As of March 31, 2014 and December 31, 2013, prepaid expenses were $65,054 and $65,616, respectively. |
Fixed Assets and Depreciation | ' |
Fixed Assets and Depreciation |
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Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the price paid to acquire the asset, and any expenditure that substantially increases the asset’s value or extends the useful life of an existing asset. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the improvements. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. |
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Maintenance and repairs are generally expensed as incurred. The estimated useful lives for fixed asset categories are as follows: |
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Office equipment | 5 years | | | | | | | | | | | |
Motor vehicles | 5 years | | | | | | | | | | | |
Leasehold improvements | Shorter of the length of lease or life of the improvements | | | | | | | | | | | |
Impairment of Long-lived Assets | ' |
Impairment of Long-lived Assets |
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The Company applies FASB ASC 360, “Property, Plant and Equipment,” which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets. No impairment of long-lived assets was recognized for the periods presented. |
Statutory Reserve Fund | ' |
Statutory Reserve Fund |
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Pursuant to corporate law of the PRC, the Company’s VIE is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the VIE’s registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund prior years’ losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. As of March 31, 2014, there was no net income transferred into statutory reserve as the Company incurred loss during this quarter. As of December 31, 2013, $1,835,144 had been transferred from retained earnings to the statutory reserve fund. |
Income Taxes | ' |
Income Taxes |
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The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. As of March 31, 2014, deferred tax asset was $30,275, recognized for net operating loss carryforward of Shenzhen Wonhe. Full valuation allowance against this deferred tax asset was established due to the uncertainty in realizing its benefits. |
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ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of March 31, 2014 and December 31, 2013, the Company did not record any liabilities for unrecognized tax benefits. |
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The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows: |
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United States |
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The Company is subject to United States tax at graduated rates from 15% to 35%. No provision for income tax in the United States has been made as the Company had no U.S. taxable income for the three months ended March 31, 2014 and 2013. |
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PRC |
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Shenzhen Wonhe and Shengshihe Consulting are subject to an Enterprise Income Tax at 25% and file their own tax returns. Consolidated tax returns are not permitted in China. On July 23, 2012, the National Tax Bureau, Shenzhen Nanshan Branch declared that Shenzhen Wonhe is qualified for the preferential tax treatment afforded by the PRC to enterprises engaged in the development of software or integrated circuits. As a result, starting from its first profitable year, Shenzhen Wonhe is entitled to a two-year exemption from the Enterprise Income Tax followed by the third year 50% reduction in its Enterprise Income Tax rate commenced from January 1, 2014. The tax regulations require that the enterprise pay income tax until its eligibility for the exemption is determined - i.e. until the local tax bureau determines that the enterprise has recorded its first profitable year. Payments were made of approximately $2,600,000 (RMB 16,107,000) based upon 2012 income while the local tax bureau reviewed the Company’s financial results. The National Tax Bureau determined that the Company had realized a profit in 2012. Since the Company has now been declared exempt from tax with respect to 2012, the payments will be applied to future income taxes due. The payments have been reflected as prepaid income taxes on the balance sheet as of March 31, 2014 and December 31, 2013. |
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BVI |
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World Win is incorporated in the BVI and is governed by the income tax laws of the BVI. According to current BVI income tax law, the applicable income tax rate for the Company is 0%. |
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Hong Kong |
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Kuayu International is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non Hong Kong source income. |
Noncontrolling interests | ' |
Noncontrolling Interests |
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The Company evaluated and determined that under the VIE agreements as disclosed in Note 1, it is deemed to be the primary beneficiary of Shenzhen Wonhe. The noncontrolling interest, representing 5% of the net assets in Shenzhen Wonhe not attributable, directly or indirectly to the Company, is measured at its carrying value in the equity section of the consolidated balance sheets. |
Reclassifications | ' |
Reclassifications |
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Certain amounts in the prior periods financial statements have been reclassified for comparative purposes to conform to the presentation in the current periods financial statements. These reclassifications had no effect on previously reported earnings. |
Recently Issued Accounting Standards | ' |
RECENTLY ISSUED ACCOUNTING STANDARDS | | | | | | | | | | | | |
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On March 5, 2013, the FASB issued ASU 2013-05 to provide guidance for whether to release cumulative translation adjustments (“CTA”) upon certain derecognition events. The update was issued to resolve the diversity in practice about whether Subtopic ASC 810-10, “Consolidation-Overall,” or ASC 830-30, “Foreign Currency Matters-Translation of Financial Statements,” applies to such transactions. ASU 2013-05 is effective prospectively for all entities with derecognition events after the effective date. For public entities, the guidance is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. ASC 830-30 applies when an entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Consequently, the CTA is released into net income only if the transaction results in complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided. Otherwise, no portion of the CTA is released. The adoption of this pronouncement is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations. |
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In July 2013, FASB issued ASU No. 2013-11, Presentation of an Unrecognized Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. An exception exists to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax of the applicable jurisdiction does not require the entity to use, and entity does not intend to use, the deferred tax asset for such a purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective for fiscal years and interim periods beginning after December 15, 2013 and is not expected to have a material impact on the Company's consolidated financial statements. |