Chapter 3
Solutions
Exercise 3.1
- Income from continuing operations = Income from operations + Gain on sale of FNVI investments − Income tax on income from continuing operations = $125,000 + $1,500 − $34,155* = $92,345
* (125,000 + 1,500) × 27% = 34,155
Net income = Income from continuing operations – Loss from operation of discontinued division (net of tax) – Loss from disposal of discontinued division (net of tax) = $92,345 − $2,500 − $3,500 = $86,345
Other comprehensive income = Unrealized holding gain − OCI (net of tax) = $12,000
Total comprehensive income = Net income + other comprehensive income = $86,345 + $12,000 = $98,345 - Under ASPE, other comprehensive income and comprehensive income do not apply.
Exercise 3.2
Quality of Earnings: In terms of earnings quality, there are issues. The company’s net income includes a significant gain on sale of idle assets, which means that a sizeable portion of earnings were not generated from ongoing core business activities. Wozzie also changed their inventory policy from FIFO to weighted average, which is contrary to the method used within their industry sector. This is cause for concern as it raises questions about whether management is purposely trying to manipulate income. A change in accounting policy is only allowed as a result of changes in a primary source of GAAP or may be applied voluntarily by management to enhance the relevance and reliability of information contained in the financial statements for IFRS. Unless Wozzie’s inventory pricing is better reflected by the weighted average method, contrary to the other companies in their industry sector, the measurement of inventory and cost of goods sold may be biased.
Investing in the Company: Investors and analysts will review the financial statements and see that part of the company’s net income results from a significant gain generated from non-core business activities (the sale of idle assets) and will also detect the lower cost of goods sold resulting from the change in inventory pricing policy disclosed in the notes to the financial statements. As a result, investors will assess the earnings reported as lower quality, and the capital markets will discount the earnings reported to compensate for the biased information. Had Wozzie not fully disclosed the accounting policy change for inventory, the market may have taken a bit longer to discount that portion of the company’s net income due to lower quality information.
Exercise 3.3
Eastern Cycles’ sale of the corporate-owned stores to a franchisee would not qualify for discontinued operations treatment because the corporate-owned stores are not a separate major line of business. Under IFRS, a component of an entity comprises operations, cash flows, and financial elements that can be clearly distinguished from the rest of the enterprise, which is not the case as stated in the question information.
Under ASPE, selling the corporate-owned stores would also not qualify for discontinued operations treatment. The corporate-owned stores are likely a component of the company, but the franchisor is still involved with the franchisees because Eastern Cycles continues to provide product to them as well as advertising, training, and support. The cash flows of Eastern Cycles (the franchisor) are still affected by those of the franchisee since Eastern Cycles collects monthly fees based on revenues.
Exercise 3.4
a.
|
Bunsheim Lyd. |
|||||
|
Total |
Common Shares |
Comprehensive Income |
Retained Earnings |
Accumulated Other Comprehensive Income |
|
| Beginning balance as reported | $707,000 | $480,000 | $50,000 | $177,000 | |
| Correction of understatement in travel expenses from 2019 of $80,000 (net of tax of $21,000) | (54,000) | (54,000) | |||
| Beginning balance as adjusted | $648,600 | $480,000 | $(8,400) | $177,000 | |
| Comprehensive income: Net income | 130,853 | $130,853 | 130,853 | ||
| Other comprehensive income: Unrealized gain - FVOCI investments[1] | 25,000 | 25,000 | 25,000 | ||
| Dividends declared | (45,000) | (45,000) | |||
| Comprehensive income | $155,853 | ||||
| Ending Balance | $759,453 | $480,000 | $77,453 | $202,000 | |
Net income = ($680,000 − $425,750 − $75,000) = 179,250 ×(1 − 27%) = $130,853
Disclosures – prior period adjustments are to be reported net of tax with the tax amount disclosed. Unrealized gain on FVOCI investments is to be disclosed net of tax with tax amount disclosed and that it may be reclassified subsequently to net income or loss.
b.
| Bunsheum Ltd. Statement of Retained Earnings For the Year Ended December 31, 2020 |
|
|---|---|
| Balance, January 1 as reported | $50,000 |
| Correction for understatement in travel expenses from 2019 of $80,000 (net of tax of $21,600) | (58,400) |
| Balance, January 1, as adjusted | (8,400) |
| Add: Net income | 130,853 |
| 122,453 | |
| Less: Dividends | 45,000 |
| Balance, December 31 | $77,453 |
Exercise 3.5
-
Patsy Inc.
Partial Statement of Comprehensive Income
For the Year Ended December 31, 2020Income from continuing operations $1,500,000 Discontinued operations Loss from operation of discontinued Calgary division (net of tax of $52,500) $(122,500) Loss from disposal of Calgary division (net of tax of $37,500) (87,500) (210,000) Net income 1,290,000 Other comprehensive income Items that may be reclassified subsequently to net income or loss: Unrealized gain on FVOCI incestments (net of tax of $11,786[1]) 27,500 Total comprehensive income $1,317,500 Earnings per share Income from continuing operations[2] $30.00 Discontinued operations (4.20) Net income $25.80 Required disclosures: Items reported at their net of tax amounts must also disclose the tax amount. Earnings per share information related to income from continuing operations and discontinued operations are required under IFRS but earnings per share information related to comprehensive income are not required under IFRS.
- Had Patsy followed ASPE, other comprehensive income and total comprehensive income do not apply. Investments that are not quoted in an active market are accounted for at cost. This also assumes that the discontinued operations meet the definition of a discontinued operation under ASPE.
Exercise 3.6
Calculation of increase or (decrease) in shareholders’ equity:
| Increase in assets: | $41,670 + $15,800 + $218,400 - $46,500 + 14,000 = | $243,370 |
| Increase in liabilities: | ($23,400) + 45,200 + $46,500 = | 68,300 |
| Increase in shareholders' equity: | $175,070 |
Breakdown of shareholders’ equity account:
| Net increase | $175,070 | |
| Increase in common shares | $87,000 | |
| Increase in contributed surplus | 18,600 | |
| Decrease in retained earnings due to dividend declaration | (44,000) | 61,600 |
| Increase in retained earnings due to net income | $113,470 |
To solve algebraically use the basic accounting equation:
Assets = Liabilities + Equity
Restated:
Change in assets = change in liabilities + change in equity
243,370 = 68,300 + X(equity)
X = 243,370 − 68,300 = $175,070 change in equity
Since equity is made up of common shares + contributed surplus + retained earnings = $175,070 then:
Change in equity − change in common shares − change in contributed surplus+dividends = change in retained earnings due to net income
175,070 − 87,000 − 18,600 + 44,000 = $113,470
Exercise 3.7
($575,000 − $75,000) ÷ 66,000 = $7.58 per share
Exercise 3.8
-
Opi Co.
Income Statement
For the Year Ended December 31, 2020Revenues Net sales revenue[3] $1,778,400 Gain on sale of land 39,000 Rent revenue 23,400 Total revenues 1,840,800 Expenses Cost of goods sold 1,020,500 Selling expenses[4] 587,600 Administrative expenses[5] 130,260 Total expenses 1,738,360 Income before tax 102,440 Income tax 30,732 Income from continuing operations 71,708 Discontinued operations Gain on disposal of discontinued operations – South Division (net of tax of $8,268)
19.292 Net income $91,000 Disclosure notes – COGS and most Other Revenue and Expense items are to be disclosed separately. Discontinued operations items are to be separately disclosed, net of tax, with tax amount disclosed.
Opi Co.
Statement of Retained Earnings
For the Year Ended December 31, 2020Retained earnings, January 1 as reported $338,000 Less error correction (net of tax of $4,050) 9,450 Retained earnings, January 1, as adjusted 328,550 Add: net income 91,000 419,550 Less: dividends 58,500 Retained earnings, December 31 $361,050 Prior period adjustments reported in retained earnings must be separately reported, net of tax with tax amount disclosed.
-
Opi Co.
Income Statement
For the Year Ended December 31, 2020Revenues Net sales revenue[6] $1,778,400 Gain on sale of land 39,000 Rent revenue 23,400 Total revenues 1,840,800 Expenses Cost of goods sold 1,020,500 Selling expenses[7] 587,600 Administrative expenses[8] 130,260 Total expenses 1,738,360 Income before tax 102,440 Income tax 30,732 Income from continuing operations 71,708 Discontinued operations Gain on disposal of discontinued operations – South Division (net of tax of $8,268)
19.292 Net income 91,000 Retained earnings, January 1 as reported 338,000 Less error correction (net of tax of $4,050 9,450 Retained earnings, January 1, as adjusted 328,550 419,550 Less dividends 58,500 Retained earnings, December 31 $361,050 Disclosure notes – COGS and most Other Revenue an Expense items are to be disclosed separately. Discontinued operations items are to be separately disclosed, net of tax, with tax amount disclosed. Prior period adjustments reported in retained earnings must be separately reported, net of ta with tax amount disclosed.
Exercise 3.9
-
Ace Retailing Ltd.
Statement of income
For the Year Ended December 31, 2020Sales revenue $1,500,000 Less cost of goods sold 750,000 Gross profit 750,000 Less selling and administrative expenses 245,000 Income from operations 505,000 Other revenues and gains Interest income $15,000 Gain on sale of FFNI investments 45,000 60,000 565,000 Other expenses and losses Loss on impairment of goodwill 12,000 Loss on disposal of equipment 82,000 Loss from warehouse fire 175,000 269,000 Income from continuing operations before income tax 296,000 Income tax expense 79,200 Income from continuing operations 216,080 Discontinued operations Loss from operations, net of income tax recovery of $76,950 208,050 Gain from disposal, net income taxes of $31,050 83,950 124,100 Net income $91,980 Earnings per share Income from continuing operations[9] $0.34 Discontinued operations[10] (0.31) Net income $0.03 (rounded) -
Ace Retailing Ltd.
Statement of income
For the Year Ended December 31, 2020Sales revenue $1,500,000 Less cost of goods sold 750,000 Gross profit 750,000 Less selling and administrative expenses 245,000 Income from operations 505,000 Other revenues and gains Interest income $15,000 Gain on sale of FFNI investments 45,000 60,000 565,000 Other expenses and losses Loss on impairment of goodwill 12,000 Loss on disposal of equipment 82,000 Loss from warehouse fire 175,000 269,000 Income from continuing operations before income tax 296,000 Income tax expense 79,200 Income from continuing operations 216,080 Discontinued operations Loss from operations, net of income tax recovery of $76,950 208,050 Gain from disposal, net income taxes of $31,050 83,950 124,100 Net income $91,980 Other comprehensive income Items that may be reclassified subsequently to net income or loss: Unrealized gain on FVOIC investments, net of income tax of $5,022 13,578 Total comprehensive income $105,558 Earnings per share Income from continuing operations[11] $0.34 Discontinued operations[12] (0.31) Net income $0.03 (rounded) -
Ace Retailing Ltd
Statement of comprehensive Income
For the Year Ended December 31, 2020Net income $91,980 Other comprehensive income Items that may be reclassified subsequently to net income or loss: Unrealized gain on FVOCI investments, net of income tax of $5,022 13,578 Total comprehensive income $105,558 -
Ace Retailing Ltd.
Income Statement
For the Year Ended December 31, 2020Revenues Sales revenue $1,500,000 Interest income 15,000 Gain on sale of FVNI investments 45,000 Total revenues 1,560,000 Expenses Cost of goods sold 750,000 Selling and administrative expenses 245,000 Loss on impairment of goodwill 12,000 Loss on disposal of equipment 82,000 Loss from warehouse fire 175,000 Total expenses 1,264,000 Income from continuing operations before income tax 296,000 Income tax 79,920 Income from continuing operations 216,080 Discontinued operations Loss from operations, net of income tax recovery of $76,950 208,050 Gain from disposal, net of income taxes of $31,050 83,950 124,100 Net income $91,980 Earnings per share Income from continuing operations[13] $0.34 Discontinued operations[14] (0.31) Net income $(0.03) rounded - Items are to be reported as Other Revenue and Expenses when using the multiple- step format for the statement of income. These are revenues, expenses, gains, and losses that are not realized or incurred as part of ongoing operations (for a retail business in this case). Examples of items that do not normally recur in a retail business are:
- Dividend revenue (from investments)
- Gain or loss on sale or disposal of current or long-term assets (i.e., investments, property, plant, equipment, and certain intangible assets such as patents and copyrights)
- Interest income or expense from receivables or investments
- Impairment losses on various assets not recorded through OCI
- Loss from fire, flood, and storm damages in areas not known for this activity
- Loss on inventory due to decline in NRV
- Rent revenue or other revenues not normally associated with the usual business of the company
- Unrealized gains or losses on investments not recorded to OCI
Note that as a rule, if the item is unusual and material, (consider size, nature, and frequency), the item is presented separately but included in income from continuing operations. If the item is unusual but immaterial, the item is combined with other items in income from continuing operations. So, there is a trade-off between additional disclosures of relevant information and too much disclosure resulting in information overload. Moreover, IFRS and ASPE reporting requirements vary and the standards change over time, so different items may need to be separately reported in one standard but not necessarily in the other standard. It is important to check the standards periodically to ensure that the latest reporting requirements are known.
Exercise 3.10
| Vivando Ltd. Income Statement (Partial) For the Year Ended December 31, 2020 |
||
|---|---|---|
| Income from continuing operations before income tax | $1,891,000 | |
| Income tax | 472,750 | |
| Income from continuing operations | 1,418,750 | |
| Discontinued operations | ||
| Loss from operation of discontinued subsidiary (net of tax of $17,000) | $(51,000) | |
| Loss from disposal of subsidiary (net of tax of $28,150) | (84,450) | 135,450 |
| Net income | $1,282,800 | |
| Earnings per share | ||
| Income from continuing operations | $6.30 | |
| Discontinued operations | (0.60) | |
| Net income | $5.70 | |
| Income from continuing operations before income tax: As previously states | $1,820,000 | |
| Gain on sale of equipment (92,000 – 33,400 – 75,000) | 16,400 | |
| Settlement of lawsuit | 180,200 | |
| Write-off of accounts receivable | (125,600) | |
| Restated | $1,891,000 | |
Note: The prior year error related to the intangible asset was correctly charged to opening retained earnings.
Exercise 3.11
-
Spyder Inc.
Income Statement
For the Year Ended September 30, 2020Sales Revenue $2,699,900 Sales revenue $21,000 Sales returns and allowances 87,220 108,220 Net sales revenue 2,591,680 Costs of goods sold 1,500,478 Gross profit 1,091,202 Operating Expenses Selling expenses: Sales commissions expenses $136,640 Entertainment expenses 20,748 Freight-out 40,502 Telephone and Internet expenses 12,642 Depreciation expense 6,972 217,504 Administrative expenses: Salaries and wages expenses 78,764 Depreciation expense 10,150 Supplies expense 4,830 Telephone and Internet expense 3,948 Miscellaneous expense 6,601 104,293 321,797 Income from operations 769,405 Other Revenues Gain on sale of land 78,400 Dividend revenue 53,200 901,005 Other Expenses Interest expense 25,200 Income from continuing operations before income tax 875,805 Income tax 262,742 Income from continuing operations 613,063 Discounted operations Loss on disposal of discontinued operations – Aphfflek Division (net of taxes of $14,700) 34,300 Net income $578,763 Earnings per share from continuing operations $4.94[15]
(0.28)[16]
New income $4.66 -
Spyder Inc.
Statement of Changes in Shareholders’ Equity
For the Year Ended September 30, 2020Common Shares Retained Earnings Accumulated Other Comprehensive Income Total Beginning balance as reported $454,000 $215,600 $162,000 $831,600 Correction of error for depreciation expense from 2019 (net of tax recovery of $7,434) (17,346) (17,346) Beginning balance restated 454,000 198,254 162,000 814,254 Comprehensive income: Net income 578,763 578,763 Total comprehensive income 578,763 578,763 Dividends – common shares (12,600) (12,600) Ending balance $454,000 $764,417 $162,000 $1,380,417 -
Spyder Inc.
Income Statement
For the Year Ended September 30, 2020Revenues Net sales revenue $2,591,680 Gain on sale of land 78,400 Dividend revenue 53,200 Total revenues 2,723,280 Expenses Cost of goods sold 1,500,478 Sales commissions expense 136,640 Entertainment expense 20,748 Freight-out 40,502 Telephone and Internet expense[17] 16,590 Depreciation expense[18] 17,122 Salaries and wages expense 78,764 Supplies expense 4,830 Miscellaneous operating expense 6,601 Interest expense 25,200 Total expenses 1,847,475 Net income from continuing operations before income tax 875,805 Income tax 262,742 Income from continuing operations 613,063 Discontinued operations Loss on disposal of discontinued operations – Aphfflek Division (net of taxes of $14,700) 34,300 Net income $578,763 Earnings per share from continuing operations 4.84[19] from discontinued operations (0.28)[20] Net income $4.56
-
Spyder Inc.
Income Statement
For the Year Ended September 30, 2020Net income $578,763 Other Comprehensive Income: Unrealized gain on FVOCI investments (net of tax of $7,500) 17,500 Comprehensive Income $596,263
Exercise 3.12
|
Garcia Corp. |
||
| Sales revenue | 36,948,590 | |
| Less: cost of goods sold | 29,564,100 | |
| Gross profit | 7,384,490 | |
| Less selling and administrative expenses | 4,658,940 | |
| Income from operations | 2,725,550 | |
| Other revenues and gains | ||
| Interest income | 163,255 | |
| Gain on sale of FVNI investments | 103,150 | 266,405 |
| 2,991,955 | ||
| Other expenses and losses | ||
| Loss on impairment of goodwill | 325,000 | |
| Loss from hurricane damage | 155,900 | 480,900 |
| Income from continuing operations, before income tax | 2,511,055 | |
| Income tax expense | ||
| For Y3 | 895,440 | |
| Tax assessment related to Y1 | 152,800 | 1,048,240 |
| Income from continuing operations | 1,462,815 | |
| Discontinued operations | ||
| Loss from operations, net of income tax recovery | 165,000 | |
| Loss from disposal, net of income tax recovery | 262,500 | 427,500 |
| Net Income | 1,035,315 | |
| Other comprehensive income | ||
| Unrealized gain on FV-OCI investment, net of tax of $80,000 | 240,000 | |
| Comprehensive income | 1,275,315 | |
| Earnings per share | $2.73 | |
| Discontinued operations | -0.86 | |
| Net Income | $1.87 | |
Exercise 3.13
|
Chen Company |
||||
| Common Shares | Retained Earnings | AOCI | Total | |
| Beginning Balance | $600,000 | $901,362 | $241,277 | $1,742,639 |
| Net Income | 20,499 | 20,499 | ||
| Unrealized gain on FVOCI Investments | 58,746 | 58,746 | ||
| Dividends declared | - 300,000 | - 300,000 | ||
| Ending Balance | $600,000 | $621,861 | $300,023 | $1,521,884 |
Exercise 3.14
|
Schaan Limited |
|
| Sales revenue | $1,156,310 |
| Cost of goods sold | 749,746 |
| Gross profit | 406,564 |
| Operating expenses | |
| Selling and administrative expense | 333,250 |
| Income from operations | 73,314 |
| Gain on disposal of building | 248,755 |
| Net income | 322,069 |
| Other comprehensive income | |
| Unrealized gain on FVOCI Investments | 17,449 |
| Comprehensive Income | $339,518 |
Exercise 3.15
1. Multi-step income statement (by function).
|
Arturo Corporation |
|||
| Sales Revenue | |||
| Sales revenue | $1,015,630 | ||
| Less: Sales returns and allowances | 14,852 | ||
| Net sales revenue | 1,000,778 | ||
| Cost of goods sold | |||
| Inventory, January 1, Y7 | $119,854 | ||
| Purchases | $678,410 | ||
| Less: purchase discounts | 9,864 | ||
| Net purchases | 668,546 | ||
| Add: Freight-in | 14,055 | 682,601 | |
| Goods available for sale | 802,455 | ||
| Inventory, December 31, Y7 | 138,960 | ||
| Cost of Goods Sold | 663,495 | ||
| Gross Profit | 337,283 | ||
| Operating Expenses | |||
| Salaries and wages expense | 72,513 | ||
| Depreciation Expense - equipment | 18,694 | ||
| Supplies expense | 8,446 | 99,653 | |
| Administrative expenses | |||
| Salaries and wages expense | 42,154 | ||
| Depreciation Expense - building | 29,778 | ||
| Office supplies expense | 9,685 | 81,617 | 181,270 |
| Income from operations | 156,013 | ||
| Other revenues and gains | |||
| Dividend revenue | 20,500 | ||
| Gain on sale of equipment | 5,693 | ||
| 182,206 | |||
| Other expenses and losses | |||
| Interest expense | 8,945 | ||
| Loss from hurriance damage | 50,053 | 58,998 | |
| Income before tax | 123,208 | ||
| Income tax | 34,498.24 | ||
| Net income | $88,709.76 | ||
2. Single step income statement (by nature)
|
Arturo Corporation |
|
| Revenues | |
| Net sales revenue | $1,000,778 |
| Dividend revenue | 20,500 |
| Gain on sale of equipment | 5,693 |
| Total revenues | 1,026,971 |
| Expenses | |
| Cost of goods sold | 663,495 |
| Salaries and wages | 114,667 |
| Depreciation expense | 48,472 |
| Supplies expense | 18,131 |
| Interest expense | 8,945 |
| Loss from hurriance damage | 50,053 |
| 903,763 | |
| Income before tax | 123,208 |
| Income tax | 34,498 |
| Net income | $88,710 |
Notes:
Net income MUST be the same under both methods.
Cost of goods sold can be one line item with the single-step method.
Exercise 3.16
|
Terry Corporation |
Notes |
|
| Balance, January 1, Y6 | $225,705 | (1) Balance, January 1, Y6 |
| Correction for depreciation error in Y4 | ||
| (net of $7,968 income tax recovery) | -18,592 | (2) income tax recovery = $26,560 × 30% |
| Balance, January 1, Y6 as adjusted | 207,113 | |
| Add net income | 167,895 | (3) $239,850 - ($239,850 × 30%) |
| 375,008 | ||
| Dividends declared | 48,900 | |
| Balance, December 31, Y6 | $326,108 | |
Exercise 3.17
|
Martony Corporation |
|||||||
| Preferred Shares | Common Shares | Contributed Surplus | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||
| Beginning Balance | $550,000 | $659,500 | $65,874 | $745,963 | $52,650 | $2,073,987 | |
| Comprehensive Income: | |||||||
| Net Income | 87,965 | 87,965 | |||||
| Other Comprehensive income | 12,544 | 12,544 | |||||
| Dividends Paid to Shareholders: | |||||||
| Preferred | -25,000 | -25,000 | |||||
| Common | -26,500 | -26,500 | |||||
| Issuance of common shares | - | 148,500 | - | - | - | 148,500 | |
| Ending Balance | $550,000 | $808,000 | $65,874 | $782,428 | $65,194 | $2,271,496 | |
- (27,500 ÷ (1 − 0.3) = $39,286 before tax. $39,286 − 27,500 = $11,786 tax) ↵
- Continuing operations $1,500,000 ÷ 50,000; discontinued operations ($210,000 ÷ 50,000) ↵
- $1,820,000 − $18,850 − $22,750 = $1,778,400 ↵
- $561,600 + $26,000 = $587,600 ↵
- $128,700 + $1,560 = $130,260 ↵
- $1,820,000 − $18,850 − $22,750 = $1,778,400 ↵
- $561,600 + $26,000 = $587,600 ↵
- $128,700 + $1,560 = $130,260 ↵
- ($216,080 − $82,000) ÷ 400,000 = 0.34 ↵
- ($124,100) ÷ 400,000 shares = (0.31) ↵
- ($216,080 − $82,000) ÷ 400,000 = 0.34 ↵
- ($124,100) ÷ 400,000 shares = (0.31) ↵
- ($216,080 − $82,000) ÷ 400,000 = 0.34 ↵
- ($124,100) ÷ 400,000 shares = (0.31) ↵
- $613,063 ÷ 124,000 common shares ↵
- $34,300 ÷ 124,000 ↵
- $12,642 + $3,948 ↵
- $6,972 + $10,150 ↵
- ($613,063 − $12,600) ÷ 124,000 common shares ↵
- $34,300 ÷ 124,000 ↵
