3.9 Exercises

Exercise 3.1

The following information pertains to Inglewood Ltd. for the 2020 fiscal year ending December 31:

Gain on sale of FVNI investments (before tax):	$1,500
Loss from operation of discontinued division (net of tax)	2,500
Loss from disposal of discontinued division (net of tax)	3,500
Income from operations (before tax)	125,000
Unrealized holding gain of FVOCI investments (net of tax)	12,000

The company tax rate is 27%. The unrealized holding gain is from FVOCI investments where the gain has been recorded to other comprehensive income (OCI).

Required:

1. Calculate income from continuing operations, net income, other comprehensive income, and total comprehensive income.
2. How would your answers change in part (a) if the company followed ASPE?

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Exercise 3.2

Wozzie Wiggits Ltd. produces and sells gaming software. In 2020, Wozzie’s net income exceeded analysts’ expectations in the stock markets by 8%, suggesting an 8% increase from operations. Included in net income was a significant gain on sale of some unused assets. The company also changed their inventory pricing policy from FIFO which is currently being used in their industry sector to weighted average cost, causing a significant drop in cost of goods sold. This policy change was fully disclosed in the notes to the financial statements.

Required:

Based solely on the information above, do you think that Wozzie’s earnings are of high quality? Would you be willing to invest in this company based on the quality of earnings noted in the question?

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Eastern Cycles Ltd. is a franchise that sells bicycles and cycling equipment to the public. It currently operates several corporate-owned retail stores in Ottawa that are not considered a separate major line of business. It also has several franchised stores in Alberta. The franchisees buy all of their products from Eastern Cycles and pay 5% of their monthly sales revenues to Eastern Cycles in return for corporate sponsored advertising, training, and support. Eastern Cycles continues to monitor each franchise to ensure quality customer service. In 2020, Eastern Cycles sold its corporate owned stores in Ottawa to a franchisee.

Required:

Would the sale of the franchise meet the classification of a discontinued operation under IFRS or ASPE?

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Exercise 3.4

For the year ended December 31, 2020, Bunsheim Ltd. reported the following: sales revenue $680,000; cost of sales $425,750; operating expenses $75,000; and unreal- ized gain on Available-for-sale investments $25,000 (net of related tax of $5,000). The company had balances as at January 1, 2020, as follows: common shares $480,000; accumulated other comprehensive income $177,000; and retained earnings $50,000. The company did not issue any common shares during 2020. On December 15, 2020, the board of directors declared a $45,000 dividend to its common shareholders payable on January 31, 2021. The company accounts for its investments in accordance with IFRS 9 meaning that any unrealized gains/losses on FVOCI investments are to be reported as other comprehensive income (OCI). On January 4, 2021, the company discovered that there was an understatement in travel expenses from 2019 of $80,000. The books for 2019 are closed.

Required

1. Prepare a statement of changes in equity including required disclosures. The en- acted tax rate is 27% and has not changed for several years.
2. Prepare the same statement as in part (a) assuming that Bunsheim Ltd. follows ASPE.

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Exercise 3.5

For the year ended December 31, 2020, Patsy Inc. had income from continuing operations of $1,500,000. During 2020, it disposed of its Calgary division at a loss before taxes of $125,000. Before the disposal, the division operated at a before-tax loss of $150,000 in 2019 and $175,000 in 2020. Patsy also had an unrealized gain in its Available for-sale investments (FVOCI) of $27,500 (net of tax). It accounts for its investments in accordance with IFRS 9. Patsy had 50,000 outstanding common shares for the entire 2020 fiscal year and its income tax rate is 30%.

Required:

1. Prepare a partial statement of comprehensive income with proper disclosures for Patsy Inc. beginning with income from continuing operations. Patsy follows IFRS.
2. How would the statement in part (a) differ if Patsy followed ASPE?

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Exercise 3.6

Below are the changes in account balances, except for retained earnings, for Desert Dorm Ltd., for the 2020 fiscal year:

Account	Account increase (decrease)
Accounts payable	$(23,400)
Accounts receivable (net)	15,800
Bonds payable	46,500
Cash	41,670
Common shares	87,000
Contributed surplus	18,600
Inventory	218,400
Investments – FVNI	(46,500)
Intangible assets – patents	14,000
Unearned revenue	45,200
Retained earnings	?

Required:

Calculate the net income for 2020, assuming there were no entries in the retained earnings account except for net income and a dividend declaration of $44,000, which was paid in 2020. (Hint: using the accounting equation A = L + E to help solve this question)

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Exercise 3.7

In 2020, Imogen Co. reported net income of $575,000, and declared and paid preferred share dividends of $75,000. During 2020, the company had a weighted average of 66,000 common shares outstanding.

Required:

Calculate the company’s basic earnings per share.

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Exercise 3.8

A list of selected accounts for Opi Co. is shown below. All accounts have normal balances. The income tax rate is 30%. Opi Co. For the year ended December 31, 2020

Opi Co. For the year ended December 31, 2020
Accounts payable	$   63,700
Accounts receivable	136,500
Accumulated depreciation – building	25,480
Accumulated depreciation – equipment	36,400
Administrative expenses	128,700
Allowance for doubtful accounts	6,500
Bond payable	130,000
Buildings	127,400
Cash	284,180
Common shares	390,00
Cost of goods sold	1,020,500
Dividends	58,500
Error correction for understated cost of goods sold from 2019	13,500
Freight-out	26,000
Gain on disposal of discontinued operations – South Division	27,560
Gain on sale of land	39,000
Inventory	161,200
Land	91,000
Miscellaneous operating expenses	1,560
Notes payable	91,000
Notes receivable	143,000
Rent revenue	338,000
Salaries and wages payable	23,500
Sales discounts	18,850
Sales returns and allowances	22,750
Sales revenue	1,820,000
Selling expenses	561,600

Required:

1. Prepare a single-step income statement with expenses by function and a separate statement of retained earnings assuming that Opi is a private company that follows ASPE.
2. Prepare a combined single-step income statement and retained earnings by function assuming ASPE.

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Exercise 3.9

Below are adjusted accounts and balances for Ace Retailing Ltd. for the year ended December 31, 2020:

Adjusted Accounts	Balances
Cost of goods sold	750,000
Dividends declared (common shares)	245,000
Dividends declared (preferred shares)	82,000
Gain on disposal of discontinued J division	115,000
Gain on sale of FVNI investments	45,000
Loss on impairment of goodwill	12,000
Loss due to warehouse fire	175,000
Loss from operation of discontinued J division	285,000
Loss on disposal of unused equipment from F division	82,000
Retained earnings, January 1, 2020	458,000
Sales revenue	1,500,000
Selling and administrative expenses	245,000
Interest Income	15,000
Unrealized gain on FVOCI investments (OCI)	18,600

Additional information:

1. Ace decided to discontinue the J division operations. A formal plan to dispose of J division has been completed. There are no plans to dispose of F division at this time.
2. During 2020, 400,000 common shares were outstanding with no shares activity for 2020.
3. Ace’s tax rate is 27%.
4. Ace follows IFRS and accounts for its investments in accordance with IFRS 9 meaning that any unrealized gains/losses for FVNI are reported through net income and FVOCI are reported in OCI.

Required:

1. Prepare a multiple-step statement of income for the year ended December 31, 2020, in good form reporting expenses by function.
2. Prepare a combined statement of income and comprehensive income in good form reporting expenses by function.
3. How would the answer in part (b) differ if a statement of comprehensive income were to be prepared without combining it with the statement of income?
4. Prepare a single-step statement of income in good form reporting expenses by function.
5. Explain what types of items are to be reported in other revenue and expenses as part of continuing operations, and provide examples for a retail business.

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Exercise 3.10

Vivando Ltd. follows IFRS and reported income from continuing operations before income tax of $1,820,000 in 2020. The year-end is December 31, 2020, and the company had 225,000 outstanding common shares throughout the 2020 fiscal year. Additional transactions not considered in the $1,820,000 are listed below:

In 2020, Vivando sold equipment of $75,000. The equipment had originally cost $92,000 and had accumulated depreciation to date of $33,400. The gain or loss is considered ordinary.

The company discontinued operations of one of its subsidiaries, disposing of it during the current year at a total loss of $180,600 before tax. Assume that this transaction meets the criteria for discontinued operations. The loss on operation of the discontinued subsidiary was $68,000 before tax. The loss from disposal of the subsidiary was $112,600 before tax.

The sum of $180,200 was received because of a lawsuit for a breached 2016 contract. Before the decision, legal counsel was uncertain about the outcome of the suit and had not established a receivable.

In 2020, the company reviewed its accounts receivable and determined that $125,600 of accounts receivable that had been carried for years appeared unlikely to be collected. No allowance for doubtful accounts was previously set up.

An internal audit discovered that amortization of intangible assets was understated by $22,800 (net of tax) in a prior period. The amount was charged against retained earnings.

Required:

Analyze the above information and prepare an income statement for the year 2020, starting with income from continuing operations before income tax (Hint: refer to the Toulon Ltd. example in Section 4 of this chapter). Calculate earnings per share as it should be shown on the face of the income statement. Assume a total effective tax rate of 25% on all items, unless otherwise indicated.

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Exercise 3.11

The following account balances were included in the adjusted trial balance of Spyder Inc. at September 30, 2020. All accounts have normal balances:

Account	Balance
Accumulated depreciation, office furniture	25,000
Accumulated depreciation, sales equipment	80,000
Accumulated Other Comprehensive Income	162,000
Allowance for doubtful accounts	2,500
Cost of good sold	1,500,478
Common shares	454,000
Depreciation expense, office furniture	10,150
Depreciation expense, sales equipment	6,972
Depreciation expense, understatement due to error – 2019	24,780
Dividend revenue	53,200
Dividends declared on common shares	12,600
Entertainment expense	20,748
Interest expense	25,200
Loss on disposal of discontinued operations – Aphfflek Divisions	49,000
Miscellaneous operating expenses (administrative)	6,601
Retained earnings	215,600
Salaries and ages expense – office staff	78,764
Sales commissions expense	136,640
Sales discounts	21,000
Sales returns and allowances	87,220
Sales revenue	2,699,900
Telephone and Internet expense (administrative)	3,948
Telephone and Internet expense (sales)	12,642

Additional information:

The company follows IFRS and its income tax rate is 30%. On September 30, 2020, the number of common shares outstanding was 124,000 and no changes to common shares during the fiscal year. The depreciation error was due to a missed month-end accrual entry at August 31, 2019.

Required:

1. Prepare a multiple-step income statement in good form with all required disclosures by function and by nature for the year ending September 30, 2020.
2. Prepare a statement of changes in equity in good form with all required disclosures for the year ended September 30, 2020.
3. Prepare a single-step income statement in good form with all required disclosures by nature for the year ending September 30, 2020, assuming this time that the dividends declared account listed in the trial balance are for preferred shares instead of common shares.
4. Assuming that Spyder also recorded unrealized gains for FVOCI investments through OCI of $25,000, prepare a statement of comprehensive income for the company

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Exercise 3.12

Information for Y3 is below for Garcia Corp:
Cost of Goods Sold	29,564,100
Dividends Declared on common shares	325,500
Dividends declared on preferred shares	100,000
Gain on disposal of FVNI Investments	103,150
Income tax assessment for Y1	152,800
Income tax on continuing operations for Y3 (assume correct)	895,440
Interest Income	163,255
Loss from hurricane damage	155,900
Loss from operations of discontinued division (net of tax of $55,000)	165,000
Loss on disposal of discountinued division (net of tax of $87,500)	262,500
Loss on impairment of goodwill	325,000
Retained Earnings	3,569,740
Sales Revenue	36,948,590
Selling and Administrative Expenses	4,658,940
Unrealized gain on FV-OCI equity investments	320,000
Garcia Corp decided to discontinue its entire oil & gas division and keep its manufacturing division.
On October 20, it sold the oil & gas division.
During Y3, there were 500,000 common shares outstanding.
Garcia has a tax rate of 25%.
Garcia prepares financial statements in accordance with IFRS.

Required:

Prepare a multi-step income statement for the year ended December 31, Y3, showing expenses by function. Include an EPS calculation.

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Exercise 3.13

Chen Company
Chen Company has a December 31 fiscal year end and had the following items for Y6:
Sales revenue	$865,490
Cost of sales	$746,350
Operating expenses	$98,641
Unrealized gain on FVOCI Investments	$58,746
On January 1, Y6, Chen Company had the following balances:
Common shares	$600,000
Accumulated other comprehesive income (AOCI)	$241,277
Retained earnings	$901,362
The company did not issue any shares during Y6.
On December 10, Y6, the board of directors declared a $300,000 dividend.
The dividend is to be paid on January 10, Y7.
Required Prepare a statement of changes in equity (IFRS). Ignore income taxes

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Exercise 3.14

Schaan Limited reported the following for Y8:
Sales revenue	$1,156,310
Cost of goods sold	$749,746
Selling and administrative expenses	$333,250
Gain on disposal of equipmment	$248,755
Unrealized gain FVOCI investment	$17,449
Required Prepare a statement of comprehensive income. Ignore EPS and income tax. FVOCI are equity investments (recycled through net income)

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Exercise 3.15

Income statement information for Arturo Corporation for Y7 is as follows:
Dividend revenue	20,500
Freight-in	14,055
Gain on disposal of equipment	5,693
Interest expense	8,945
Inventory - beginning	119,854
Inventory - ending	138,960
Loss from hurricane damage	50,053
Purchase discounts	9,864
Purchases	678,410
Sales returns	14,852
Sales revenue	1,015,630
Service (operating) expenses
Salaries and wages expense	72,513
Depreciation Expense - equipment	18,694
Supplies expense	8,446
Administrative expenses:
Salaries and wages expense	42,154
Depreciation Expense - building	29,778
Office supplies expense	9,685
The effective tax rate is 28%. Arturo follows ASPE.
Required 1. Prepare a multi-step income statement for Y7, showing expenses by function. 2. Prepare a single-step income statement for Y7, showing expenses by nature.

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Exercise 3.16

Terry Corporation is a private company that follow ASPE.  Terry Corporation began operations in Y3. During the first three years of operations, Terry reported the following amounts:

	Dividends Declared	Net Income
Y3	$ -	$42,365
Y4	48,900	121,500
Y5	48,900	159,640

The following information is available for Y6:

Income before income tax	$239,850
Prior period error correction (from Y4)
Understatement of Depreciation expense (before tax)	26,560
Dividends declared	48,900
Effective tax rate	30%

Required

Prepare a statement of retained earnings for Y6.  Terry has a December 31 year end.

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Exercise 3.17

Martony Corporation has the following balances at December 31, Y8:

Accumulated other comprehensive income	$52,650
Common shares	659,500
Contributed surplus	65,874
Preferred shares	550,000
Retained earnings	745,963

During the year ended December 31, Y9, the company reported the following:

Dividends paid to common shareholders	$26,500
Dividends paid to preferred shareholders	25,000
Net income	87,965
Sold common shares	148,500
Unrealized holding gain on FVOCI investments	12,544

Required

Martony follows IFRS, prepare a statement of changes in equity for the year ended December 31, Y9.