4.6 Exercises

Exercise 4.1

Using the classification codes identified in brackets below, identify where each of the accounts below would be classified:

Account name	Classification
Preferred shares
Franchise agreement
Salaries and wages payable
Accounts payable
Buildings (net)
Investment – Held for Trading
Current portion of long-term debt
Allowance for doubtful accounts
Accounts receivable
Bond payable (maturing in 10 years)
Notes payable (due next year)
Office supplies
Mortgage payable (maturing next year)
Land
Bond sinking fund
Inventory
Prepaid insurance
Income tax payable
Cumulative unrealized gain or loss from an OCI investment
Investment in associate
Unearned subscriptions revenue
Advances to suppliers
Unearned rent revenue
Copyrights
Petty cash
Foreign currency bank account or cash

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Exercise 4.2

Below is a statement of financial position as at December 31, 2021, for Aztec Artworks Ltd., prepared by the company bookkeeper:

Aztec Artworks Ltd. Statement of Financial Position For the Year Ended December 31, 2021
Current assets
Cash (including a bank overdraft of $18,000)	$ 225,000
Accounts receivable (net)	285,000
Inventory (FIFO)	960,000
Investments (trading)	140,000
Property, plant, and equipment
Construction work in progress	220,000
Building (net)	1,500,000
Equipment (net)	380,000
Land	420,000
Intangible assets
Goodwill	190,000
Investment in bonds	200,000
Prepaid expenses	30,000
Patents (net)	21,000
Current liabilities
Accounts payable	450,000
Notes payable	300,000
Pension obligation	210,000
Rent payable	120,000
Long-term liabilities
Bonds payable	800,000
Shareholders’ equity
Common shares	700,000
Preferred shares	900,000
Contributed surplus	430,000
Retained earnings	501,000
Accumulated other comprehensive income	160,000

Additional information as at December 31, 2021:

1. Cash is made up of petty cash of $3,000, a bond sinking fund of $100,000, and a bank overdraft of $18,000 held at a different bank than the bank account where the cash balance is currently on deposit.
2. Accounts receivable balance of $285,000 includes:

   Credit balances to be cleared in 90 days

   Allowance for doubtful accounts

   35,000

   12,000

   The company considers the credit balance to be significant.

3. Inventory ending balance does not include inventory costing $20,000 shipped out on consignment on December 30, 2021. The company uses FIFO cost formula and a perpetual inventory system.The net realizable value of the inventory at year-end is:

   Inventory, December 31

   Inventory on consignment

   $ 960,000

   25,000
4. Investments are held for trading purposes. Their fair value at year-end is $135,000.
5. The accumulated depreciation account balance for buildings is $450,000 and $120,000 for equipment. The construction work-in-progress represents the costs to date on a new building in the process of construction. The land where the building is being constructed was purchased of $220,000. The remaining land is being held for investment purposes.
6. Goodwill of $190,000 was included in the accounts when management decided that their product development team has added significant value to the company.
7. The investment in bonds is being held to maturity in 2030, and is accounted for using amortized cost.
8. Patents were purchased by Aztec on January 1, 2019, at a cost of $30,000. They are being amortized on a straight-line basis over 10 years.
9. Income tax payable of $80,000 was accrued on December 31 and included in the
   accounts payable balance.
10. The notes payable are due June 30, 2022. The principal is not due until then.
11. The pension obligation is considered by the auditors to be a long-term liability.
12. The 20-year bonds payable bear interest at 5% and are due August 31, 2025. The bonds’ annual interest was paid on December 31. The company established the bond sinking fund that is included in the cash balance.
13. For common shares, 900,000 are authorized and 700,000 are issued and outstanding. The preferred shares are $2, non-cumulative, participating shares. Fifty thousand are authorized and 20,000 are issued and outstanding.
14. Net sales for the year are $3,000,000 and gross profit is 40%.

Required:

1. Prepare a corrected classified SFP/BS as at December 31, 2021, in good form, including all required disclosures identified in Chapter 4. Adjust the account balances as required
   based on the additional information presented.
2. Calculate one liquidity ratio and one activity ratio and comment on the results. Use ending balances in lieu of averages when calculating ratios.

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Exercise 4.3

Below is the trial balance for Johnson Berthgate Corp. at December 31, 2021. Accounts are listed in alphabetical order and all have normal balances.

Account	Balance
Accounts payable	$ 350,000
Accounts receivable	330,000
Accrued liabilities	70,000
Accumulated depreciation, buildings	110,000
Accumulated depreciation, equipment	50,000
Accumulated other comprehensive income	55,000
Administrative expenses	580,000
Allowance for doubtful accounts	15,000
Bonds investment at amortized cost	190,000
Bonds payable	655,684
Buildings	660,000
Cash	131,000
Commission payable	90,000
Common shares	520,000
Correction of prior year’s error – a missed expense in 2020 (net of tax)	90,000
Cost of goods sold	3,050,000
Equipment	390,000
Freight-out	11,000
Goodwill	30,000
Income tax expense	8,500
Intangible assets, franchise (net)	115,000
Intangible assets, patents (net)	125,000
Interest expense	135,000
Inventory	440,000
Investment (available for sale)	180,000
Investment (trading)	100,000
Land	170,000
Notes payable (due in 6 months)	60,000
Notes payable	571,875
Preferred shares	80,000
Prepaid advertising	6,000
Retained earnings	290,941
Sales revenue	4,858,000
Selling expenses	1,190,000
Unearned consulting fees	13,000
Unrealized gain on trading investments	40,000
Unusual gain	102,000

Additional information as at December 31, 2021:

1. Inventory has a net realizable value of $430,000. The weighted average cost method of inventory valuation was used.
2. Trading investments are securities held for trading purposes and have a fair value of $120,000. Investments in bonds are being held to maturity at amortized cost with interest payments each December 31. Investments in other securities are classified as available for sale (FVOCI) and any gains or losses will be recognized through other comprehensive income (OCI). These have a fair value of $180,000 at the reporting date.
3. Correction of the prior period error relates to a missed travel expense from 2020. The books are still open for 2021.
4. Patents and franchise were being amortized on a straight-line basis. Accumulated amortization to December 31, 2021 is $80,000 for patents and $45,000 for the franchise.
5. Goodwill was recognized at the time of the purchase as the excess of the cash paid purchase price over the net identifiable assets.
6. The bonds were issued at face value on December 31, 2005 and are 5%, 20 year, with interest payable annually each December 31.
7. The 3%, 5-year note payable will be repaid by December 31, 2024 and was signed when market rates were 3.5%.Below is the payment schedule:
   

   Date	Payment Amount	Interest @ 3.5%	Amortization	Balance
   December 31, 2019				$566,906
   December 31, 2020	17,400	19,842	2,442	569,348
   December 31, 2021	17,400	19,927	2,527	571,875
   December 31, 2022	17,400	20,016	2,616	574,491
   December 31, 2023	17,400	20,107	2,707	577,198
   December 31, 2024	17,400	20,202	2,802	580,000

8. During the year ended December 31, 2021, no dividends were declared and there was no preferred or common share activity.
9. On December 31, 2021, the share structure was; common shares, unlimited authorized, 260,000 shares issued and outstanding. $3 preferred shares, non-cumulative, 1,200 authorized, 800 shares issued and outstanding.
10. The company prepares financial statements in accordance with IFRS and investments in accordance with IFRS 9.
11. The income tax rate is 25%.

Required:

1. Prepare a classified statement of financial position as at December 31, 2021, in good form, including all required disclosures identified in Chapter 4. Adjust the account balances as required based on the additional information presented.
2. Calculate the company’s debt ratio and equity ratio and comment on the results.
3. Assume now that accounts receivable is made up of the following:

   Accounts with debit balances

   Accounts with credit balances

   $ 580,000

   (250,000)

   Discuss whether this change in the accounts will affect the liquidity of this company. Round final ratio answers to the nearest 2 decimal places.

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Exercise 4.4

Below is the trial balance in no particular order for Hughey Ltd. as at December 31, 2021:

Hughey Ltd. Trial Balance As at December 31, 2021
	Debits	Credits
Cash	$ 250,000
Accounts receivable	1,015,000
Allowance for doubtful accounts		$ 55,000
Prepaid rent	40,000
Inventory	1,300,000
Investments – available for sale (FVOCI)	2,100,000
Land	530,000
Building	770,000
Patents (net)	25,000
Equipment	2,500,000
Accumulated depreciation, equipment		1,200,000
Accumulated depreciation, building		300,000
Accounts payable		900,000
Accrued liabilities		300,000
Notes payable		600,000
Bond payable		1,100,000
Common shares		2,500,000
Accumulated other comprehensive income		245,000
Retained earnings		1,330,000
	$ 8,530,000	$ 8,530,000

Additional information as at December 31, 2021:

1. The inventory has a net realizable value of $1,350,000. The company uses FIFO method of inventory valuation.
2. Investments in available for sale securities (FVOCI) have a fair value of $2,250,000.
3. The company purchased patents of $60,000 on January 1, 2015.
4. Bonds are 8%, 25-year and pay interest annually each January 1, and are due December 31, 2030.
5. The 7%, notes payable represent bank loans that are secured by investments in available for sale securities (FVOCI) with a carrying value of $800,000. Interest is paid each December 31 and no principal is due until its maturity on April 30, 2022.
6. The capital structure for the common shares are # of authorized, 100,000 shares; issued and outstanding, 80,000 shares.

Required:

1. Prepare a classified statement of financial position as at December 31, 2021, in good form, including all required disclosures identified in Chapter 4.
2. Calculate the annual amortization for the patent.
3. Does this company follow IFRS or ASPE? Explain your answer.

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Exercise 4.5

Below is a list of independent transactions. For each transaction, identify which section of the statement of cash flows it is to be reported and indicate if it is a cash in-flow (a positive number) or cash out-flow (negative number). (Hint: recall the use of the accounting equation to help determine if an amount is a positive or negative number.)

Description	Section	Amount
Issue of bonds payable of $500 cash
Sale of land and building of $60,000 cash
Retirement of bonds payable of $20,000 cash
Current portion of long-term debt changed from $56,000 to $50,000
Repurchase of company’s own shares of $120,000 cash
Issuance of common shares of $80,000 cash
Payment of cash dividend of $25,000 recorded to retained earnings
Purchase of land of $60,000 cash and a $100,000 note
Cash dividends received from a trading investment of $5,000
Interest income received in cash from an investment of $2,000
Interest and finance charges paid of $15,000
Purchase of equipment for $32,000
Increase in accounts receivable of $75,000
Decrease in a short-term note payable of $10,000
Increase in income taxes payable of $3,000
Purchase of equipment in exchange for a $14,000 long-term note

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Exercise 4.6

Below is the unclassified balance sheet for Carmel Corp. as at December 31, 2020:

Carmel Corp. Balance Sheet As at December 31, 2020
Cash	$ 84,000	Accounts payable	$ 146,000
Accounts receivable (net)	89,040	Mortgage payable	172,200
Investments – trading (FVNI)	134,400	Common shares	400,000
Buildings (net)	340,200	Retained earnings	297,440
Equipment (net)	168,000		$ 1,015,640
Land	200,000
	$ 1,015,640

The net income for the year ended December 31, 2021, was broken down as follows:

The following events occurred during 2021:

1. Investments in traded securities are short-term securities and the entire portfolio was sold for cash at a gain of $2,200. No new investments were purchased in 2021.
2. A building with a carrying value of $225,000 was sold for cash at a loss of $5,000.
3. The cash proceeds from the sale of the building were used to purchase additional land for investment purposes.
4. On December 31, 2021, specialized equipment was purchased in exchange for issuing an additional $50,000 in common shares.
5. An additional $20,000 in common shares were issued and sold for cash.
6. Dividends of $8,000 were declared and paid in cash to the shareholders.
7. The cash payments for the mortgage payable during 2021 included principal of $30,000 and interest of $35,000. For 2022, the cash payments will consist of $32,000 for the principal portion and $33,000 for the interest.
8. All sales to customers and purchases from suppliers for operating expenses were on account. During 2021, collections from customers were $980,000 and cash payments to suppliers were $900,000.
9. Ignore income taxes for purposes of simplicity.

Required:

1. Prepare a classified SFP/BS in good form as at December 31, 2021. Identify which required disclosures discussed in Chapter 4 were missed due to lack of information?
2. Prepare a statement of cash flows in good form with all required disclosures for the year ended December 31, 2021. The company prepares this statement using the indirect method.
3. Calculate the company’s free cash flow and discuss the company’s cash flow pattern including details about sources and uses of cash.
4. How can the information from the SFP/BS and statement of cash flows be beneficial to the company stakeholders (e.g., creditors, investors, management and others)?

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Exercise 4.7

Below is the comparative balance sheet for Lambrinetta Industries Ltd.:

Lambrinetta Industries Ltd. Balance Sheet
	December 31, 2021	December 31,2020
Assets:
Cash	$ 32,300	$ 40,800
Accounts receivable	79,900	107,100
Investments – trading (FVNI)	88,400	81,600
Land	86,700	49,300
Plant assets	425,000	345,100
Accumulated depreciation – plant assets	(147,900)	(136,000)
Total assets	$ 564,400	$ 487,900
Liabilities and Equity:
Accounts payable	$ 18,700	$ 6,800
Current portion of long-term note	8,000	10,000
Long-term note payable	119,500	75,000
Common shares	130,900	81,600
Retained earnings	287,300	314,500
Total liabilities and equity	$ 564,400	$ 487,900

Additional information:

1. Net income for the year ended December 31, 2021 was $161,500.
2. Cash dividends were declared and paid during 2021.
3. Plant assets with an original cost of $51,000 and with accumulated depreciation of $13,600 were sold for proceeds equal to book value during 2021.
4. The investments are reported at their fair value on the balance sheet date. During 2021, investments with a cost of $12,000 were purchased. No other investment transactions occurred during the year. Fair value adjustments are reported directly on the income statement.
5. In 2021, land was acquired through the issuance of common shares. The balance of the common shares issued were for cash.

Required:

Using the indirect method, prepare the statement of cash flows for the year ended December 31, 2021 in good form including all required disclosures identified in Chapter 4. The company follows ASPE.

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Exercise 4.8

Below is a comparative statement of financial position for Egglestone Vibe Inc. as at December 31, 2021:

Egglestone Vibe Inc. Statement of Financial Position
	December 31, 2021	December 31, 2020
Assets:
Cash	$ 84,500	$ 37,700
Accounts receivable	113,100	76,700
Inventory	302,900	235,300
Investments – available for sale (FVOCI)	81,900	109,200
Land	84,500	133,900
Plant assets	507,000	560,000
Accumulated depreciation – plant assets	(152,100)	(111,800)
Goodwill	161,200	224,900
Total assets	$ 1,183,000	$ 1,265,900
Liabilities and Equity:
Accounts payable	$ 38,100	$ 66,300
Dividend payable	19,500	41,600
Notes payable	416,000	565,500
Common shares	322,500	162,500
Retained earnings	374,400	370,200
Accumulated other comprehensive income	12,500	59,800
Total liabilities and equity	$ 1,183,000	$ 1,265,900

Additional information:

1. Net income for the 2021 fiscal year was $24,700.
2. During 2021 land was purchased for expansion purposes. Six months later, another section of land with a carrying value of $111,800 was sold for $150,000 cash.
3. On June 15, 2021, notes payable of $160,000 were retired in exchange for the issuance of common shares. On December 31, 2021, notes payable for $10,500 were issued for additional cash flow.
4. Available for sale investments (FVOCI) were purchased during 2021 for $20,000 cash. By year-end, the fair value of this portfolio dropped to $81,900. No investments from this portfolio were sold in 2021.
5. At year-end, plant assets originally costing $53,000 were sold for $27,300, since they were no longer contributing to profits. At the date of the sale, the accumulated depreciation for the asset sold was $15,600.
6. Cash dividends were declared and a portion of those were paid in 2021. Dividends are reported under the financing section.
7. Goodwill impairment loss was recorded in 2021 to reflect a decrease in the recoverable amount of goodwill.

Required:

1. Prepare a statement of cash flows in good form, including all required disclosures identified in Chapter 4. The company uses the indirect method to prepare the statement.
2. Analyze and comment on the results reported in the statement.

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Exercise 4.9

The comparative statement of financial position of Lisbon Corporation at December 31, Y4 follows:
Lisbon Corporation Statement of Financial Position December 31
	Y4	Y3
Assets
Cash	$51,220	$17,560
Accounts receivable	96,530	89,650
Equipment	32,600	22,690
Less: Accumulated Depreciation	-12,350	-13,560
Total Assets	$168,000	$116,340
Liabilities and shareholders' equity
Accounts payable	$21,560	$17,580
Common shares	120,000	80,000
Retained Earnings	26,440	18,760
Total liabilities and shareholders' equity	$168,000	$116,340
Additional information for Y4:
Net income for the year was $36,510.
Dividends of $28,830 were declared and paid.
New equipment was purchased.
Equipment with a cost of $12,550 and accumulated depreciation of $6,890 was sold for $9,400.
Required Prepare a statement of cash flow using the indirect method. Lisbon follows ASPE.

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Exercise 4.10

For each account listed below, indicate the proper statement of financial position classification.

If there is a situation that an item may be classified in more than one category, indicate the additional information that would be required to determine the proper category.

The classifications are:

	Account Name	Classification
1	Preferred Shares
2	Franchises
3	Salaries and Wages Payable
4	Accounts Payable
5	Leasehold Improvements
6	FV-NI Investments
7	Current Portion of Long-Term Debt
8	Obligations under Lease (portion due next year)
9	Bonds Payable (maturing in two years)
10	Notes Payable (due next year)
11	Supplies
12	Mortgage Payable (principal portion due beyond next year)
13	Land (for use)
14	Bond Sinking Fund Investment
15	Inventory
16	Prepaid Insurance
17	Bonds Payable (maturing next year)
18	Unrealized Gain or Loss—OCI
19	Deficit
20	FV-OCI Investments
21	Common Shares
22	Dividends Payable
23	Accumulated Depreciation – Equipment
24	Petty Cash
25	Interest Payable
26	Income tax payable
27	Land improvements
28	WIP – Direct Materials
29	Wages Payable
30	Unearned Revenue
31	Litigation Liability
32	Accounts receivable
33	Accumulated depreciation – buildings
34	Allowance for doubtful accounts
35	Buildings
36	Copyrights
37	Inventory
38	Equipment
39	Patents
40	HST Payable