Question 1

Income statement, including corrections
During calendar 2020, Scone Corporation reported income from continuing operations of $800,000 (after taxes). In addition, the following information, which has not yet been considered or included in the above figure, has been revealed:
1. On December31, 2020, Scone adopted the average cost method of inventory valuation. The company had previously used the FIFO method. The change decreases income for 2020 by $50,000 (pre-tax) and the cumulative effect of the change on prior years' income was a $60,000 (pre-tax) decrease.
2. A machine was sold for $140,000 cash during the year at a time when its book value was $100,000. (Depreciation has been correctly recorded.)
3. Scone decided to discontinue its stereo division in 2020. During the current year, the loss on the disposal of this segment was $150,000 (before applicable taxes).
Instructions
Present in good form the income statement of Scone Corporation for 2020 starting with "income from continuing operations." Assume that Scone's tax rate is 20% and that 100,000 common shares were outstanding during the year.

Accepted Answer

The answer of Income statement, including corrections
During calendar 2020, Scone...

Question 2

Multiple-step income statement
Presented below is information that relates to Muffin Limited for 2020:
\(\begin{array}{llcc}
  \text {  Collections of credit sales...........................................} &\$1,100,000  \
 \text { Retained earnings, January 1, 2020............................. } &800,000\
 \text { Sales............................................................................ } &1,900,000\
 \text { Selling and administrative expenses............................. } &290,000\
 \text {Casualty loss (pre-tax)..................................................  } &350,000\
 \text {  Cash dividends declared on common shares...................} &34,000\
  \text {Cost of goods sold...........................................................  } &1,100,000  \
 \text {Loss resulting from calculation error on depreciation charge in 2018 (pre-tax)........  } &460,000\
 \text {Other revenues..............................................................  } &180,000\
 \text {Other expenses...............................................................  } &120,000\
 \text {Loss from early extinguishment of debt (pre-tax)...........  } &340,000\
 \text {Gain from transactions in foreign currencies (pre-tax).......  } &220,000\
 \text {Proceeds from sale of Muffin common shares......................  } &60,000\
\end{array}\)

Additional information:
1. Early in 2020, Muffin changed depreciation methods for its plant assets from the double- declining-balance to the straight-line method. The affected assets were purchased at the beginning of 2015 for $200,000, had no residual value, and had useful lives of 10 years. Depreciation expense of $20,000 is included in the selling and administrative expenses of $290,000.
2. On September 1, 2020, Muffin sold one of its segments (product line) to Best Industries for a gain (pre-tax) of $550,000. During the period January 1 to August 31, the discontinued segment incurred an operating loss (pre-tax) of $480,000. This loss is not included in any of the numbers shown above.
3. Included in selling and administrative expenses is bad debts expense of $19,000. Muffin bases its bad debts expense upon a percentage of sales. In 2018 and 2019, the percentage was 0.5 %. In 2020, the percentage was changed to 1%.
Instructions
In good form, prepare a multiple-step income statement for 2020. Assume a 20% income tax rate and that 20,000 common shares were outstanding during the year.

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Presented below is information that...

Question 3

Changes in accounting principles
Describe how changes in accounting principles are applied and affect the financial statements.

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Describe how changes in...

Question 4

Statement of retained earnings
Mondial Corporation prepares financial statements in accordance with ASPE. At January 1, 2020, the company had retained earnings of $420,000. In 2020, net income was $1,737,000, and cash dividends of $360,000 were declared and paid.
Prepare a 2020 statement of retained earnings for Mondial Corporation.

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Mondial Corporation prepares financial...

Question 5

Statement of changes in equity
Tote Ltd. reported the following balances at January 1, 2020:
 $\begin{array}{llcc}
  \text { Common shares................................................................ } &\$370,000  \
 \text { Retained earnings............................................................. } &70,000\
 \text {Accumulated other comprehensive income.........................  } &71,000\
\end{array}$
 During the year Tote earned net income of $310,000 and generated other comprehensive income of $64,000.
Instructions
Prepare a statement of shareholders' equity for the year ended December 31, 2020.

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The answer of Statement of changes in equity
Tote Ltd. reported...

Question 6

Understandability/disclosure trade-off
Explain briefly the trade-off between understandability and full disclosure. Would statements provided to external users have more or less detail than internal management reports? Why?

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Explain briefly the trade-off between understandability...

Question 7

Discontinued operations
Motivated Inc.'s manufacturing division lost $140,000 (net of tax) for the year ended December 31, 2020. Motivated estimates that it can sell the division at a loss of $190,000 (net of tax). The division qualifies for treatment as a discontinued operation.
Instructions
a) Explain how the discontinued operation would be measured and presented on the income statement and balance sheet under ASPE.
b) Explain how your answer to part (a) would be different if Motivated prepared financial statements in accordance with IFRS.

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The answer of Discontinued operations
Motivated Inc.'s manufacturing division lost $140,000...

Question 8

Recycled items
Under IFRS, some items included in other comprehensive income are "recycled" or reclassified which means that they are recognized first in OCI and then reclassified later to net income. Identify which of the following items should be recycled/reclassified and which should not by using the letter "Y" for yes and the letter "N" for no.

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Under IFRS, some items included in...

Question 9

Cash basis
Argent Inc. reported the following information for their 2020 fiscal year:
$\begin{array}{llcc}
  \text {Revenue on the income statement.....................................  } &\$114,000  \
 \text {  Accounts receivable, Jan 1...............................................} &3,200\
 \text {Accounts receivable, Dec 31..............................................  } &6,120\
 \text { Unearned revenue, Jan 1.................................................. } &1,200\
 \text {  Unearned revenue, Dec 31................................................} &1,840\
\end{array}$

Instructions
Calculate the revenue for the year on a cash basis.

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The answer of Cash basis
Argent Inc. reported the following information...

Question 10

The OSC and non-GAAP measures
In an effort to curb to potential confusion created by non-GAAP earnings discussed in Exercise 4-111, the OSC has issued a staff notice on these disclosures. Briefly explain what this notice states issuers should do. Why do you think the OSC is particularly interested in streamlining these disclosures?

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In an effort...

Question 11

Multiple-step income statement
Presented below is information related to Pastry Inc.
 \(\begin{array}{llcc}
  \text {Retained earnings, December 31, 2019 ......................................................... } & \$650,000 \
 \text {Sales ............................................................................................................ } &1,400,000\
 \text {Selling and administrative expenses ............................................................. } &240,000\
 \text {Hurricane loss (pre-tax) on plant..................................................................  } &250,000\
 \text {Cash dividends declared on common shares..................................................  } &33,600\
 \text { Cost of goods sold........................................................................................ } &820,000\
 \text { Gain resulting from calculation error on depreciation } &\
 \text {charge in 2019 (pre-tax) .............................................................................. } &520,000\
 \text {Other revenue..............................................................................................  } &60,000\
 \text {Other expenses............................................................................................  } &50,000\
\end{array}\)
 Instructions
In good form, prepare a multiple-step income statement for the year 2020. Assume a 20% tax rate and that 50,000 common shares were outstanding during the year. Pastry is a private corporation following ASPE.

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Presented below is information...

Question 12

Nature versus function of expense presentation
IFRS requires a business to present an analysis of expenses based on either "nature" or "function." Explain what this means.

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IFRS requires...

Question 13

Terminology
In the space provided, write the word or phrase that is defined or indicated.

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In the space provided, write the word...

Question 14

Discontinued operations
Bagel Corporation operates several stores in British Columbia (Vancouver, Victoria, Kamloops, Penticton, and Prince George). The restructuring of its organization on November 20, 2020, has led to the decision to sell its Prince George store. In preparing financial statements at December 31, 2020, the following information was made available:
1.	The Prince George operation incurred a loss of $283,500 for the 2020 calendar year, including $225,000 for the period January 1 to November 20, 2020.
2.	Estimated costs to sell are $300,000.
3.		At December 31, 2020, the fair value of the Prince George assets is estimated at $7 million and the carrying (book) value is $7.3 million.
4.	The combined provincial and federal income tax rate is 30%.
5.		It is estimated that the operation will lose an additional $250,000 before it is sold.
Instructions
a)The Prince George operation qualifies for reporting as a discontinued operation. What amount should be reported in the discontinued operations section of Bagel’s 2020 income statement?
b)In early 2021, the Prince George operation is sold for $8.5 million, with actual costs to sell of $400,000. Additional disposal costs related to the sale are $500,000. The operation lost an additional $150,000 before it was sold. What amount should be reported in the discontinued operations section of Bagel’s 2021 income statement?

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Bagel Corporation operates several stores in...

Question 15

Analyzing financial health and quality of earnings
List some items that you should be looking for when analyzing the health and quality of earnings of a company.

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Question 16

Comprehensive income
Sunshine Corporation had the following balances at December 31, 2020 (in thousands): preferred shares $3,012; common shares $4,718; contributed surplus $1,750; retained earnings $16,791; and accumulated other comprehensive income $514.
During the year ended December 31, 2020, the company earned net income of $3,613,000, sold common shares of $30,000, and paid out dividends of $14,000 and $5,000 to preferred and common shareholders, respectively.
Prepare a statement of changes in equity for the year ended December 31, 2020, as well as the shareholders' equity section of the Sunshine Corporation balance sheet as at December 31, 2020.

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Sunshine Corporation had the following balances...

Question 17

Comprehensive income terminology
Explain the difference(s) between other comprehensive income, comprehensive income, and accumulated other comprehensive income.

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Explain the difference(s) between other...

Question 18

Non-GAAP measures
Companies often try to help users assess the results of operations and their financial position by providing modified GAAP information such as non-GAAP earnings. Describe what is meant by non-GAAP earnings, and explain the danger in providing these numbers.

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Companies often try to help users...

Question 19

Cash Basis
Explain the theoretical weaknesses of the cash basis approach. Isn't cash management the most important part of a business?

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Explain the theoretical weaknesses of the...

Question 20

Discontinued operations
Hibou Ltd., a private company based in Vancouver, decided to sell its Industrial Design Division. After two years of losses and heavy competition, a plan to dispose of the division was put in place. At the end of 2020, the plan was finalized and approved by the board of directors. The sale is anticipated to be completed by June 30, 2021.
Other information:1. Hibou's 2020 after-tax net income (excluding the results from the Industrial Design Division) was $450,000.
2. During the year, the division reported an after-tax loss of $120,000 (revenues: $30,000, expenses: $150,000).
"3. Management estimates that after-tax legal and audit fees of $32,000 as well as severance payments of $66,000 will be required to finalize the disposal plan. A portion of these costs is expected to be offset by the after-tax proceeds of $61,000 from the sale of the division's assets.
Instructions
Assuming the Industrial Design Division qualifies for treatment as a discontinued operation, prepare a partial income statement for Hibou for 2020. The statement should begin with income from continuing operations and include an appropriate footnote pertaining to the disposal of the Industrial Design Division."

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Hibou Ltd., a private company...

Quiz 4: Reporting Financial Performance

Changes in accounting principles Describe how changes in accounting principles are applied and affect the financial statements.

Understandability/disclosure trade-off Explain briefly the trade-off between understandability and full disclosure. Would statements provided to external users have more or less detail than internal management reports? Why?

Nature versus function of expense presentation IFRS requires a business to present an analysis of expenses based on either "nature" or "function." Explain what this means.

Terminology In the space provided, write the word or phrase that is defined or indicated.

Analyzing financial health and quality of earnings List some items that you should be looking for when analyzing the health and quality of earnings of a company.

Comprehensive income terminology Explain the difference(s) between other comprehensive income, comprehensive income, and accumulated other comprehensive income.

Non-GAAP measures Companies often try to help users assess the results of operations and their financial position by providing modified GAAP information such as non-GAAP earnings. Describe what is meant by non-GAAP earnings, and explain the danger in providing these numbers.

Cash Basis Explain the theoretical weaknesses of the cash basis approach. Isn't cash management the most important part of a business?