4.7: Exercises

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

 

Current assets (CA)	Non-current liabilities (NCL)
Long-term investments (LI)	Share Capital (Cap)
Property, plant, and equipment (PPE)	Contributed surplus (CS)
Intangible assets (IA)	Retained earnings (RE)
Accumulated other comprehensive income (AOCI)	Current liabilities (CL)

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

 

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			35,000
   Allowance for doubtful accounts			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		$	960,000
   Inventory on consignment			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.

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:

   	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		$	580,000
   Accounts with credit balances			(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.

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.

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

 

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:

Revenues		$	1,000,000
Gain			2,200
Total revenue			1,002,200
Expenses
Operating expenses			809,200
Interest expenses			35,000
Depreciation expense – building			28,000
Depreciation expense – equipment			20,000
Loss			5,000
			897,200
Net income		$	105,000

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)?

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

 

Lambrinetta Industries Ltd.
Balance Sheet
		December 31
		2021			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.

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			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.

1. Discussed in Chapter 8, Intercorporate Investments