1. CL
2. CL
3. CL
4. CL
5. Both
6. Not recorded
7. CL and possibly NCL if goods/services provided more than one year in the future
8. NCL, unless decommissioning will happen within one year, then CL
9. Not recorded unless lawsuit is settled/resolved
10. CL
11. CL
12. Both
13. CL or NCL, depending on term of note
14. CL
15. Both, depending on expiry date of points

1. 

   Note: The cash represents the total of the individual payroll cheques that would be written to each employee, less the amount of the advances paid.

2. 

   Note:

   (based on 5 working days per week)

   In practice, the calculation of the government pension expense would be more complicated than this. However, the company would likely omit this part of the calculation, as it is not material to the accrual.

1. 	January 2021	Factor	Revenue
   One-year subscription		12/12	$2,040
   Two-year subscription		12/24	$2,400
   Three-year subscription		12/36	$2,800

   	July 2021	Factor	Revenue
   One-year subscription		6/12	$1,080
   Two-year subscription		6/24	$1,000
   Three-year subscription		6/36	$1,027

   	December 2021	Factor	Revenue
   One-year subscription		1/12	$120
   Two-year subscription		1/24	$250
   Three-year subscription		1/36	$280

   Total of all revenue amounts recognized = $10,997

   Note: This calculation assumes that services are provided in equal proportions throughout the contract term. If a different assumption is more accurate, then the calculations would be adjusted to reflect the expected pattern of service.

3. Total contract payments received:

   	=	$	45,080
   Less revenue recognized in 2021		$	10,997
   Total deferred revenue at December 31, 2021		$	34,083

   This will be reported as:

   Current liability		$	18,013
   Non-current liability		$	16,070

   Calculation:

   	January 2021	Factor	Current Liability
   One-year subscription		0/12	$0
   Two-year subscription		12/24	$2,400
   Three-year subscription		12/36	$2,800

   	July 2021	Factor	Current Liability
   One-year subscription		6/12	$1,080
   Two-year subscription		12/24	$2,000
   Three-year subscription		12/36	$2,053

   	December 2021	Factor	Current Liability
   One-year subscription		11/12	$1,320
   Two-year subscription		12/24	$3,000
   Three-year subscription		12/36	$3,360

   Total current liability = $18,013

   Total non-current liability =

1. 
2. Unearned revenue at December 31, 2022 =

1. 

   Note: This is simply a reclassification, as the employee would have been paid his or her regular pay on a sick day.

2. Vacation pay liability at December 31 = $24,720, per part (a)

   Sick pay liability at December 31 = $0 (these benefits do not accumulate)

1. 

   Total sales generated =

   Fair value per cup =

   (Denominator is total cups sold plus expected redemptions.)

   Unearned revenue =

   

   This records the redemption of the first 1,000 free cups.

2. Liability at the end of 2020 will be the unearned revenue balance: = = $2,560

   This will be reported as a current liability, as all loyalty cards expire within one year.

1. 

   Note: This journal entry assumes that the three-year warranty period for all machines sold in 2021 has now expired. The balance of the provision must be reduced to zero once the warranty period ends. If there were still machines with remaining warranty rights, the balance of the provision would be carried forward to 2024 until the warranty period expired.

2. 2021 warranty liability =

   2023 warranty liability =

   (assuming all warranty periods have expired by the end of 2023)

   Note: In 2021, the liability would be separated into current and non-current portions, based on management's best estimate of the pattern of future warranty repairs. In 2022, the liability would be reported only as current.

1. If contract is completed:

   	=	$	450,000
   	=		500,000
   Loss on contract		$	(50,000)

   If contract is cancelled and sales still made:

   Sales revenue (as above)		$	450,000
   	=		310,000
   Cancellation penalty			75,000
   Profit on contract		$	65,000

   If contract is cancelled and no sales made, the $75,000 penalty still applies.

   Because the option of cancelling the contract and continuing to make sales results in a profit, this is not an onerous contract. No journal entry is required.

2. If contract is completed, loss is as calculated in part (a)	$	(50,000)
   If contract is cancelled and sales made:
   Sales revenue (as above)	$	450,000
   		310,000
   Cancellation penalty		150,000
   Loss on contract	$	(10,000)
   If contract is cancelled and no sales, penalty applies	$	(150,000)

   In this case, all options result in a loss, so this is an onerous contract. A journal entry is required to recognize the least costly option available:

   

1. Ratio	2021	2020
   Current	1.14	1.13
   Quick	0.74	0.79
   Days' sales uncollected	66 days	58 days
   Days' payable outstanding	140 days	120 days

   Current:		2021
   		2020
   Quick:		2021
   		2020

   Days' sales uncollected:		2021
   		2020
   Days' payable outstanding:		2021
   		2020

2. The company's cash decreased from the previous year, but this does not reveal much. The ratio analysis, however, does reveal some worrying trends in liquidity. The current ratio has been maintained at almost exactly the same level as the previous year, but it is only slightly above 1. This may indicate that the company will have difficulty meeting its short-term obligations when they come due. The quick ratio further emphasizes this point. The quick ratio declined from the previous year and is now less than 1. This means the company would not be able to fully pay its current obligations if they were to become immediately due. This could cause problems with trade creditors and the company's bank, which could lead to further actions taken by those parties that could negatively affect the business.

   The collection period for receivables has also slowed by 8 days from the previous year, which indicates that it is taking longer to collect from customers. This trend will further exacerbate any cash flow problems the company has in meeting its current payment obligations. The actual collection period of 66 days may be reasonable, but the company's credit terms and general industry conditions would need to be examined to see if this is in line with what is expected for this type of business.

   The payment period for the company's suppliers shows the most alarming trend. The company is now taking 140 days to pay its payable, an increase of 20 days over the previous year. This could indicate serious cash flow problems, and may cause loss of credit with suppliers which could, ultimately, result in an inability to obtain a supply of inventory. The standard credit terms offered by suppliers will need to be examined to put this calculation into context. As well, the supplier list should be examined to see if there are any related parties involved that are granting more favourable credit terms than would be normally expected.

   Overall, the company appears to have some problems in managing its working capital, which could lead to more serious liquidity problems in the future. The company seems to be using trade creditors as its main source of short term financing, which may cause a degrading of the company's credit and reputation with those suppliers. However, more information is required to fully understand these trends.

1. Financing is generally obtained through three sources: borrowing the funds, issuing shares, and using internally generated funds. Using borrowed money to leverage, where the interest rate from the borrowing is less than the return from generating the profit, can maximize the returns paid to shareholders, and the related interest paid is tax deductible. However, borrowed funds must be repaid, which affects the company's liquidity and solvency risk. Issuing shares, on the other hand, does not impact liquidity and solvency risk, but it may result in the dilution of ownership and associated lower market value and less dividends per share. Using internally generated funds may be appropriate if the company has excess cash profits and has determined that this project is the best use for these funds.
2. Based on the information provided, borrowing is the most suitable source of financing for Evergreen Ltd. With a debt to total assets ratio of 56%, Evergreen Ltd. is underleveraged as compared with competitors operating in the same industry, averaging 60%. As a result, Evergreen Ltd. will likely be able to finance the expansion by borrowing and still maintain an acceptable level of liquidity and solvency risk lower than, or equal to, the 60% industry standard benchmark. If Evergreen Ltd. has significant amounts of property, plant, and equipment, it may be able to obtain the loan and secure it with its existing tangible assets. However, more information would be required before making a concrete recommendation.

1. 
2. 
3. The market interest rate at the time of signing the note would have been 5% because the note was issued at face value, meaning that the 5% stated rate was the same as the market rate at that time.
4. The yield is the same as the market or effective rate, which is 5% in this case. Had the market rate been greater or lower than the face rate, the yield would be equal to the market rate.
5. The current portion of the long-term debt is the principal portion of the debt that will be paid within one year of the reporting (balance sheet) date. In this case, as no principal portions are due until the note's maturity on January 1, 2024, no amount will be reported as a current portion of long-term debt as at the December 31, 2021, reporting date. However, when the balance sheet at December 31, 2023, is prepared, the long-term note payable of $400,000 will be classified as a current liability because it will be due within one year of the December 31, 2023, reporting date.

1. 
2. 

3. Face value of bond		$	500,000
   Present value of bond			535,531
   Premium		$	35,531

1. 
2. 
3. If the note face value is $120,000, the duration is three years, and the PV is equal to $95,260, the interest rate would be:

   Interest rate = (+/- 95,260 PV, 3 N, 120,000 FV) = 7.999 (or 8%)

4. Date		Interest @ 8%		Balance
   Jan 1, 2021				95,260
   Dec 31, 2021		7,621		102,881
   Dec 31, 2022		8,230		111,111
   Dec 31, 2023		8,889		120,000

PMT = (+/- 25,000 PV, 3 N, 8 I/Y) = 9,700.84 (or 9,701)

Payments each December 31 would be $9,701.

1. 

   To calculate the market rate (yield) at the time of the issuance to two decimal places:

   I/Y = (+/- 196,000 PV, 7,000 PMT, 10 N, 200,000 FV) = 3.74%

   
   

2. Hobart Services Ltd.
   Statement of Financial Position
   As at December 31, 2021
   Current liabilities:
   Interest payable		$	7,000
   Long-term liabilities:
   Long-term bonds payable, 7%, due January 1, 2026		$	196,673

   Check Figures:

   

   Note: There is no current portion of long-term debt in this case because there is no pay-down of the principal. Looking at the payment schedule, the balance owing is increasing due to the amortization of the discount.

3. 

4. Hobart Services Ltd.
   Statement of Financial Position
   As at December 31, 2021
   Current liabilities:
   Interest payable		$	7,000
   Long-term liabilities:
   Long-term bonds payable, 7%, due January 1, 2026		$	196,800

   Check Figures:

   

5. The total cost of borrowing will be the same for both methods, though the pattern of recognition as illustrated in the two interest schedules above is different throughout the life of the bonds.

1. Effective interest rate:
   
   

   I/Y = (+/- 785,000 PV, 20,000 PMT, 40 N, 800,000 FV) = 2.5756% every 6 months

   

   * Fee is capitalized and will be amortized over the life of the bond. See full amortization schedule above.

2. 

3. Hobart Services Ltd.
   Statement of Financial Position
   As at December 31, 2021
   Current liabilities:
   Interest payable		$	20,000
   Long-term liabilities:
   Long-term bonds payable, 5%, due January 1, 2041		$	785,442

4. When a note or bond is issued, the brokerage fees and any other directly attributable costs should be included in the fair value and amortized over the life of the debt. As a result, these types of additional costs will affect both the amount of the bond discount (or premium) amortized and the interest expense over the term of the bond. Exceptions to this are where the debt will subsequently be measured at fair value under the fair value option. In this case, the transaction costs would be expensed at the time of issuance and not included in the initial fair value measurement. [CPA Handbook, Accounting, Part II, Section 3856.07 and Part I, IFRS 9].

When a note or bond is issued, the brokerage fees and any other directly attributable costs should be included in the fair value and amortized over the life of the debt. As a result, these types of additional costs will affect both the amount of the bond discount or premium amortized and the interest expense over the term of the bond. Exceptions to this are where the debt will subsequently be measured at fair value under the fair value option. In this case, the transaction costs would be expensed at the time of issuance and not included in the initial fair value measurement. (CPA Handbook, Accounting, Part II, Section 3856.07 and Part I, IFRS 9)

1. ASPE
   
2. IFRS (IFRS 9)
   
3. The risk for Tribecca increased in this case, so the fair value of its debt owing decreased. The offsetting entry to the decrease (debit) to bonds payable is an unrealized gain. An entry booking a gain seems like an illogical outcome, given that the company is now worse off than before due to higher risk.

1. Under IFRS, this debt is to be reported as a current liability on the December 31, 2021, financial statements because it was not refinanced by the reporting date. The only exception is if the refinancing was done under an agreement that existed at December 31, 2021, and the decision about the refinancing was solely up to management's discretion.
2. Under ASPE, this debt can be reported as a long-term liability because it has been refinanced on a long-term basis before the financial statements are completed. In this case, the entity's financial statements are not yet finalized, so ASPE would permit the debt to be included with long-term liabilities.

Settlement or modification:

Old debt: $25,000 (amount due):

New annual interest payment:

New debt (PV using the old rate): PV (1,080 PMT, 8 I/Y, 3 N, 18,000 FV) = 17,072

The new debt is more than 10% difference of the old debt's value, so the renegotiation would be considered a settlement and not a modification in terms. A settlement requires the old debt to be removed from the records and the present value amount of the note payable with the new terms be recorded.

The PV of the new note payable at the current market rate would be:

PV (1080 PMT, 7 I/Y, 3 N, 18,000 FV) = 17,527.62

The entries would be:

1. Initial fair value amount of the house on January 1, 2021:

   PV = (5.75%, 6 N, 800,000 FV)	=	$	572,015
   Dec 31, 2021 Interest: ()	=		32,891
   Carrying value of the note, Dec 31, 2021	=	$	604,906

2. The assessed value for the house of $590,000 is only a tax assessment notice for purposes of tax levies and payments. Though it is intended to reflect some sort of value of the house, it may not necessarily be an accurate measure. The more accurate measure in this case would be the present value of the future cash flows of the note, using a known, agreed-upon bank rate. The tax assessment amount of $590,000 can be compared to the present value of $572,015 for consistency and reasonableness. In this case, the amounts are close.

1. The purchase price of the equipment should be recorded at the present value of the future cash flows of the instalment note at the imputed interest rate of 7%. This is the best measure of the fair value of the asset because it represents the present value of an agreed series of future cash flows at a known market rate. The listing price represents a tentative amount asked for the equipment and could be above or below the price that is agreed to between both parties.
2. PV = (40,541 PMT, 7 I/Y, 4 N) = 137,321
   
3. From the perspective of a creditor, an instalment note payment includes both the interest and principal, whereas, for an interest-bearing note, the principal amount is not due until maturity. In other words, the instalment note provides a regular reduction of the principal balance as part of every payment received, reducing the creditor's investment in the debt and freeing up cash to use elsewhere.

For Hornblower Corp.:

1. Determine if this is a modification of terms or settlement:

   Present value of old debt is $700,000.

   Present value of new debt using the historic rate:

   PV = (45,500 PMT, 8 I/Y, 2 N, 650,000 FV) = 638,409

   This loan is deemed as a modification in terms because the present value of the future cash flows of the new debt using the old rate of $638,409 does not differ by an amount greater than 10% of the present value of the old debt of $700,000.

   There will be no entry for Hornblower Corp. due to the restructure of the loan. The old debt remains on the books of Hornblower Corp. at $700,000 and no gain or loss is recognized. A note disclosure regarding the modification of terms is required.

2. The interest expense is based on the future cash flows specified by the new terms with the pre-restructuring carrying amount of the debt of $700,000. The effective interest rate is calculated as follows:

   I/Y = (+/- 700,000 PV, 45,500 PMT, 2 N, 650,000 FV) = 2.98% (rounded)

3. 				Interest		Reduction in
   Date		Payment		@ 2.98%		Carrying Amount		Balance
   Dec 31, 2021								700,000
   Dec 31, 2022		45,500		20,860		24,640		675,360
   Dec 31, 2023		45,500		20,140*		25,360		650,000
   				* Rounded

   
4. 

For Firstly Trust:

5. Present value of old debt is $700,000.

   Present value of new debt using the historic rate:
   PV = (45,500 PMT, 8 I/Y, 2 N, 650,000 FV)	=	$	638,409
   Loss		$	61,591

   

   Note: If Firstly Trust had previously recorded an allowance for doubtful accounts for this note, the debit entry would be to the AFDA account instead of the bad debt expense.

6. 		Payment		Interest		Reduction in
   Date		7%		@ 8%		Carrying Amount		Balance
   Dec 31, 2021								638,409
   Dec 31, 2022		45,500		51,072		5,572		643,981
   Dec 31, 2023		45,500		51,519*		6,019		650,000
   				* Rounded

7. 
8. 

1. Determine if the changes should be accounted for as a settlement or as a modification:

   Old debt: $150,000

   New terms using old rate of 10%:

   PV = (11,700 PMT, 10 I/Y, 2 N, 130,000 FV) = 127,744

   The present value of the new terms using the old rate of 10% differs by an amount larger than 10% of the present value of the old debt of $150,000. As a result, the renegotiated debt is considered a settlement. The old debt is removed from the books of Ulting Ltd. with a gain/loss being recognized, and the new debt is recorded.

   

   Interest Schedule:

   Payment		Interest		Reduction in
   9%		@ 5%		Carrying Amount		Balance
   						139,669
   11,700		6,983.45		4,717		134,952
   11,700		6,747.62		4,952		130,000

   
2. 

   Interest schedule:

   Payment		Interest		Adjust to
   9%		@ 10%		Carrying Amount		Balance
   						127,744
   11,700		12,774		1,074		128,818
   11,700		12,882		1,182		130,000

   

1. PV = (60,000 PMT, 8 I/Y, 4 N, 1,000,000 FV) = $933,757
2. For IFRS, the residual method is used. This allocates the proceeds first to the liability component and the residual to the equity component. The debt component is measured first as the par value compared to the present value of future cash flows without the convertible feature:

   Total proceeds at par		$	1,000,000
   PV of the debt component by itself			(933,757)
   Incremental value of option		$	66,243

   Entry:

   
3. Under ASPE, the zero-equity method can be used as a policy choice. The equity component would be measured at $0 and the rest to the debt component.

   Entry:

   

   Also, the residual method can also be used as explained above. Entry is the same as the entry for IFRS:

   Entry:

   

1. Under IFRS, the residual method is applied whereby cash is allocated to the value of the debt instrument first, and the residual is allocated to equity. The debt value is calculated as $576,000 and the warrants are accounted for as equity instruments.
   
2. Under ASPE one option is to measure the component that is most easily measurable first (usually the debt component) and apply the residual to the other equity component. This is the option under IFRS, and the journal entry will, therefore, be the same:
   

   Another option is to measure the equity component using the zero-equity method. This means that equity is measured at $0 and the journal entry would be:

   
3. Allocating the entire issuance to the debt component, and therefore zero to equity, results in a higher debt to total assets ratio as compared with the residual method. A lower debt to total assets ratio indicates better debt paying ability and long-run solvency.

1. 

   *
   **

2. 

   Note: The bonds payable carrying value would no longer include any unamortized premium, so the face value or par value would be the carrying value at maturity.

3. Due to common shares market price volatility, there is a risk in waiting to convert the bonds. If the bondholder does not convert when the common share market value is high, no gain will be realized. Conversely, if the common shares market price declines too far, the bondholder risks not being able to sell the bonds, rendering the conversion rights worthless.

Residual method, using the fair value of the warrants first and the residual to the bonds:

Zero-equity method, which measures the equity component at $0:

Residual method:

Zero-equity method, which measures the equity component at $0:

Fair value of bonds without warrants is () = $396,000

Residual method:

Zero-equity method:

1. January 1, 2020: No journal entry necessary since the fair value of the forward contract would be $0.
   
2. 

January 1, 2020: No entry on the grant date.

1. January 1, 2021: No entry on the grant date.
   
2. The market price of the shares of $15 on May 1, 2023, is not used in recording the exercise of the stock options. From an accounting perspective, the market price is not relevant. It is, nonetheless, relevant to the employees in making their decision to exercise their stock options. The market price is mentioned to indicate that the timing of the exercise is justified, or at least makes sense. Employees exercising a stock option would have paid $10 and could resell the shares immediately for $15, for a gain of $5 per share.

1. Current Tax:

   		Amount
   Accounting profit		$	3,500,000
   Permanent differences:
   None
   Temporary differences:
   Construction not yet taxable			(900,000)
   Capital allowance > depreciation			(1,100,000)
   Taxable profit			1,500,000
   Tax rate			30%
   Current tax payable		$	450,000

   Temporary difference re: depreciation calculated as follows:

   Cost of asset		$	6,800,000
   Accumulated depreciation			1,200,000
   Carrying value			5,600,000
   Less tax base			4,500,000
   Excess capital allowance		$	1,100,000

   Deferred Tax Liability:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Construction revenue	900,000	0	(900,000)	30%	(270,000)
   PPE	5,600,000	4,500,000	(1,100,000)	30%	(330,000)
   Total					(600,000)

2. 

3. Profit before tax					$	3,500,000
   Income taxes
   Current expense			(450,000)
   Deferred expense			(600,000)
   						(1,050,000)
   Net profit for the year					$	2,450,000

1. Current Tax:

   		Amount
   Accounting profit		$	3,700,000
   Permanent differences:
   None
   Temporary differences:
   Construction now taxable			900,000
   Capital allowance < depreciation			400,000
   Taxable profit			5,000,000
   Tax rate			30%
   Current tax payable		$	1,500,000

   Temporary difference re: depreciation calculated as follows:

   Cost of asset		$	6,800,000
   Accumulated depreciation			2,600,000
   Carrying value			4,200,000
   Less tax base			3,500,000
   Excess capital allowance		$	700,000

   Since last year's excess was $1,100,000, $400,000 of the temporary difference reversed during the year.

   Deferred Tax Liability:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Const. rev.	0	0	0	30%	0
   PPE	4,200,000	3,500,000	(700,000)	30%	(210,000)
   Total					(210,000)
   Opening bal.					(600,000)
   Adjustment					390,000

2. 

3. Profit before tax					$	3,700,000
   Income taxes
   Current expense			(1,500,000)
   Deferred income			390,000
   						(1,110,000)
   Net profit for the year					$	2,590,000

1. Opening deferred tax liability balance of $17,500 implies an opening temporary difference of . If the carrying amount at 31 December 2021 was $320,000, then the tax base must have been .

   At 31 December 2022, the carrying amount will be

   At 31 December 2022, the tax base will be

   Current Tax:

   		Amount
   Accounting profit		$	416,000
   Permanent differences:
   Non-deductible entertainment			21,000
   Temporary differences:
   Warranty not deductible in 2022			56,000
   Capital allowance > depreciation			(8,000)
   Taxable profit			485,000
   Tax rate			25%
   Current tax payable		$	121,250

   Deferred Tax Liability:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Warranty	(56,000)	0	56,000	25%	14,000
   PPE	270,000	192,000	(78,000)	25%	(19,500)
   Total					(5,500)
   Opening bal.					(17,500)
   Adjustment					12,000

2. 

3. Profit before tax					$	416,000
   Income taxes
   Current expense			(121,250)
   Deferred income			12,000
   						(109,250)
   Net profit for the year					$	306,750

4. Current Liabilities
   Income taxes payable		$	121,250
   Non-Current Liabilities
   Deferred income taxes			5,500

1. Current Tax:

   		2021		2022		2023
   Accounting profit		110,000		242,000		261,000
   Permanent differences:
   Dividend		(10,000)		(10,000)		(10,000)
   Temporary differences:
   (plug to balance)		(15,000)		(36,000)		34,000
   Taxable profit		85,000		196,000		285,000
   Tax rate		20%		23%		23%
   Current tax payable/exp.		17,000		45,080		65,550

   Deferred Tax Liability – 2021:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	15,000	0	(15,000)	20%	(3,000)
   Opening bal.					0
   Adjustment					(3,000)

   Deferred Tax Liability – 2022:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	51,000	0	(51,000)	23%	(11,730)
   Opening bal.					(3,000)
   Adjustment					(8,730)

   Deferred Tax Liability – 2023:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	17,000	0	(17,000)	23%	(3,910)
   Opening bal.					(11,730)
   Adjustment					(7,820)

2. Summary: Income Statement

   		2021			2022			2023
   Current tax expense			17,000			45,080			65,550
   Deferred tax expense (income)			3,000			8,730			(7,820)

   Balance Sheet

   		2021			2022			2023
   Deferred tax liability			3,000			11,730			3,910

3. Profit before tax					$	242,000
   Income taxes
   Current			45,080
   Deferred resulting from temporary differences			8,280
   Deferred resulting from tax rate change			450
   						53,810
   Net profit for the year					$	188,190

   Note: The deferred tax resulting from the rate change is calculated as the opening temporary difference from 2021 multiplied by the rate differential: . The deferred tax resulting from temporary differences is calculated as the current year temporary differences multiplied by the current rate: . Deferred tax adjustments resulting from rate changes must be disclosed separately from deferred tax adjustments resulting from changes in temporary differences.

1. Current Tax:

   		2021		2022		2023
   Accounting profit		110,000		242,000		261,000
   Permanent differences:
   Dividend		(10,000)		(10,000)		(10,000)
   Temporary differences:
   (plug to balance)		(15,000)		(36,000)		34,000
   Taxable profit		85,000		196,000		285,000
   Tax rate		20%		23%		23%
   Current tax payable/exp.		17,000		45,080		65,550

   Deferred Tax Liability – 2021:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	15,000	0	(15,000)	23%	(3,450)
   Opening bal.					0
   Adjustment					(3,450)

   NOTE: Deferred tax is recorded at the rate expected to be in effect. This is substantively enacted rate at the end of 2021.

   Deferred Tax Liability – 2022:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	51,000	0	(51,000)	23%	(11,730)
   Opening bal.					(3,450)
   Adjustment					(8,280)

   Deferred Tax Liability – 2023:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	17,000	0	(17,000)	23%	(3,910)
   Opening bal.					(11,730)
   Adjustment					7,820

2. Summary:

   		2021		2022		2023
   Current tax expense		17,000		45,080		65,550
   Deferred tax expense (income)		3,450		8,280		(7,820)
   Deferred tax liability		3,450		11,730		3,910

3. Profit before tax					$	242,000
   Income taxes
   Current			45,080
   Deferred			8,280
   						53,360
   Net profit for the year					$	188,640

   Note: The deferred tax resulting from the rate change does not need to be reported as it was already accounted for in 2021.

1. 

   ending balance of carry forward after applying loss to reduce current taxable income to 0
   Ending deferred tax =
   Adjustment to deferred tax asset =

   There is no adjustment for current taxes in 2024 because taxable income has been reduced to 0 by the carryforward.

2. 

   No j/e in 2023 for the benefit of the loss carry forward, as the asset is not recognized. However, disclosure will be made of the unrecorded carry forward amount (47,000).

   No j/e in 2024, as current tax will be 0 and no deferred tax asset will be established. However, disclosure is required of the current tax expense components:

   Current tax expense		$	3,780
   Less benefit of loss carried forward			(3,780)
   Current tax expense		$	0

   As well, disclosure of the remaining, unrecorded loss carried forward (26,000) would continue.

1. Current Tax:

   		Amount
   Accounting profit		$	750,000
   Permanent differences:
   Non-deductible fines			12,000
   Non-taxable dividends			(7,500)
   Temporary differences:
   Previously taxed revenue now earned			(95,000)
   New subscriptions taxed but not earned			68,000
   Capital allowance < depreciation			13,000
   Taxable profit			740,500
   Tax rate			30%
   Current tax payable		$	222,150

   Deferred Tax:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Unearned revenue	(220,000)	0	220,000	30%	66,000
   PPE	298,000	192,000	(106,000)	30%	(31,800)
   Total					34,200
   Opening bal.					38,400
   Adjustment					(4,200)

   Unearned revenue
   Carrying amount PPE
   Tax base PPE

2. 

3. Profit before tax					$	750,000
   Income taxes
   Current expense			(222,150)
   Deferred expense			(4,200)
   						(226,350)
   Net profit for the year					$	523,650

4. 	2022	2021
   Current assets
   Income taxes receivable	–	16,250
   Non-current assets
   Deferred income taxes	34,200	38,400
   Current liabilities
   Income taxes payable	222,150	–

1. Deferred Tax Liability – 2021:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	180,000	165,000	(15,000)	25%	(3,750)
   Opening bal.					0
   Adjustment					(3,750)

   Deferred Tax Liability – 2022:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	160,000	135,000	(25,000)	30%	(7,500)
   Opening bal.					(3,750)
   Adjustment					(3,750)

   Deferred Tax Liability – 2023:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	140,000	135,000	(5,000)	35%	(1,750)
   Opening bal.					(7,500)
   Adjustment					5,750

   Deferred Tax Liability/Asset – 2024:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	120,000	135,000	15,000	35%	5,250
   Opening bal.					(1,750)
   Adjustment					7,000

   Deferred Tax Asset – 2025:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Temp Diff	100,000	110,000	10,000	30%	3,000
   Opening bal.					5,250
   Adjustment					(2,250)

   NOTE: The carrying amount/tax base are determined by taking the original cost of $200,000 and deducting the accumulated depreciation/accumulated capital allowances at the end of each year.

2. Current taxes

   		2021		2022		2023		2024		2025
   Accounting profit (loss) reported		150,000		60,000		(440,000)		(80,000)		350,000
   Temporary difference:
   Depreciation expense		20,000		20,000		20,000		20,000		20,000
   Capital allowance claimed for
   tax purposes		(35,000)		(30,000)		0		0		(25,000)
   Taxable profit (loss)		135,000		50,000		(420,000)		(60,000)		345,000
   Enacted tax rate		25%		30%		35%		35%		30%
   Tax payable (refund)		33,750		15,000		(48,750)*		0**		15,000***

   * In 2023, a tax refund is generated as follows:

   Tax loss applied to 2021 taxable profit			135,000
   Rate			25%
   Refund						33,750
   Tax loss applied to 2022 taxable profit			50,000
   Rate			30%
   Refund						15,000
   Total refund and tax income for the year								$	48,750

   ** In 2024, the additional loss cannot be carried back, as there are no further taxable profits to apply it against. Therefore, no tax refund is generated.

   *** In 2025, the current tax payable is determined as follows:

   Taxable profit						345,000
   Less loss carry forward applied:
   2023 tax loss			(420,000)
   Applied to 2021			135,000
   Applied to 2022			50,000
   2024 loss			(60,000)
   Total loss available in 2025						(295,000)
   Taxable profit after loss carry forward applied						50,000
   Tax rate						30%
   Tax payable						15,000

3. 		2023		2024
   Opening balance of loss		0		(235,000)
   Current tax loss/profit		(420,000)		(60,000)
   Carried back to 2021 and 2022		185,000		–
   Balance to carry forward		(235,000)		(295,000)
   Probability of use		80%		10%
   Expected benefit		(188,000)		0
   Tax rate		35%		35%
   Deferred tax asset		65,800		0
   Opening balance		0		65,800
   Adjustment required		65,800		(65,800)

   In 2024, management's estimate of its ability to utilize the tax losses has dropped to 10%, which means it is no longer probable that the asset can be realized. At this point, the asset should be derecognized.

   In 2025, the balance of the loss ($295,000) can be fully used against current taxable profit ($345,000). In 2025, the company will record current tax income of . This will offset the current tax expense of , leaving a net current tax expense of $15,000. Although there is no deferred tax adjustment as the asset was previously derecognized, disclosure of the two different components of current tax expense will be required.

4. 		2021		2022		2023		2024		2025
   Current tax expense (income)		33,750		15,000		(48,750)		0		15,000
   (from part b)
   Deferred tax expense (income) – PPE		3,750		3,750		(5,750)		(7,000)		2,250
   (from part a)
   Deferred tax (income) expense – loss		0		0		(65,800)		65,800		0
   (from part c)
   Total tax expense (income)		37,500		18,750		(120,300)		58,800		17,250

1. Current Tax:

   		Amount
   Accounting profit		$	150,000
   Permanent differences:
   None
   Temporary differences:
   Unearned rent taxed in current year			96,000
   Construction revenue not taxable			(90,000)
   Capital allowance > depreciation			(4,000)
   Taxable income			152,000
   Tax rate			30%
   Current tax payable		$	45,600

   Future Tax:

   Item	Carrying Amount	Tax Base	Temp. Diff.	Rate	Deferred Tax
   Unearned rent revenue	(96,000)	0	96,000	30%	28,800
   Construction revenue	90,000	0	(90,000)	30%	(27,000)
   PPE	108,000	119,000	11,000	30%	3,300
   Total					5,100
   Opening bal.					4,500
   Adjustment					600

   NOTE: Opening balance = DR

   Summary:

   Current tax expense		$	(45,600)
   Future tax benefit			600
   Total tax expense		$	(45,000)

2. Balance sheet presentation

   Non-current assets
   Future income taxes		$	17,700
   Current liabilities
   Income taxes payable			45,600
   Future income taxes			12,600

   NOTE:

   

   

   One-half of the future tax related to unearned revenue is classified as current and one-half as non-current because this is way in which the underlying unearned revenue would be classified. The future tax related to construction revenue is classified as current because the underlying construction in process account would be classified this way. The future tax related to the PPE is classified as non-current because PPE would be classified as non-current.

3. Income Statement Presentation:

   Income tax expense

   $

   (45,600)

   Balance Sheet Presentation:

   Current liabilities
   Income tax payable		$	45,600

   No future tax amounts are recorded.

1. monthly salary

   

   

   

   Note:

   

   

   

   

2. The company will report a pension expense of $630,000 in the appropriate section of the income statement.
3. The company will report a pension liability of $87,500 on December 31, 2022. This will be reported as a current liability, as the funds are remitted to the plan in January 2023.

1. 	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual	OCI
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	6,300,000 CR	5,950,000 DR	350,000 CR
   Service cost	575,000 CR				575,000 DR
   Interest: DBO	441,000 CR				441,000 DR
   Interest: assets		416,500 DR			416,500 CR
   Contribution		682,000 DR		682,000 CR
   Benefits paid	186,000 DR	186,000 CR
   Remeasurement		20,500 DR				20,500 CR
   gain: assets
   Journal entry			103,000 DR	682,000 CR	599,500 DR	20,500 CR
   Closing balance	7,130,000 CR	6,883,000 DR	247,000 CR

2. 
3. The company will report a non-current liability of $247,000 on December 31, 2021.

1. 	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual	OCI
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	4,400,000 CR	4,550,000 DR	150,000 DR
   Service cost	565,000 CR				565,000 DR
   Interest: DBO	352,000 CR				352,000 DR
   Interest: assets		364,000 DR			364,000 CR
   Contribution		422,000 DR		422,000 CR
   Benefits paid	166,000 DR	166,000 CR
   Remeasurement		52,000 CR				52,000 DR
   loss: assets
   Remeasurement	176,000 CR					176,000 DR
   loss: DBO
   Journal entry			359,000 CR	422,000 CR	553,000 DR	228,000 DR
   Closing balance	5,327,000 CR	5,118,000 DR	209,000 CR

2. 

3. Non-Current Liabilities:
   Net defined benefit liability		$	209,000
   Accumulated Other Comprehensive Income:
   Net remeasurement losses on defined benefit liability		$	(228,000)

1. 2020:

   	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual	OCI
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	0 CR	0 DR	0 CR
   Service cost	389,000 CR				389,000 DR
   Interest: DBO	0 CR				0 DR
   Interest: assets		0 DR			0 CR
   Contribution		348,000 DR		348,000 CR
   Benefits paid	0 DR	0 CR
   Remeasurement		2,000 DR				2,000 CR
   gain: assets
   Remeasurement	27,000 DR					27,000 CR
   gain: DBO
   Journal entry			12,000 CR	348,000 CR	389,000 DR	29,000 CR
   Closing balance	362,000 CR	350,000 DR	12,000 CR

   Remeasurement gains are derived by working backwards from the ending balances of the DBO and plan assets. No interest is calculated as the opening balances were zero and it is assumed that transactions occur at the end of the period.

   2021:

   	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual	OCI
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	362,000 CR	350,000 DR	12,000 CR
   Service cost	395,000 CR				395,000 DR
   Interest: DBO*	25,340 CR				25,340 DR
   Interest: assets**		24,500 DR			24,500 CR
   Contribution		301,000 DR		301,000 CR
   Benefits paid	50,000 DR	50,000 CR
   Remeasurement		15,500 CR				15,500 DR
   loss: assets***
   Remeasurement	0 CR					0 DR
   loss: DBO
   Journal entry			110,340 CR	301,000 CR	395,840 DR	15,500 DR
   Closing balance	732,340 CR	610,000 DR	122,340 CR

   *
   **
   *** (Work backwards from the ending balance to determine the balancing figure.)

   2022:

   	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual	OCI
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	732,340 CR	610,000 DR	122,340 CR
   Service cost	410,000 CR				410,000 DR
   Interest: DBO*	58,587 CR				58,587 DR
   Interest: assets**		48,800 DR			48,800 CR
   Contribution		265,000 DR		265,000 CR
   Benefits paid	54,000 DR	54,000 CR
   Remeasurement		15,000 CR				15,000 DR
   loss: assets
   Remeasurement	42,000 CR					42,000 DR
   loss: DBO
   Journal entry			211,787 CR	265,000 CR	419,787 DR	57,000 DR
   Closing balance	1,188,927 CR	854,800 DR	334,127 CR

   *
   **

2. 2020:
   

   2021:

   

   2022:

   
3. 2020:

   Non-Current Liabilities:
   Net defined benefit liability (underfunded)		$	12,000
   Accumulated Other Comprehensive Income:
   Net remeasurement gains on defined benefit liability		$	29,000

   2021:

   Non-Current Liabilities:
   Net defined benefit liability (underfunded)		$	122,340
   Accumulated Other Comprehensive Income:
   Net remeasurement gains on defined benefit liability		$	13,500*

   * Note:

   2022:

   Non-Current Liabilities:
   Net defined benefit liability (underfunded)		$	334,127
   Accumulated Other Comprehensive Income:
   Net remeasurement losses on defined benefit liability		$	(43,500)*

   * Note:

1. 	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	6,246,000 CR	6,871,000 DR	625,000 DR
   Past service cost	215,000 CR				215,000 DR
   Service cost	510,000 CR				510,000 DR
   Interest:	581,490 CR				581,490 DR
   Health Benefit Obligation*
   Interest: assets**		618,390 DR			618,390 CR
   Contribution		430,000 DR		430,000 CR
   Benefits paid	850,000 DR	850,000 CR
   Journal entry			258,100 CR	430,000 CR	688,100 DR
   Closing balance	6,702,490 CR	7,069,390 DR	366,900 DR

   *
   **

   The post-employment health benefit expense will be $688,100 for the year. Note that the interest on the health benefit obligation is calculated after taking the past service adjustment into account. This is necessary as the past service adjustment was made on January 1.

2. The company will report a non-current asset of $366,900, subject to any adjustment required as a result of the asset ceiling test.

1. 	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	6,300,000 CR	5,950,000 DR	350,000 CR
   Service cost	575,000 CR				575,000 DR
   Interest: DBO	441,000 CR				441,000 DR
   Interest: assets		416,500 DR			416,500 CR
   Contribution		682,000 DR		682,000 CR
   Benefits paid	186,000 DR	186,000 CR
   Remeasurement		20,500 DR			20,500 CR
   gain: assets
   Journal entry			103,000 DR	682,000 CR	579,000 DR
   Closing balance	7,130,000 CR	6,883,000 DR	247,000 CR

2. 
3. The company will report a non-current liability of $247,000 on December 31, 2021.

1. 	Pension Plan		Company Accounting Records
   	DBO	Plan	Net	Cash	Annual
   		Assets	Defined		Pension
   			Benefit		Expense
   			Balance
   Opening balance	4,400,000 CR	4,550,000 DR	150,000 DR
   Service cost	565,000 CR				565,000 DR
   Interest: DBO	352,000 CR				352,000 DR
   Interest: assets		364,000 DR			364,000 CR
   Contribution		422,000 DR		422,000 CR
   Benefits paid	166,000 DR	166,000 CR
   Remeasurement		52,000 CR			52,000 DR
   loss: assets
   Remeasurement	176,000 CR				176,000 DR
   loss: DBO
   Journal entry			359,000 CR	422,000 CR	781,000 DR
   Closing balance	5,327,000 CR	5,118,000 DR	209,000 CR

2. 

3. Non-Current Liabilities:
   Net defined benefit liability		$	209,000

   No accumulated other comprehensive income is reported. The remeasurement losses would simply be included in retained earnings through the closing of the pension expense account at the end of the year.

1. Lessee analysis (ASPE):
   • Does ownership title pass? No, title remains with the lessor.
   • Is there a BPO or a bargain renewal option? Yes
   • Is the lease term 75% or more of the asset's estimated economic or useful life? No 6 years/10 years = 60%, which does not meet the 75% threshold
   • Does the present value of the minimum lease payments exceed 90% of the leased asset's fair value? Yes, as calculated below.

     Present value of minimum lease payments:

     PV = (25,100 PMT/AD, 7 I/Y, 6 N, 3,000 FV) = $130,014 (rounded)

     ASPE interest rate used must be the lower of the two rates, since both are known.

     The present value compared to the fair value of $130,000 exceeds the 90% numeric threshold. Note that the leased asset and obligation cannot exceed fair value, so $130,000 will be the amount used as the valuation in the journal entries below.

   Any one of the criteria met will result in a classification of a capital lease. In this case, the lease agreement has met two criteria: a bargain purchase option, and a present value of the minimum lease payments that exceeds 90% of the fair value of the asset.

   Lessor Analysis (ASPE)

   The lease agreement meets the capitalization criteria for the lessee above. Additionally, there are no uncertainties regarding the collectability of the lease payments and the costs yet to be incurred by the lessor (both must be met). This would, therefore, be classified as a capital lease for the lessor. The initial amount of net investment (fair value) of $130,000 exceeds the lessor's cost of $90,000, making the lease a sales-type lease to the lessor.

2. Gross investment (lease receivable) for the lessor:

   The minimum lease payments regarding this lease are:

   Calculation:		=	$	150,600
   BPO		+		3,000
   Gross investment at inception			$	153,600

   Net investment for the lessor:

   The $130,000 fair value in this case (or the present value if it does not exceed the fair value).

3. Lessee and Lessor
   Lease Amortization Schedule
   		Annual
   		Lease						Reduction			Balance
   		Payment			Interest			of Lease			Lease
   Date		Plus BPO			@ 7%			Obligation			Obligation
   Jul 1, 2021		$	25,100								$	130,000
   Jul 1, 2021			25,100					$	25,100			104,900
   Jul 1, 2022			25,100		$	7,343			17,757			87,143
   Jul 1, 2023			25,100			6,100			19,000			68,143
   Jul 1, 2024			25,100			4,770			20,330			47,813
   Jul 1, 2025			25,100			3,347			21,753			26,060
   Jul 1, 2026			25,100			1,824			23,276			2,784
   Jun 30, 2027			3,000			216*			2,784			0
   		$	153,600		$	23,600		$	130,000

   * Note: The lease valuation is limited to its fair value of $130,000 instead of the present value of $130,014. The difference ($14) is insignificant, thus a new interest rate is not required for the amortization schedule above. Had the present value been significantly higher than the fair value, a new effective interest rate would be required and calculated using the following methodology.

   I/Y = (+/- 130,000 PV, 25,100 PMT/AD, 6 N, 3,000 FV) = 7.004876% or 7%

   As can be seen, the 7% rate for the lessor has not significantly changed, so 7% will be the rate used in the amortization schedule above.

4. Lessee journal entries:
   

   Year-end adjusting entries:

   

   * Note: Because there is a bargain purchase option, the leased asset is depreciated over its economic life rather than over the lease term. This is because the BPO, much less than the market price at that time, will be exercised by the lessee and the asset will be used beyond the lease term.

   
5. Lessor entries
   

   Year-end adjusting entry:

   

   2022 payment:

   

   Year-end adjusting entry:

   

   Note: The lessor could record six months of interest income in July, and six months of interest income on December 31 to match the lessee interest entries. However, the minimum reporting requirement would be to recognize interest income each reporting date (December 31). If the lessor also had interim reporting every six months within the fiscal year, interest income would be accrued every six months to ensure that both the interim and year-end financial statements were complete.

6. For the lessee:

   Rather than using quantitative factors, such as the 75% and the 90% hurdles, the IFRS (IAS 17) criteria use qualitative factors to establish whether the risks and rewards of ownership have transferred to the lessee, which supports the classification as a capitalized lease:

   • There is reasonable assurance that the lessee will obtain ownership of the leased property by the end of the lease term. If there is a bargain purchase option in the lease, it is assumed that the lessee will exercise it and obtain ownership of the asset (same as with ASPE).
   • The lease term is long enough that the lessee will receive substantially all of the economic benefits that are expected to be derived from using the leased property over its life (equivalent to the 75% numeric threshold for ASPE).
   • The lease allows the lessor to recover substantially all of its investment in the leased property and to earn a return on the investment. Evidence of this is provided if the present value of the minimum lease payments is close to the fair value of the leased asset (equivalent to the 90% numeric threshold for ASPE).
   • The leased assets are so specialized that, without major modification, they are of use only to the lessee (IFRS (IAS 17) only).

   If the lease is deemed as a lease subject to capitalization, the accounting treatment of the lease by the lessee would be the same as ASPE, although it would be referred to as a finance lease, rather than a capital, direct financing lease.

   The treatment of the lease by the lessor would be the same as the lessee above, using qualitative criteria rather than numeric thresholds used for ASPE. (The criteria will not include the two-revenue recognition-based tests for uncertainty regarding collectability of lease payments and estimated un-reimbursable costs for the lessor.) The lease would be referred to as a finance lease, manufacturer or dealer rather than a sales-type lease.

7. If the lease agreement included an unguaranteed residual, the leased asset would be physically returned to the lessor at the end of the lease term. The depreciation charge would, therefore, be over the lease term and not the asset's economic life, which is the case when a bargain purchase is involved. As well, the depreciation calculation would not include a residual value.

1. Lessee analysis (IFRS, IAS 17)
   • Does ownership title pass? No, title remains with the lessor.
   • Is there a BPO or a bargain renewal option? No
   • Is the lease term covering the majority of the asset's estimated economic or useful life? Consider that the lease term is eight years and the economic life is ten years, so this constitutes a major part of the economic life of the asset. Yes, capitalize leased asset.
   • The leased asset is a specialized piece of landscaping machinery, so it will only benefit the lessee without major modifications. Yes, capitalize leased asset.
   • Does the present value of the minimum lease payments allow the lessor to recover substantially all of the leased asset's fair value as well as realizing a return on the investment? Consider that the present value of the minimum lease payments shown below is nearly equal to the fair value of $270,000, so it appears that the lessor will be reimbursed for all of the leased investment, including a return on investment. Yes, capitalize leased asset.

     Yearly payment		$	46,754
     Less: Executory costs			2,000
     Minimum annual lease payment		$	44,754

     Present value of minimum lease payments:
     PV = (44,754 PMT/AD, 9 I/Y, 8 N, 0 FV) = $269,999 (which is virtually 100% of the fair value of $270,000)

   Under IFRS (IAS 17), the lessee will classify this lease as a finance lease since the lease term covers substantially all of the asset's useful life, the present value of the minimum lease payments allows the lessor to recover almost all of the leased asset's fair value (as well as realizing a return on the investment), and the machinery is highly specialized. Three of the criteria considered were met so it is reasonable to assume that the lessee will capitalize the lease.

   The treatment of the lease by the lessor would be the same as the lessee above, using the qualitative criteria rather than numeric thresholds used for ASPE. Except the lessor classification criteria will not include the two-revenue recognition-based tests for uncertainty regarding collectability of lease payments and estimated un-reimbursable costs for the lessor. Again, since three criteria were met, it is reasonable to assume that the lease would be classified as a finance lease.

2. IFRS (IAS 17) states that the rate implicit in the lease is to be used wherever it is reasonably determinable. Using the fair value of $270,000, the implicit rate can be calculated:

   I/Y = (+/- 270,000 PV, 44,754 PMT/AD, 8 N) = 9% (rounded) which is the same rate as the lessee's

   Mercy Ltd.
   Lease Amortization Schedule
   (Lessee)
   		Annual Lease
   		Payment						Reduction			Balance
   		Excluding			Interest			of Lease			Lease
   Date		Executory Costs)			@ 9%			Obligation			Obligation
   											$	270,000
   Jan 1, 2021		$	44,754					$	44,754			225,246
   Jan 1, 2022			44,754		$	20,272			24,482			200,764
   Jan 1, 2023			44,754			18,069			26,685			174,079
   Jan 1, 2024			44,754			15,667			29,087			144,992
   Jan 1, 2025			44,754			13,049			31,705			113,287
   Jan 1, 2026			44,754			10,196			34,558			78,729
   Jan 1, 2027			44,754			7,086			37,668			41,061
   Jan 1, 2028			44,754			3,693*			41,061			0
   		$	358,032		$	88,032		$	270,000
   * rounded

3. 

Mercy Ltd.
Statement of Financial Position
December 31, 2022
Non-current assets
Equipment under lease		$	270,000
Accumulated depreciation			(67,500)
			202,500
Current liabilities
Interest payable			18,069
Current portion of long-term lease obligation*			26,685
Non-current liabilities
Long-term lease obligation ()		$	174,079

* The principal portion of the lease payment over the next 12 months after the reporting date of December 31, 2022. Refer to the amortization schedule above.

Required disclosure in the notes:

The following is a schedule of future minimum lease payments under the finance lease, expiring December 31, 2028, together with the balance of the obligation under finance lease.

*

Note: Additional disclosures would also be required about material lease arrangements, including contingent rents, sub-lease payments, and lease-imposed restrictions. These do not apply in this case.

Lessee Analysis (IFRS, IAS 17)

• Does the ownership title pass? No, title remains with the lessor.
• Is there a BPO or a bargain renewal option? No
• Does the lease term cover the majority of the asset's estimated economic or useful life? Consider that the lease term is eight years, and the economic life is twelve years, the lease covers a major part of the economic life of the asset. Yes, capitalize leased asset.
• As the leased asset is a specialized piece of landscaping machinery, it will only benefit the lessee without major modifications. Yes, capitalize leased asset.
• Does the present value of the minimum lease payments allow the lessor to recover substantially all of the leased asset's fair value, as well as realizing a return on the investment? Consider that the present value of the minimum lease payments is $288,960, compared to the fair value of $300,000, making the minimum lease payments nearly equal to the fair value at that date. As such, the lessor will recover substantially all of the leased asset's fair value, as well as a return of 9% on the investment. Yes, as calculated below.

  Yearly payment		$	50,397
  Less: Executory costs			2,500
  Minimum annual lease payment		$	47,897

  Present value of minimum lease payments:
  PV = (47,897 PMT/AD, 9 I/Y, 8 N, 0 FV) = 288,960 (which is substantially most of the fair value of $300,000)

  Consider the following criteria: The lease term covers substantially all of the asset's useful life, the present value of the minimum lease payments recovers substantially most of the leased asset's fair value (as well as realizing a return on the investment), and the machinery is highly specialized for the lessee. As these three factors have been met, it is reasonable to assume that the lease will be classified as a finance lease for the lessee under IFRS (IAS 17).

1. This is a finance lease to Oberton Ltd. The IFRS (IAS 17) criteria use qualitative factors to establish whether the risks and rewards of ownership are transferred to the lessee, and supports classification as a finance lease:
   1. There is reasonable assurance that the lessee will obtain ownership of the leased property by the end of the lease term. If there is a bargain purchase option in the lease, it is assumed that the lessee will exercise it and obtain ownership of the asset. No
   2. The lease term is long enough that the lessee will receive substantially all of the economic benefits that are expected to be derived from using the leased property over its life (as evidenced by a four-year lease compared to a six-year estimated economic life). Yes, this represents a major part of the economic life of the asset.
   3. The lease allows the lessor to recover substantially all of its investment in the leased property and to earn a return on the investment. Evidence of this is provided if the present value of the minimum lease payments is close to the fair value of the leased asset. Yes

      Compared to a fair value of $18,000 = 100% recovery of investment + an 8% return on investment.

   4. The leased assets are so specialized that, without major modification and/or significant cost to the lessor, they are of use only to the lessee. No

   The standard also states that these indicators are not always conclusive. The decision has to be made on the substance of each specific transaction. If the lessee determines that the risks and benefits of ownership have not been transferred to it, the lease is classified as an operating lease. In this case, two factors have been met so it would be reasonable to classify this lease as a finance lease for the lessee.

   For Black Ltd. (the lessor) under IFRS (IAS 17), the lease would receive the same treatment as for the lessee using the qualitative factors. Black Ltd. reasonably meets the factors, and is not a manufacturer or dealer, and so this is a finance lease.

2. Calculation of annual rental payment:

   PMT = +/- 18,000 PV, 8 I/Y, 4 N, 3,500 FV = = $4,333 lease payment, including executory costs of $20.

   This confirms that the interest rate used to calculate the lease payment was 8% per annum.

3. Lease Amortization Schedule
   		Lease
   		Payment						Reduction			Balance
   		Excluding			Interest			of Lease			Lease
   Date		Executive Costs)			@ 8%			Obligation			Obligation
   											$	18,000
   Jan. 1, 2021		$	4,313					$	4,313			13,687
   Jan. 1, 2022			4,313		$	1,095			3,218			10,469
   Jan. 1, 2023			4,313			838			3,475			6,994
   Jan. 1, 2024			4,313			560			3,753			3,241
   Jan. 1, 2025			3,500			259			3,241			0
   		$	20,752		$	2,752		$	18,000

4. 

5. Oberton Ltd.
   Statement of Financial Position
   December 31, 2021
   Non-current assets
   Property, plant, and equipment
   Vehicles under lease		$	18,000
   Less accumulated depreciation			3,625
   			14,375
   Current liabilities
   Interest payable			1,095
   Obligations under lease (Note 1)			3,218
   Non-current liabilities
   Obligations under lease (Note 1)		$	10,469

   Note 1: The following is a schedule of future minimum payments under finance lease expiring January 1, 2025, together with the present balance of the obligation under the lease.

   Year ending December 31, 2021
   2022		$	4,333
   2023			4,333
   2024			4,333
   2025			3,500
   			16,499
   Amount representing executory costs			(60)
   Amount representing interest			(2,752)
   Balance of obligation December 31, 2021		$	13,687

   Oberton Ltd.
   Statement of Income
   For the Year Ended December 31, 2021
   Administrative expense
   Depreciation expense		$	3,625
   Insurance expense			20
   Other expenses
   Interest expense			1,095

   * from lease amortization schedule part (c)

6. 
7. Entries for Black Ltd.:
   

8. Black Ltd.
   Income Statement
   For the Year Ended December 31, 2021
   Revenue
   Interest income (leases)*		$	1,095

   * from lease amortization schedule part (c)

   Note: The insurance recovery of $20 per year would offset the original insurance expense incurred by Black Ltd.

1. Lessor Analysis (ASPE)
2. 

   * Note: The unguaranteed residual value is included in the lessor's gross investment even though the lessee does not guarantee it. From the lessor's perspective, it anticipates receiving $25,000 from a third party at the end of the lease term and it does not matter who they receive it from. ** The residual value is unguaranteed, so its present value must be removed from the sale price to the lessee. Present value of the minimum lease payments = (35,000 PMT/AD, 5 I/Y, 10 N, 25,000 FV) = $299,122 Sales price OR remove the $25,000 residual value from the present value calculation above. PV = (35,000 PMT/AD, 5 I/Y, 10 N) = $283,774 *** The unearned interest income of $75,878 is calculated as the lease receivable (gross investment) less the present value of the minimum lease payments ().

   
3. Assuming the $25,000 residual value was guaranteed by the lessee, this would change the initial entry for the sale as follows:
   

   The sales revenue and cost of goods sold would not need to be reduced by the present value of the estimated residual value ($15,348) calculated in part (b). The sales revenue would, therefore, be the amount equalling the present value of the minimum lease payments.

4. Lease payment PMT/AD = (299,122 PV, 5 I/Y, 12 N, 40,000 FV) = $29,748 (rounded)

1. Lessee Analysis (ASPE)
   • Does ownership title pass? Yes, legal title passes to the lessee at the end of the lease term.
   • Is there a BPO or a bargain renewal option? N/A, title passes, so BPO is not relevant.
   • Is the lease term 75% or more of the asset's estimated economic or useful life? Yes 10 years/10 years = 100% which meets the 75% threshold
   • Does the present value of the minimum lease payments exceed 90% of the leased asset's fair value? Yes, as calculated below.

     PV = (61,507 PMT/A, 7 I/Y, 10 N, 0 FV) = $432,000 (rounded)

     The ASPE interest rate used must be the lower of the two, since both are known.

     The present value is equal to the fair value of $432,000, so it exceeds the 90% numeric threshold.

     Any one of the criteria met will result in a classification of a capital lease for the lessee. In this case, the lease agreement has met three criteria: legal title passes to the lessee, a lease term that exceeds 75% of the estimated economic life of the leased asset, and a present value of the minimum lease payments that exceeds 90% of the fair value of the asset.

   Lessor Analysis (ASPE)

   The lease agreement meets the capitalization criteria for the lessee above. In addition, there are no uncertainties regarding the collectability of the lease payments or the costs yet to be incurred by the lessor (both must be met). This would, therefore, be classified as a capital lease for the lessor. Additionally, as the lessor is a financing company this lease would be classified as a direct-financing lease by the lessor.

2. Kimble Ltd. (lessee) entries
   

   Note: The present value calculation in this case will involve the annual payment (PMT) of an ordinary annuity (paid at the end of each year) for 10 periods at 7%. The interest rate under ASPE is to be the lower of the two rates, if both are known.

   Earlier leasing questions involved the annual payment of an annuity due at the beginning of each year over the lease term.

   

   Note: Under ASPE, Kimble Ltd. is to use the lower of the two rates. The deferred profit on the sale-leaseback is to be amortized on the same basis that the asset is being depreciated, which, in this case, is ten years.

   Quick Finance Corp. (lessor) entries

   

Note: The contributed surplus is reduced on a pro-rata basis, as this surplus resulted from a share premium on issue, and not from a previous re-acquisition.

Also, note that the contributed surplus is fully utilized because it resulted from a previous re-acquisition of the same class of shares. As such, we do not need to allocate it on a pro-rata basis.

May 20 – no journal entry required

May 30 – no journal entry required

1. Calculation		Preferred			Common			Total
   Current year: ()		$	150,000					$	150,000
   Balance of dividends			–		$	1,050,000			1,050,000
   		$	150,000		$	1,050,000		$	1,200,000

2. Calculation		Preferred			Common			Total
   Arrears: ()		$	300,000					$	300,000
   Current year: ()			150,000						150,000
   Balance of dividends			–		$	750,000			750,000
   		$	450,000		$	750,000		$	1,200,000

3. Calculation		Preferred			Common			Total
   Arrears, as before		$	300,000					$	300,000
   Current year year basic dividend			150,000		$	240,000			390,000
   Current year participating dividend			196,146			313,854			510,000
   		$	646,146		$	553,854		$	1,200,000

   Note: The basic preferred dividend is calculated as before. Then, a like amount is allocated to the common shares. The preferred dividend can be expressed as a percentage: (or ). Therefore, the common shares are also allocated a basic dividend of () = $240,000. This leaves a remaining dividend of $510,000, which is available for participation. The participation is allocated on a pro-rata basis as follows:

   Carrying amounts of each class:

   Preferred		$	5,000,000		38.46%
   Common			8,000,000		61.54%
   Total		$	13,000,000		100%

   The participating dividend is therefore:

   Preferred:		=	$196,146
   Common:		=	$313,854

1. Implied value of the company before the dividend:

   

   50% share dividend would issue an additional shares

   The ex-dividend price should be per share

   A 3-for-2 share split results in the same number of shares being issued as above, making the share price $8.

2. For the 50% share dividend, the dividend amount will be calculated as

   Common shares		$	32,500,000
   Retained earnings			22,000,000
   Total equity		$	54,500,000

   A 3-for-2 share split has no effect on the accounts, as it simply increases the number of outstanding shares. Therefore, the equity section will appear as follows:

   Common shares		$	12,500,000
   Retained earnings			42,000,000
   Total equity		$	54,500,000

3. Either action will result in the share price dropping to $8 per share from $12. However, the total reported equity will not change as it's just a question of how the deck will be shuffled, so to speak, in the equity section. The decision will depend on both the legal framework in the company's jurisdiction and the corporate objectives of the distribution. There may be legal restrictions and tax implications, with respect to the share dividend, which would make the share split easier to implement. On the other hand, if the directors would like to capitalize some of the retained earnings to potentially reduce future shareholder demands for dividends, then the share dividend would be the better approach. The directors will also have to consider if the shareholder response will be different for each scenario. The directors should also consider if there are any other contracts or agreements, such as loan covenants, that would be affected by the decision.

1. 

   Average issue price =

   

   Preferred dividend:
   Common dividend:

2. Ocampo Inc.
   Statement of Changes in Shareholders' Equity
   Year Ended 31 December 2022
   																	Accumulated
   					Preferred			Common			Contributed			Retained			Other Comp.
   		Total			Shares			Shares			Surplus			Earnings			Income
   Balance on January 1		$	1,217,000		$	225,000		$	280,000		$	7,000		$	590,000		$	115,000
   Comprehensive Income:
   Net income			120,000												120,000
   Revaluation			23,000															23,000
   Total comprehensive
   income			143,000
   Shares issued			64,000			19,000			45,000
   Shares retired			(140,000)						(81,250)			(7,000)			(51,750)
   Cash dividend – common			(33,000)												(33,000)
   Cash dividend – preferred			(11,000)												(11,000)
   Share dividend – common			–						48,000						(48,000)
   Balance on December 31		$	1,240,000		$	244,000		$	291,750			–		$	566,250		$	138,000

   Note: Additional details of the transactions and the authorized and issued shares would be contained in the notes to the financial statements.

Note: Treasury shares were acquired at a price of per share. This is the price used to remove the treasury shares on resale.

Average issue price = per share

Average issue price = per share

There is no contributed surplus balance associated with preferred share re-acquisitions, so the full difference is charged to retained earnings.

Common dividend:

Note: The shares remaining in treasury are excluded from the dividend calculation, as the company cannot pay itself a dividend. The company's issued share capital includes the treasury shares, although they are not outstanding.

Preferred dividend:

Note: This calculation assumes that the cumulative, unpaid dividend on the retired preferred shares was not paid. Depending on the articles of incorporation and local legislation, the cumulative, unpaid dividend may need to be paid prior to retirement of the shares. This would result in an additional dividend of $50,000 () paid on the date of retirement.

1. Basic earnings per share calculation:

   Step 1: Record the opening balance of shares outstanding and each subsequent event, date, description, and number of shares for the current reporting. An event is where the outstanding number of shares changes.

   Step 2: For stock dividends or stock splits, apply the required retroactive restatement factor(s) from the event point when it initially occurs and backwards to the beginning of the fiscal year.

   Step 3: For each event, complete the duration between events under the date column and complete the corresponding fraction of the year column accordingly. Multiply the shares outstanding times the retroactive restatement factor(s) times the fraction of the year for each event. Sum the amounts to determine the WACS amount.

   

   	Income	WACS		Basic EPS
   Net income from continuing operations
   ()	$336,250
   Less preferred dividends	0
   Net income available to common shareholders	$336,250		240,865		$1.40

   Disclosures:

   Earnings per share:			Basic
   Income from continuing operations		$	1.40
   Loss from discontinued operations, net of tax*			(0.11)
   Net income		$	1.29

   *

2. Common shareholders need to know how much of a company's available income can be attributed to the shares they own. This helps them assess future dividend payouts and the value of each share. Earnings per share (EPS) becomes a per share way of describing net income, making EPS a good metric for shareholders and investors. When the income statement reports discontinued operations, EPS should be disclosed for income from continuing operations, discontinued operations, and net income. These disclosures make it possible for shareholders and potential investors to know the specific impact of income from continuing operations on earnings per share, as opposed to a single EPS number, that includes income or loss from non-continuing operations not expected to continue.
3. EPS is used in the calculation of the price earnings ratio (), which compares the market price of the company's shares with income generated on a per-share basis. Market price of the company's shares will generally adjust after issuance of a stock dividend or a stock split. For the calculation of price earnings ratio to remain valid after a stock dividend or stock split, EPS should also be adjusted in the company's financial statements to assume that the additional shares have been outstanding since the beginning of the year in which the stock dividend or stock split occurred.

Step 1: Record the opening balance of shares outstanding and each subsequent event, date, description, and number of shares for the current reporting. An event is where the outstanding number of shares changes.

Step 2: For stock dividends or stock splits, apply the required retroactive restatement factor(s) from the event point it when initially occurs and backwards to the beginning of the fiscal year.

Step 3: For each event, complete the duration between events under the date column and complete the corresponding fraction of the year column accordingly. Multiply the shares outstanding times the retroactive restatement factor(s) times the fraction of the year for each event. Sum the amounts to determine the WACS amount.

1. Event	Date	Description	Shares	Retroactive	Fraction	Total Shares
   			Outstanding	Restatement	of the	Outstanding
   				Factor(s)	Year
   2021						of the Year
   1	Jan 1	Opening balance	475,000	1.1	4/12		174,167
   	Jan 1 – May 1
   2	May 1	25,000 shares issued	25,000
   	May 1 – Jul 1		500,000	1.1	2/12		91,667
   3	Jul 1	10% stock dividend
   	Jul 1 – Oct 1		550,000		3/12		137,500
   4	Oct 1	Repurchased	(15,000)
   	Oct 1 – Dec 31	15,000 shares	535,500		3/12		133,750
   	Total WACS		535,500		12/12		537,084

2. Event	Date	Description	Shares	Retroactive	Fraction	Total Shares
   			Outstanding	Restatement	of the	Outstanding
   				Factor(s)	Year
   2021						of the Year
   1	Jan 1	Opening balance	475,000	0.2	4/12		31,667
   	Jan 1 – May 1
   2	May 1	25,000 shares issued	25,000
   	May 1 – Jul 1		500,000	0.2	2/12		16,667
   3	Jul 1	1:5 reverse stock
   	Jul 1 – Oct 1		(400,000)
   			100,000		3/12		25,000
   4	Oct 1	Repurchased	(15,000)
   	Oct 1 – Dec 31	15,000 shares	85,000		3/12		21,250
   	Total WACS		85,000		12/12		94,584

1. Event	Date	Description	Shares	Retroactive	Fraction	Total Shares
   			Outstanding	Restatement	of the	Outstanding
   				Factor(s)	Year
   2021						of the Year
   1	Jan 1	Opening balance	500,000		1/12		137,500
   	Jan 1 – Feb 1
   2	Feb 1	180,000 shares issued	180,000
   	Feb 1 – Mar 1		680,000		1/12		187,000
   3	Mar 1	10% stock dividend
   	Mar 1 – May 1		748,000		2/12		374,000
   4	May 1	Repurchased	(200,000)
   	May 1 – Jun 1	200,000 shares	548,000		1/12		137,000
   5	Jun 1	3-for-1 stock split
   	Jun 1 – Oct 1		1,644,000		4/12		548,000
   6	Oct 1	60,000 shares issued	60,000
   	Oct 1 – Dec 31		1,704,000		3/12		426,000
   	Total WACS		1,704,000		12/12		1,809,500

2. Earnings per share:

   (declared dividend for non-cumulative preferred shares)

   EPS = $1.93

3. Earnings per share:

   (dividend entitlement for non-cumulative preferred shares)

   EPS = $1.49

4. Earnings per share:

   EPS
   Income from continuing operations		$	2.17
   Discontinued operations, net of tax*			(0.24)
   Net income		$	1.93	from part (b)

   * ()

5. The earnings process occurs continuously throughout the fiscal year and the capital basis can fluctuate during that time. It is, therefore, necessary to adjust the denominator of the EPS ratio to reflect the various lengths of time during the year that the different amounts of capital from the different number of shares outstanding were available to generate earnings during the year.