chapter 7 financial statements (exercises)_57882

The following is an alphabetical pre-closing trial balance for Wasson Ltd., for the year ended December 31, 20X5.

WASSON LTD. Pre-closing Trial Balance December 31, 20X5

Debit Credit Accounts payable Accounts receivable

Accumulated depreciation — equipment Accumulated profits Advertising expense Cash

Ordinary stock

Depreciation expense Equipment Fees earned

Income tax expense Interest expense Land

Miscellaneous expense Notes payable — due 20Y0 Repair expense Salaries payable Salary expense Supplies on hand Unearned fees Totals

Required

€ 3,200 400 5,000 500 10,600 800 2,000 25,000 290 100 3,300 800 € 51,990 € 2,100 1,350 4,700

10,000

8,450

24,000

500

0 € 51,990 a. Prepare, in good format, a statement of comprehensive income for Wasson Ltd. for the year ended December 31, 20X5.

b. Prepare, in good format, a statement of financial position for Wasson Ltd. as at December 31, 20X5.

c. Prepare, in good format, a statement of changes in equity for Wasson Ltd. for the year ended December 31, 20X5.

Financial Accounting 2

Review material 3 1

LESSON 2 Question 1

Finish Enterprises is a diversified company with five separate operating divisions. At December 31, 20X5, the enterprise had the following combined operating results for all five divisions:

Sales € 35,000,000 Cost of sales € 15,000,000 Selling & administration expenses € 18,000,000 Gain on disposal of chemical division € 3,500,000 The enterprise’s income tax note is 40%.

Additional information:

1. Pre-tax operating results for the textile division for 20X5 were as follows: Sales € 7,000,000 Cost of sales € 3,500,000 Selling & administration expenses € 3,700,000

The textile division had six manufacturing plants that produced a variety of textile products. In September, 20X5, the company sold one of these plants and realized a loss of €100,000. The loss is included in operating expenses. The textile production from the plant that was sold was reallocated among the remaining five textile plants that the company continued to operate.

2. Pre-tax operating results for the chemical division for 20X5 were as follows: Sales € 5,500,000 Cost of sales € 2,800,000 Selling & administration expenses € 3,200,000

In February of 20X5, the board of director’s authorized a plan to dispose of the chemical division. The sale was finalized in November 20X5 and the company realized a pre-tax gain of €3,500,000 on disposal of the plant.

Required

1. How should the sale of the textile plant be treated in the 20X5 statement of comprehensive income? Explain the reason for your conclusions.

2. Prepare, in good form, a statement of comprehensive income for the year ending December 31, 20X5.

Financial Accounting 2 Review material 3 2

Question 2

For each of the following events and transactions of Sports Enterprises, state whether it would be found in the statement of comprehensive income or in the statement of changes in shareholders’ equity, or that it would not be found in either statement. In addition, state the specific classification that would be used if the item would be included in the statement of comprehensive income or the statement of changes in shareholders’ equity.

a. Payments for television advertising during the World Cup soccer games amounted to €600,000. b. The company incurred an uninsured loss in the amount of €500,000 as a result of the collapse of the roof of one of its manufacturing facilities during an earthquake. The manufacturing facility was located in an area where earthquakes happened every couple of years, however, this was an unusually strong one. c. The company uses the allowance method to account for bad debts. During the year, €220,000 in accounts receivable were determined to be uncollectible and were written off. d. The cost of sports equipment sold during the year equalled €7,800,000. e. The company is negotiating with one of the top stars of the World Cup soccer games to promote its product. The company’s offer is for €4,000,000 per year for the next five years. f. The company’s auditors discovered €2,000,000 in prior years’ building repair expenses, which had been added to the cost of buildings by an inexperienced junior accountant. g. A review of market conditions indicated that the life of one of the company’s most popular trademarks should be increased from 15 to 20 years. h. The company’s president was awarded a €300,000 bonus for financial performance above the minimum specified by the board of directors. i. The company incurred a gain of €2,100,000 as a result of a government expropriation of certain of its landholdings to create a protected area in an environmentally sensitive area. j. The company paid dividends of €1,100,000.

k. At the beginning of the year, the company paid €250,000 for specialized cutting equipment, which will perform tasks that had previously been performed using manual labour. The equipment will be depreciated using the units of production method of depreciation. The company has not previously used this method of

depreciation but feels it is the most appropriate method for this type of equipment. l. The company offers a lifetime warranty on certain of its products. The company makes an annual provision for the warranty associated with the current year sales.

Financial Accounting 2 Review material 3 3

An analysis of actual warranty costs incurred indicates that warranty costs have been underestimated by €500,000 over the last several years.

Question 3

Sumner Enterprises reported preliminary profit from operations, before tax, of €2,300,000 for the year ending December 31, 20X4. The following additional information relates to 20X4:

1. On January 1, 20X2, Sumner purchased some equipment at a cost of €1,200,000. The equipment was initially depreciated on a double declining balance basis, under the assumption that it would have a 10-year useful life and a €200,000 salvage value. At the beginning of 20X4, the company decided to change its depreciation method to the straight-line basis. Accordingly, the change in policy should be applied retroactively. The profit of €2,300,000 includes the current year’s depreciation expense using the straight-line method of depreciation.

2. During the year, the company decided to shut down its wholesale division, a major business segment. Operating losses before taxes from this division, which are included in the profit of €2,300,000, for 20X4 equalled €210,000. The

company expects operating losses for 20X5, up to the date the division is sold, to amount to €100,000.

3. During 20X4, a freak hailstorm destroyed €500,000 of inventory in the company warehouse. The company was insured for €300,000 against this type of damage but did not receive the proceeds until February 20X5.

4. The preliminary profit of €2,300,000 includes rental income reported on the cash basis. The company realized it had been accounting for rental income incorrectly and determined that unearned rent from tenants’ deposits at the end of 20X3 and 20X4 equalled €250,000 and €400,000 respectively.

Accumulated profits were reported at €5,000,000 on the statement of financial

position at December 31, 20X3. Dividends paid during 20X4 totalled €700,000. The company pays tax at a rate of 40%.

Required

1. Prepare, in good form, a statement of comprehensive income for Sumner

Enterprises for 20X4 starting with profit from operating activities. For purposes of calculating earnings per share, assume the company had 100,000 ordinary shares outstanding throughout the year.

2. Prepare, in good form, the 20X4 statement of changes in equity as it relates to accumulated profits.

Financial Accounting 2

Review material 3 4

Question 4

The following alphabetical adjusted trial balance is available for Space Games Enterprise, for the year ended December 31, 20X5.

SPACE GAMES ENTERPRISE

Adjusted Trial Balance December 31, 20X5

DR CR Accounts payable Accounts receivable

Accumulated depreciation — Property, plant & equipment

Accumulated profits, January 1, 20X5 Amortization expense Cash

Change in accounting policy, declining balance to straight-line depreciation Cost of sales

Depreciation expense Dividends

Loss due to earthquake damage Goodwill

Income tax on ordinary activities

Income tax on change in accounting method Income tax on earthquake loss Income tax payable Interest expense Inventory Land

Note payable (due 20X9) Other operating expenses Property, plant & equipment Salaries payable Sales

Share capital

Unearned revenue Totals

Additional information:

€ 3,200,000 250,000 4,750,000 6,300,000 500,000 400,000 200,000 5,200,000 1,024,000 720,000 1,000,000 800,000 4,756,000 2,090,000 20,000,000 € 51,190,000 € 2,100,000

1,350,000 10,900,000

1,800,000

80,000 1,500,000

16,620,000

100,000 12,450,000 3,400,000 0,000 € 51,190,000 a. There were 200,000 ordinary shares issued and outstanding throughout the year.

Financial Accounting 2

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b. The company will make principal payments, on the note payable, in the amount of €2,770,000 during 20X6. Required

Prepare the following statements, in good form, for Space Games Enterprise for 20X5

1. Statement of comprehensive income, using the functional approach; your statement should include earnings per share

2. Statement of changes in equity, accumulated profits section

3. Statement of financial position, using the current/non-current format

LESSON 3 REVIEW MATERIAL

Review questions Question 1

Following are a selection of transactions for Frid Ltd. relating to the year ended December 31, 20X6:

a. Sales for the year equalled €2,300,000, unearned revenue increased by €12,000 and accounts receivable increased by €28,000.

b. Cost of goods sold equalled €1,115,000, inventory decreased €41,000 and accounts payable decreased €33,000.

c. Insurance expense equalled €24,000 and prepaid insurance increased €1,000.

d. Income tax expense equalled €198,000 and income tax payable increased €12,000. e. The company paid dividends of €55,000.

f. A truck costing €28,000 with accumulated depreciation of €18,000 was sold for €6,000.

g. Ordinary shares were issued in exchange for €158,000 cash.

h. Plant and equipment costing €120,000 was acquired by issuing ordinary shares.

Required

1. For each part state whether the transactions would be treated as operating, investing, or financing cash flows in the statement of cash flows.

2. For each part that impacts the cash flow from operating activities section of the statement of cash flows, state the euro amount and how it would be disclosed in the statement using the direct method of presenting cash flows from operating activities.

3. For each part that impacts the cash flow from operating activities section of the statement of cash flows, state the euro amount and how it would be disclosed in the statement using the indirect method of presenting cash flows from operating activities.

Financial Accounting 2

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