On March 1 of the current year, the board of directors of Lockwood

Q: Which of the following should be considered as discontinued operations?

Parts of a companys business or product line will typically be classified as a discontinued operation if they are no longer operational, have been removed from the company, or have been, or will be sold (referred to as being held for sale”).

Determine if a related party relationship exists in each of the cases below and describe what disclosures would be required under IAS 24.

Índice Show

Which is the first step within the hierarchy of guidance when selecting accounting policies?
Which of the following should be considered as discontinued operations?
How should the effect of a change in accounting estimate be accounted for?
Which of the following is accounted for as a change in accounting principle?

Kessel Ltd. sells goods on credit to Sterling Inc., a company owned by the daughter of Ms. Bender (Ms. Bender is a director of Kessel Ltd.). On December 31, 2021, trade receivables of $50,000, owing from Sterling Inc., were reported on Kessel Ltd’s books. Management of Kessel Ltd. decided to write off $20,000 of this receivable and provide a full allowance against the remaining balance.
During 2021, Kessel Ltd. purchased goods from Saunders Ltd. for $175,000. Saunders Ltd. indicated that this amount represents the normal price it would charge to arm’s length customers. Kessel Ltd. owns 35% of the shares of Saunders Ltd.
In late December 2021, a vacation property owned by Kessel Ltd. was sold to one of its directors, Mr. Chiang, for $325,000. The property had a carrying value of $150,000 and an estimated market value of $360,000. Kessel Ltd. also provided a guarantee on the mortgage that Mr. Chiang took out to acquire the property.
On December 31, 2021, Kessel Ltd. owed $120,000 to its major supplier, Rickert Ltd., for purchases made on account at regular commercial terms.

In each of the cases below, determine if the relationships should be considered related party relationships under IAS 24.

Mr. Fowler is a director of both Goss Ltd. and Link Inc. Are these two companies related?
Rosen Ltd. and Chabon Inc. are both associated companies of Lethem Ltd. Are Rosen Ltd. and Chabon Inc. related parties?
Abernathy Ltd. and Beron Inc. each have a board containing seven directors, five of who are common. There are no common shareholdings. Are the two companies related?

The following events occurred between December 31, 2022 (the reporting date) and March 22, 2023, the date that Ealing Inc.’s financial statements were approved for issue:

January 8, 2023: The local government approved the expropriation of one of the company’s manufacturing facilities for construction of a new motorway. On December 31, 2022, the carrying value of the property, land and building, was $2,750,000. The company has determined that they will be able to move most of the manufacturing machines to other facilities. The company was not previously aware of the local government’s plan, as the council discussions had been held in camera. The local government has not yet proposed a compensation amount. The appropriation will occur later in 2023.
January 27, 2023: The board of directors approved a staff bonus of $250,000. The terms of this bonus were included in the employment contracts of key management personnel and the bonus calculation was based on the reported financial results of the December 31, 2022 fiscal year.
February 3, 2023: The company received notice from the federal income tax authority that additional income taxes of $75,000 for the 2020 and 2021 fiscal years were payable. The company had previously disputed the calculation of these taxes, and had reported an accrual $30,000 on December 31, 2022.
February 21, 2023: The accounts receivable clerk was fired after it was discovered she had perpetrated a fraud in the accounts. The accounts receivable balance was overstated by $75,000 on December 31, 2022. The company has consulted legal counsel to determine if any action can be brought to recover the stolen funds, but no action has yet been filed.
March 16, 2023: The board of directors declared a dividend of $550,000 based on the results reported on the December 31, 2022 financial statements.
March 18, 2023: A fire completely destroyed one of the company’s production machines. It is not expected that any insurance proceeds will be received on this asset.

Required:

Determine what adjustments or disclosures, if any, should be made on the December 31, 2022 financial statements for the above items.

On January 15, 2023, several pieces of plaster fell from the ceiling in the offices of Satterlee LLP, a firm of professional accountants, crushing several pairs of green eye shades. Luckily, no accountants were injured. The management of the firm hired professional engineers to examine the problem. The engineers determined that there were, in fact, more serious problems in the overall structure of the building, and, in particular, the foundation. The engineers indicated that it appeared the foundation had been sinking for several years, although the evidence of the cracked ceiling only just appeared. The engineers indicated that the repair work to the foundation was essential to keep the building safe for occupation.

Required:

Determine how this event should be dealt with on Satterlee LLP’s financial statements for the year ended December 31, 2022.

On November 12, 2022, the federal government filed a lawsuit against Magus Corp. The lawsuit contends that one of Magus Corp.’s factories has been dumping unfiltered effluent into a local river, resulting in contamination that has required the water treatment plant downstream to commit to additional procedures to keep the water safe for community residents. The lawsuit not only seeks compensation for the damage done, but also seeks a remedy that would force the company to install filtration equipment at the factory to clean the effluent before it reaches the river. The company has not accrued any provision for this lawsuit on December 31, 2022, as the company’s legal counsel has indicated that the outcome cannot currently be determined. Management of the company has indicated that if they are forced to install the filtration equipment, that they will, instead, shut down the factory as the required equipment would render the entire operation economically infeasible. The factory in question is one of three factories that the company operates, producing approximately 40% of the company’s output.

Required:

Discuss the potential impact of the above situation on the auditor’s report for the year ended December 31, 2022.

Arburator Inc. has six business lines with the following information:

Business Line	Total Revenue	Operating Profit/(Loss)	Assets
1	$90,000	$18,000	$150,000
2	25,000	(7,000)	20,000
3	20,000	(4,000)	15,000
4	140,000	30,000	266,000
5	10,000	4,000	15,000
6	4,000	(3,000)	12,000
	$289,000	$38,000	$478,000

Required:

If Arburator Inc. follows IFRS, determine which business lines, if any, qualify as a reportable operating segment for purposes of financial reporting.

Regarding interim reporting, what accounting issues can occur? Is there a difference between IFRS and ASPE regarding interim reporting?

The condensed income statement for Egor Inc. is shown below:

	2021	2020	2019

Net sales	25,000	22,500	21,000
Cost of goods sold (COGS)	16,250	13,500	13,230
Gross profit	8,750	9,000	7,770
Selling and administration expenses	5,000	4,800	4,600
Income from continuing operations before income taxes	3,750	4,200	3,170

Required:

Analyze Egor Inc.’s statement using vertical and horizontal techniques.
What are some of the limitations of this type of analysis?

Presented below is the balance sheet, including disclosures, of Hibertia Corp. for the year 2020:

Hibertia Corp. Balance Sheet December 31, 2020
Assets
Current assets
Cash		$60,000
Accounts receivable	$215,500
Less allowance for doubtful accounts	2,400	213,100
Inventory*		210,500
Prepaid insurance		15,900
Total current assets			$499,500

Long-term investments*
Investments in shares*			320,000

Property, plant, and equipment
Cost of uncompleted plant facilities:
Land	$125,000
Building in process of construction	220,000	345,000
Equipment	325,000
Less accumulated depreciation	180,000	145,000	490,000

Intangible assets
Patents*			60,000
Total assets			$1,369,500

Liabilities and Shareholders’ Equity
Current liabilities
Notes payable to bank*		$112,000
Accounts payable		215,000
Accrued liabilities		66,200
Total current liabilities			$393,200

Long-term liabilities
Bonds payable, 11%, due Jan. 1, 2031		250,000
Less discount on bonds payable		22,000	228,000
Total liabilities			621,200

Shareholders’ equity
Capital shares
Common shares; 600,000 shares authorized,
400,000 shares issued and outstanding		400,000
Retained earnings		203,300
Accumulated other comprehensive income		145,000**	748,300
Total liabilities and shareholders’ equity			$1,369,500

Disclosures:

Inventory — at lower of FIFO cost/NRV
Long-term investments – fair value through OCI
Investments in shares, of which investments costing $140,000 have been pledged as security for notes payable to bank.
Patents (net of accumulated amortization of $20,000). Amortization is on a straight-line basis.
Notes payable to bank, due 2021 and secured by investments which cost $140,000.

Additional information:

Net sales for 2020 are $550,000; Cost of goods sold is $385,000; Net Income is $125,000.

Required:

Based on the information available above, identify and calculate:

One liquidity ratio
One activity ratio

Briefly discuss the results for this company. Also, use ending balances in lieu of averages when calculating ratios.

Below is the balance sheet for Great Impressions Ltd. as at December 31, 2020.

Great Impressions Ltd. Balance Sheet As at December 31, 2020
Assets
Current assets:
Cash			$300,000
Accounts receivable		$900,000
Allowance for doubtful accounts		(13,000)	887,000
Inventory			55,000
Spare parts supplies			1,500
Prepaid insurance			53,000
Total current assets			$1,296,500

Property, plant, and equipment:
Land		300,000
Equipment	$143,000
Accumulated depreciation, equipment	(62,000)	81,000	381,000

Intangible assets:
Patent			300,000

Total assets			$1,977,500

Liabilities
Current liabilities:
Accounts payable		265,200
Unearned consulting fees		25,500
Current portion of long-term note payable		100,000
Total current liabilities			390,700
Long-term liabilities
Long-term note payable			93,800
Total liabilities			$484,500

Equity
Contributed capital:
Preferred shares, authorized 5,000 shares;
issued and outstanding 3,744 shares		93,600
Common shares, unlimited authorized;
issued and outstanding, 15,900 shares		159,000
Total contributed capital		252,600
Retained earnings		1,240,400
Total equity			1,493,000
Total liabilities and equity			$1,977,500

Additional information:

Net sales for 2020 are $1,100,000; Cost of goods sold is $500,000; Net income is $544,960.

Market price per common share is currently $97.

Industry average ratios:
Accounts payable turnover		2 times
Current ratio		2:1
Days’ sales in inventory		28 days
Debt ratio		26%
Profit margin		45%
Total asset turnover		1 times

Required:

Calculate all the ratios listed above and comment on this company’s performance. Identify each ratio as either being a liquidity, activity, solvency or profitability, or coverage ratio. Explain the purpose of the ratio selected and comment on the company’s performance. Round your answers to the nearest two decimal places. Use the current year closing account balances in lieu of averages when calculating ratios requiring averages.

Leo Creations Co. sells art supplies to retail outlets. Their financial statements are shown below:

Leo Creations Co. Income Statement For the Year Ended December 31, 2020
Sales		$1,500
Cost of goods sold		980
Gross profit		$520
Operating expenses:
Depreciation expense	$48
Other expenses	221	269
Operating income		$251
Other revenues and expenses
Interest expense	$12
Loss on sale of equipment	16	28
Net income		$223

Leo Creations Co. Comparative Account Information December 31, 2020 and 2019
	2020	2019
Accounts payable	$129	$115
Accounts receivable (net)	310	180
Bonds payable (due 2030)	610	100
Cash	75	42
Common shares	850	450
Equipment	1,360	500
Inventory	250	210
Accumulated depreciation	206	282
Long-term investment	400	400
Retained earnings	500	310
Salaries payable	100	75

Following are industry averages:

Current ratio	2.5:1
Inventory turnover	5.5 times
Acid-test (quick) ratio	1.4:1
Return on assets	13.4%
Accounts receivable turnover	8.2 times
Return on common shareholders’ equity	18.3%

Required:

(Round all calculations to two decimal places.)

1. Calculate the acid-test ratio for 2020. What type of ratio is this and what is its purpose?
2. Is the company’s acid-test ratio favourable or unfavourable, as compared to the industry average?
1. Calculate the accounts receivable turnover for 2020.
2. Is the company’s accounts receivable turnover favourable or unfavourable, as compared to the industry average in 2020?
Do Leo Creations Co.’s assets generate profits favourably or unfavourably, as compared to the industry average in 2020?

The following information appeared on the alphabetized adjusted trial balance of Jill’s Used Books Inc. for the year ended June 30, 2020. Assume all accounts have a normal balance.

Accounts payable		$1,800
Accounts receivable		29,000
Accumulated depreciation, equipment		3,800
Advertising expense		20,000
Allowance for doubtful accounts		1,400
Cash		10,000
Cost of goods sold		123,900
Delivery expense		4,875
Depreciation expense		5,000
Equipment		15,000
Interest income		2,000
Common shares		49,325
Preferred shares		40,000
Retained earnings		50,000
Cash dividends		46,000
Merchandise inventory		17,000
Notes payable ($3,000 is due by June 30, 2021)		7,000
Notes receivable (due in 2023)		14,000
Office supplies		750
Long-term investment		75,000
Copyright		25,000
Office supplies expense		1,200
Patent		2,500
Petty cash		500
Rent expense		17,900
Salaries expense		41,750
Salaries payable		950
Sales		314,000
Sales returns and allowances		22,000
Unearned sales		1,100

Additional information:

Assume total assets, liabilities, and equity at June 30, 2019 for Jill’s Used Books Inc. were $120,000, $75,000, and $45,000, respectively.

Required:

Explain whether the balance sheet was strengthened or not from June 30, 2019 to June 30, 2020.

The following selected financial statement information is available for Yeo Company.

	2020	2019
	(000’s)
	December 31,
Cash	60	10
Accounts receivable (net)	80	70
Merchandise inventory	240	50
Equipment (net)	490	520
Accounts payable	180	75
Notes payable, due 2022	300	300

Required: Comment on the change in Yeo Company’s ability to pay short-term debt. As part of your answer, include an explanation of the relationship between short-term debt paying ability and cash flow. Round to two decimal places.

The following are comparative debt ratios for two companies in the same industry:

	2020	2019
Dilly Inc.	40%	35%
Kevnar Corporation	70%	83%

Required:

Which company has strengthened its balance sheet? Explain your answer.

Which is the first step within the hierarchy of guidance when selecting accounting policies?

Which is the first step within the hierarchy of guidance when selecting accounting policies? a. Apply a standard from IFRS if it specifically relates to the transaction.

Which of the following should be considered as discontinued operations?

Parts of a company's business or product line will typically be classified as a discontinued operation if they are no longer operational, have been removed from the company, or have been, or will be sold (referred to as being “held for sale”).

How should the effect of a change in accounting estimate be accounted for?

The effect of a change in an accounting estimate is recognised prospectively by including it in profit or loss in: the period of the change, if the change affects that period only; or. the period of the change and future periods, if the change affects both.

Which of the following is accounted for as a change in accounting principle?

A change in inventory valuation from average cost to FIFO is the correct answer. A change in inventory valuation method is considered a change in accounting policy.