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SM 04

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 4

REPORTING FINANCIAL PERFORMANCE

Learning Objectives
1. Understand how firms create value, manage performance
and communicate useful information to users.
2. Understand the concept of and be able to assess the quality
of earnings/information.
3. Understand the differing perspectives on how to measure
income.
4. Measure and report results of discontinued operations.
5. Measure income and prepare the income statement and the
statement of comprehensive income using various formats.
6. Prepare the statement of retained earnings and the statement
of changes in equity.
7. Understand how disclosures and analysis help users of
financial statements assess performance.
8. Identify differences in accounting between IFRS and ASPE
and potential changes.
9. Explain the differences between the cash basis of accounting
and the accrual basis of accounting.

Solutions Manual 4.1 Chapter 4

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Ite LO BT Item LO BT Ite LO BT Ite LO BT Item LO BT

m m m
Brief Exercises
1. 1 C 6. 2 C 11. 3,8 AP 16. 5,7 AP 20. 6 AP
2. 1 C 7. 2 C 12. 4 C 17. 5,7 AP 22. 7 Ap
3. 1 C 8. 2 C 13. 4,8 C 18. 5,7 AP 23. 7 AN
4. 1,2 C 9. 2 C 14. 4,8 C 19. 6 AP 24. 7 AN
5. 2 C 10. 3 AP 15. 5,7 AP 20. 6 AP 25. 9 AP
Exercises
1. 3 AP 6. 5 AP 5 AP 16. 6 AP 21. 2 AN
11.
2. 3,8 AP 7. 5 AP 5,7 AP 17. 7 AP 22. 2 AN
12.
3. 4,8 AP 8. 5 AP 5 AP 18. 7 AP
13.
4. 4,8 AP 9. 5 AP 5 AP 19. 9 AP
14.
5. 5 AP 10. 5,6,8 AP 15 6 AP 20. 9 AP
.
Problems
1. 2 C 5. 5,6 AP 9. 4,5,6,8 AP 13. 4,5 AP 17. 9 AP
2. 4,7 AP 6. 1,7 C 4,5,6 AP 14. 4,5 AP 18. 9 C
10.
3. 4,5,7 AP 7. 1,7 C 2,4,5,6 AP 15. 6 AP
11.
4. 2,4,7 AP 8. 5,6 AP 5,6 AP 16. 1,7 C
12.
Cases
1. 4,5,6 AP IC 1. 2,3,4 AN IC2 3,4,5 AN
Research and Analysis
RA 3,4, AP RA2 2,3,6 AP RA 7 AP RA 2 AN RA5 7 AN
1 5 3 4
RA 7 AN
6

Solutions Manual 4.2 Chapter 4

Legend: The following abbreviations will appear throughout the solutions

manual file.

LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
DAIS Data Analytics and Information Systems

Solutions Manual 4.3 Chapter 4

ASSIGNMENT CLASSIFICATION TABLE

Brief
Topics Exercises Exercises Problems

1. Creating value and 1, 2, 3 6, 7, 16

managing
performance. Using
performance
information

2. Earnings quality. 4, 5, 6, 7,8, 9 21,22 1, 4, 11

3. Measuring income. 10, 11 1,2 6, 7

4. Discontinued 12,13, 14 3,4 2, 3, 4, 9, 10, 11,

operations 13, 14

5. Statements of income/ 15, 16, 17, 5, 6, 7, 8, 9, 3, 4, 5, 8, 9, 10,

comprehensive 18 10, 11, 12, 11, 12, 13, 14
income 13, 14

6. Statement of retained 19, 20,21 10, 15, 16 4, 5, 8, 10, 11,

earnings/changes in 12, 15
equity.

7. Disclosure and 15, 16, 17, 12, 17, 18 8, 16

analysis. 18, 22, 23,
24

8. Differences between 11, 13, 14 2, 3, 4, 10 9

IFRS and ASPE.

9. Cash basis* 25 19, 20 17, 18

* This material is covered in an Appendix to the chapter.

Solutions Manual 4.4 Chapter 4

ASSIGNMENT CHARACTERISTICS TABLE

Level of Time
Item Difficulty (minutes)
Description

E4.1 Comprehensive income. Simple 15-20

E4.2 Comprehensive income. Complex 40-50
E4.3 Discontinued operations. Moderate 15-20
E4.4 Discontinued operations. Moderate 20-25
E4.5 Calculation of net income. Simple 15-20
E4.6 Calculation of net income – proprietorship. Simple 15-20
E4.7 Income statement items. Simple 15-20
E4.8 Multiple-step and single-step. Moderate 30-40
E4.9 Combined single-step. Moderate 25-30
E4.10 Multiple-step statement of financial Moderate 30-40
performance, with retained earnings.
E4.11 Single-step income statement. Moderate 20-25
E4.12 Multiple-step and single-step. Simple 30-35
E4.13 Multiple-step and unusual items. Moderate 30-35
E4.14 Condensed income statement. Moderate 20-25
E4.15 Retained earnings statement. Simple 15-20
E4.16 Comprehensive income. Simple 15-20
E4.17 Earnings per share. Simple 20-25
E4.18 Earnings per share. Moderate 15-20
*E4.19 Cash and accrual basis. Simple 10-15
*E4.20 Cash and accrual basis. Moderate 10-15
E4.21 Analytics in Action Moderate 15-20
E4.22 Analytics in Action Moderate 15-20

P4.1 Earnings management. Moderate 20-25

P4.2 Discontinued operations. Moderate 35-45
P4.3 Multiple-step statement of financial Moderate 40-45
performance
P4.4 Irregular items. Moderate 35-45
P4.5 Single-step income statement and retained Simple 25-30
earnings statement.
P4.6 Unusual items. Moderate 20-25
P4.7 Identification of income statement Moderate 30-40
weaknesses.
P4.8 Multiple- and single-step income statement Moderate 45-55
and retained earnings.
P4.9 Irregular items. Moderate 30-35
P4.10 Comprehensive combined statement of Moderate 45-50
income and retained earnings.
P4.11 Income statement and irregular items. Moderate 35-45

Solutions Manual 4.5 Chapter 4

ASSIGNMENT CHARACTERISTICS TABLE

(CONTINUED)

Level of Time
Item Description Difficulty (minutes)

P4.12 All-inclusive vs. current operating. Moderate 35-45

P4.13 Income statement and irregular items. Moderate 25-35
P4.14 Identification of income statement Simple 25-30
deficiencies.
P4.15 Retained earnings statement, correction of Simple 15-20
error.
P4.16 Identify income statement deficiencies. Simple 20-25
*P4.17 Cash and accrual basis. Moderate 35-40
*P4.18 Cash and accrual basis. Moderate 30-40

Solutions Manual 4.6 Chapter 4

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4.1

a. Pharmedical would have a higher gross profit percentage

because it follows a cost differentiation strategy. Sunmart
is a discount retailer and follows a low cost/high volume
strategy.

b. Pharmedical would have a higher selling expense as a

percentage of sales because it likely has a sizeable sales
force that markets and educates customers about its
products.

c. Pharmedical would have a higher research and development

expense as a percentage of sales because it develops
medications to prevent and treat diseases.

d. Either Sunmart or Pharmedical may have higher net income.

Pharmedical has a higher gross profit percentage, meaning
a higher amount of every dollar of sales is available to
cover operating expenses. However, Pharmedical also has
a higher selling expense as a percentage of sales and
research and development expense as a percentage of
sales, meaning a higher amount of every dollar of sales is
needed to cover operating expenses.
LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.7 Chapter 4

BRIEF EXERCISE 4.2

In the opinion paragraph, the auditor attests to the fair

presentation of the financial statements in accordance with
IFRS. In order to judge fairness, the auditor must have sufficient
understanding of the business model and environment to
assess and address the risks of material misstatement in the
financial statements. Without this understanding, the auditor
would not be able to competently carry out the responsibilities
of the audit, including evaluating the appropriateness of
accounting policies used, the reasonableness of estimates
made, and the overall presentation of the financial statements.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: Audit CPA: CPA: cpa-t001 cpa-t004 CM: Reporting and
Audit

BRIEF EXERCISE 4.3

The purpose of a financial audit is to provide assurance to users

that the financial statements are fairly presented and free from
material error.

Users (typically investors) may be concerned that the preparers

of the financial statements (typically management) are biased in
their reporting. The availability of an audit provides users with
an independent, objective opinion that confirms the fairness of
management’s presentation. The additional credibility of
audited financial statements allows users to make their
investment decisions with more confidence, thereby enabling a
lower cost of capital for the firm and improving overall market
efficiency.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: Audit CPA: CPA: cpa-t001 cpa-t004 CM: Reporting and
Audit

Solutions Manual 4.8 Chapter 4

BRIEF EXERCISE 4.4

a. The information provided by Kimper appears to be of lower

quality. Several of Kimper’s major customers experienced
cash flow problems in 2023 for reasons that may persist.
However, Kimper decreased the estimated percentage of
its outstanding accounts receivable that will become
uncollectible. Kimper also did not disclose any additional
information in the notes to financial statements regarding
potentially higher risk of uncollectible accounts. Kimper’s
reporting of accounts receivable (net) and bad debt
expense appears to be incomplete and may be biased,
resulting in lower quality of information.

b. The earnings reported by Kimper will likely be discounted

by the capital markets. Financial statement users,
including investors and analysts, will likely note that the
company’s accounts receivable turnover ratio decreased
significantly in 2023, but that bad debt expense as a
percentage of sales decreased in the same period. This is a
signal of a potentially overly optimistic valuation of
accounts receivable, resulting in lower bad debt expense
and earnings which may not be replicated.
LO 1,2 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.9 Chapter 4

BRIEF EXERCISE 4.5

BigData and artificial intelligence have led to the availability of

large volumes and variety of information and are therefore
reducing the measurement uncertainty for future warranty
returns. Companies have access to many different types of data
such as consumer behaviour or product specific data, not only
from their own company, but also from the industry in which
they operate. Predictive analytics can be applied to estimations
within accounting. Using predictive analytics, specifically
regression analysis, companies can use the information
available to calculate estimates with more accuracy.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: CPA: cpa-t001, cpa-t007 Reporting and DAIS

BRIEF EXERCISE 4.6

Cipher Corporations earnings may not be sustainable. Although

Cipher is growing, its carbon emissions are 20% higher than its
competitors, thus having a negative impact on the environment.
The idea of sustainable earnings goes beyond just sustaining
profits for shareholders. Stakeholders, which include
shareholders, are interested in the Environment, Social and
Corporate Governance (ESG) of any company. Companies are
still expected to operate with a goal of generating a profit, but in
a manner that addresses ESG factors.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.10 Chapter 4

BRIEF EXERCISE 4.7

a. From the perspective of an investor, the earnings reported

by Environmental appear to be of lower quality. The
company’s net income includes a significant gain on
disposal of investments, which means that earnings do not
primarily reflect the earnings generated from ongoing core
business activities. Environmental also changed from the
declining balance method to the straight-line method for
depreciation of its equipment (which is non-typical for
companies in the industry). According to GAAP, the
depreciation method must reflect the pattern in which the
economic benefits are expected to be consumed. Unless
Environmental’s pattern of use of the equipment is better
reflected by the straight-line method, the measurement of
equipment (net) and depreciation expense may be biased.

b. The earnings reported by Environmental will likely be

discounted by the capital markets. Financial statement
users, including investors and analysts, will likely note that
the company’s net income included a significant gain
generated from non-core business activities, and lower
depreciation expense as a result of a change to a
depreciation method which may be biased. As a result,
content of the earnings reported appears to be lower
quality, and the capital markets will likely discount the
earnings reported.
LO 2 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.11 Chapter 4

BRIEF EXERCISE 4.8

a. The earnings reported by Cyan appear to be of lower

quality. Cyan’s expected value of the loss on the lawsuit
and the liability of $500,000 appears to be based on the
estimate of the lawyer who provided the second opinion.
Cyan’s management sought the second legal opinion
because of the potentially significant impact of the original
estimate on 2023 net income. This is a form of earnings
management and is unethical because the resulting
financial statements included an estimate that was not
reliably determined and based on all of the reliable
information available at the time. After representing Cyan
and disputing the claim, Cyan’s original legal counsel
would have provided the most informed and reliable
estimate of the loss and the liability.

b. If Cyan did not fully disclose all estimates of the loss on

the lawsuit and the liability, the capital markets may not
immediately see through Cyan’s attempt to mask the
underlying economic reality. However, the earnings
reported by Cyan will likely be discounted by the capital
markets eventually, if or when it becomes apparent that the
estimate of the loss on the lawsuit and the liability were in
fact biased and misleading.
LO 2 BT: C Difficulty: M Time: 15 min. AACSB: Ethics CPA: CPA: cpa-t001 cpa-e001 Reporting and Ethics

Solutions Manual 4.12 Chapter 4

BRIEF EXERCISE 4.9

a. The information provided by Delaney appears to be of high

quality. Although there was no change to the accounting
estimate for warranty expense, there is enough information
provided in the note disclosure to indicate that this may be
a “one time” occurrence. Delaney provided an explanation
of exactly what the defect was, including technical details,
but also provided industry statistics of the defect. Delaney
also assured stakeholders that the defect does not exist in
2024 models.

b. The earnings reported by Delaney will likely not be

discounted by the capital markets. Financial statement
users, including investors and analysts, will likely note that
the industry statistic is in line with the current warranty
expense estimate of 10% that Delaney is currently
recording. Although Delaney mentions that 2024 models do
not contain the defect, users may still however be
concerned about whether defective models were sold
earlier in the year, and whether some still remain in
inventory. Users may still also be concerned about the
impact of the defect on 2025 financial results since the
warranty on products sold in 2023 covers a three-year
period.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: CPA: cpa-t001, cpa-t007 Reporting and DAIS

BRIEF EXERCISE 4.10

a. Net income = $18,000 (dividend revenue)

b. Other comprehensive income = $25,000
c. Comprehensive income = Net income + Other
comprehensive income = $18,000 + $25,000 = $43,000
d. Accumulated other comprehensive income = Beginning
balance + Other comprehensive income = $0 + $25,000 =
$25,000
LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: CPA: cpa-t001 Reporting
Solutions Manual 4.13 Chapter 4
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Solutions Manual 4.14 Chapter 4

BRIEF EXERCISE 4.11

a. Income from continuing operations = Income from

operations + Gain on disposal of FV-NI investments –
Income tax on income from continuing operations =
$220,000 + $15,000 – $63,000 = $172,000

b. Net income = Income from continuing operations – Loss

from operation of discontinued division (net of tax) – Loss
on disposal of discontinued division (net of tax) = $172,000
– $42,000 – $75,000 = $55,000

c. Other comprehensive income = Unrealized holding gain –

OCI (net of tax) = $12,000

d. Comprehensive = Net income + Other comprehensive

income = $55,000 + $12,000 = $67,000

e. Under ASPE, other comprehensive income and

comprehensive income do not exist and therefore all
impacts on comprehensive income in IFRS would be
reported in net income in ASPE. Investments that are not
quoted in an active market are accounted for at cost.
LO 3,8 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

BRIEF EXERCISE 4.12

A component of an entity comprises operations, cash flows, and

financial elements that can be clearly distinguished from the rest
of the enterprise. Selling the corporate-owned stores to a
franchisee would not qualify for discontinued operations
treatment, because the corporate-owned stores are not a
separate major line of business.
LO 4 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.15 Chapter 4

BRIEF EXERCISE 4.13

a. There is a formal plan to sell the head office tower (which

has been approved by the Board of Directors) and this
supports classification as Held for Sale. However, there are
other criteria that must be met: the building must be
available for immediate sale in its present state, there must
be an active plan to find a buyer, the sale must be
probable, the selling price reasonable and it must be likely
that the plans to sell will materialize. In this case, because
the company plans to continue to use the building until its
new head office is built, and because construction has not
yet started, all of the criteria are not met. Specifically, the
building is not available for immediate sale.

Therefore, the building would not be segregated on the

Statement of Financial Position as an “Asset held for sale”.
The company would continue to depreciate the asset and
should consider whether impairment exists. If the building
meets the impairment test, then the building would be
remeasured to its fair value of $49 million (minus costs to
sell).

b. Assuming that the criteria noted in a. are now met, the

company will record the building as Held for Sale. This
means that the asset will be written down to its fair value of
$42 million and a loss of $3 million will be reported in the
income statement. It does not appear that this building
qualifies as a discontinued operation, since operations are
still continuing in the new building. Depreciation on the
old building will be stopped at the time it is classified as
‘Held for Sale’.

Under ASPE, the old building will continue to be presented

as a long-term asset but will be shown separately on the
Statement of Financial Position as Assets Held for Sale.

Under IFRS, the old building will be shown under current

assets, in a category called Assets Held for Sale.
LO 4,8 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting
Solutions Manual 4.16 Chapter 4
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

BRIEF EXERCISE 4.14

a. The $100,000 (net of tax) loss from operation of the

discontinued division, and the $200,000 (net of tax) loss on
impairment of net assets of the discontinued division
should be shown in the discontinued operations section of
the income statement for the year ended December 31,
2023. The discontinued operations section follows income
from continuing operations. Under ASPE, the assets and
liabilities related to the discontinued manufacturing
division should be segregated on the Statement of
Financial Position according to their nature (e.g. current
assets related to the discontinued manufacturing division
should be presented as current assets held for sale/related
to discontinued operations, and noncurrent assets related
to the discontinued manufacturing division should be
presented as noncurrent assets held for sale/related to
discontinued operations).

b. Under IFRS, the income statement presentation would be

the same. However, on the Statement of Financial Position,
all assets and liabilities related to the discontinued
manufacturing division should be presented as held for
sale, and classified as current assets and current liabilities,
respectively.
LO 4,8 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.17 Chapter 4

BRIEF EXERCISE 4.15

Sierra Corporation
Income Statement
For the Year Ended December 31, 2023

Revenues
Sales revenue $5,850,000
Investment revenue 227,000
Total revenues 6,077,000

Expenses
Cost of goods sold 4,610,000
Salaries and wages expense 668,000
Advertising expense 126,000
Entertainment expense 78,000
Rent expense 101,000
Utilities expense 44,000
Interest expense 160,000
Total expenses 5,787,000

Income before income tax 290,000

Income tax expense 84,000
Net income $206,000
Earnings per share1 $2.06
1
($206,000  100,000)

LO 5,7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

Solutions Manual 4.18 Chapter 4

BRIEF EXERCISE 4.16

a.
Sierra Corporation
Income Statement
For the Year Ended December 31, 2023

Sales revenue $5,850,000

Cost of goods sold 4,610,000
Gross profit 1,240,000
Operating expenses
Selling expenses $572,000
Administrative expenses 445,000 1,017,000
Income from operations 223,000
Other revenues and gains
Investment income 227,000
450,000
Other expenses and losses
Interest expense 160,000
Income before income tax 290,000
Income tax expense 84,000
Net income $ 206,000

Earnings per share1 $2.06

1
($206,000 / 100,000)

b. Price earnings ratio

Market price per share = $66.00 = 32 times

EPS $2.06
LO 5,7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

Solutions Manual 4.19 Chapter 4

BRIEF EXERCISE 4.17

Blue Collar Corporation

Partial Statement of Financial Performance
For the Year Ended December 31, 2023

Income from continuing operations $12,600,000

Discontinued operations
Loss from operation of discontinued
restaurant division (net of tax
$135,000) $315,000
Loss on disposal of restaurant
division (net of tax of $38,000) 89,000 404,000
Net income 12,196,000

Other comprehensive income

Items that will not be recycled
subsequently to net income or loss:
Unrealized gain on fair value-OCI
investments (net of tax of $18,000) 43,000

Comprehensive income $12,239,000

Earnings per share:

Income from continuing operations $1.26
Discontinued operations (.04)
Net income $1.22

Note: Earnings per share information related to comprehensive

income is not required under IFRS.
LO 5,7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

Solutions Manual 4.20 Chapter 4

BRIEF EXERCISE 4.18

Big and Rich Corporation

Partial Statement of Income
For the Year Ended December 31, 2023

Income from operations $4,400,000

Other expenses and losses
Loss from tornado 760,000
Loss on disposal of building 150,000

Income before income tax 3,490,000

Income tax expense 1,047,000
Net Income $2,443,000
Earnings per share1 $1.22

1
($2,443,000  2,000,000 common shares)
LO 5,7 BT: AP Difficulty: S Time: 15 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

Solutions Manual 4.21 Chapter 4

BRIEF EXERCISE 4.19

Parfait Limited
Statement of Changes in Shareholders’ Equity
For the Year Ended December 31, 2023
Accumulated
Other
Common Retained Comprehensiv
Shares Earnings e Income Total
Beginning balance $600,000 $900,000 $250,000 $1,750,000
Comprehensive income
Net income1 50,000 50,000
Other comprehensive Income 60,000 60,000
Dividends _______ (300,000) _______ (300,000)

Ending balance $600,000 $650,000 $310,000 $1,560,000

1
($900,000 – $750,000 – $100,000).

LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.22 Chapter 4

BRIEF EXERCISE 4.20

Global Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2023

Balance, January 1 $1,038,000

Add: Net income 335,000
1,373,000
Less: Dividends 70,000
Balance, December 31 $1,303,000

LO 6 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

BRIEF EXERCISE 4.21

Global Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2023

Balance, January 1, as reported $1,038,000

Correction for overstatement of depreciation
in 2020 (net of tax of $17,000) 40,000
Balance, January 1, as adjusted 1,078,000
Add: Net income 335,000
1,413,000
Less: Dividends 70,000
Balance, December 31 $1,343,000

LO 6 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.23 Chapter 4

BRIEF EXERCISE 4.22

The number of common shares outstanding at December 31,

2023 is 44,000 (40,000 – 8,000 + 12,000)

Weighted average number of shares:

January 1 – April 1 40,000 X 3/12 = 10,000

April 1 – August 31 32,000 X 5/12 = 13,333
August 31 – Dec. 31 44,000 X 4/12 = 14,667
38,000
LO 7 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

BRIEF EXERCISE 4.23

$8,600,000 – $3,200,000
= $6.00 per share
900,000
LO 7 BT: AN Difficulty: S Time: 15 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 4.24 Chapter 4

BRIEF EXERCISE 4.24

a. EPS Calculation:
2022:
$7,500,000 – $1,500,000
= $6.00 per share
1,000,000

2023:
$9,000,000 – $1,500,000
= $7.50 per share
1,000,000

b.
EPS increased from $6.00 per share in 2022 to $7.50 per
share in 2023.

IF(2023 EPS > 2022 EPS, “EPS INCREASED”, “EPS

DECREASED”)

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 4.25 Chapter 4

*BRIEF EXERCISE 4.25

a.
Cash Receipts - Beginning accounts = Revenue on
from Customers receivable accrual basis
+ Ending accounts
receivable

$152,000 - $13,000 + $18,600 = $157,600

b.
Cash payments + Beginning prepaid = Operating
for operating expenses expenses on
expenses - Ending prepaid accrual basis
expenses

$97,000 + $17,500 - $23,200 = $91,300

LO 9 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.26 Chapter 4

SOLUTIONS TO EXERCISES

EXERCISE 4.1

Reach Out Card Company Limited

Statement of Comprehensive Income
For the Year Ended December 31, 2023

Sales revenue $1,200,000

Cost of goods sold 750,000
Gross profit 450,000
Operating expenses
Selling and administrative expenses 320,000
Income from operations 130,000
Gain on disposal of building 250,000
Net income 380,000
Other comprehensive income
Items that will not be recycled subsequently to
net income or loss:
Unrealized gain on FV-OCI investments 18,000
Comprehensive income $398,000

LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.27 Chapter 4

EXERCISE 4.2

a. Calculation of net income:

Income from operations $375,000

Other revenues and gains
Gain on disposal of equipment $27,000
Gain on disposal of FV-NI investments 33,000
Gain on disposal of FV- OCI investments 71,0001 131,000
506,000
Other expenses and losses
Loss on disposal of building 68,000
Unrealized loss on FV-NI investments 54,000 122,000
Income before income tax 384,000
Income tax expense 99,000
Net income $285,000

b. Calculation of retained earnings:

Balance, January 1 $410,000

Transfer of accumulated revaluation surplus
on land 74,000
Add: Net income 285,000
Balance, December 31 $769,000
1
$55,000 + ($126,000 - $110,000)

Solutions Manual 4.28 Chapter 4

EXERCISE 4.2 (CONTINUED)

c. Accumulated other comprehensive income (AOCI) had a

balance of $129,000 ($74,000 + $55,000) at January 1, 2023.
Prior to the transfer to Retained Earnings, the balance in
AOCI at December 31, 2023 is $74,000 which relates to
revaluation surplus (land). This amount represents the
cumulative revaluation gains/(losses) related to the piece
of land accounted for under the revaluation model. Under
the revaluation model, revaluation gains are recorded as
revaluation surplus (OCI) and accumulated in AOCI until
the asset is retired or disposed of. Pike sold the piece of
land in 2023 when the carrying amount of the land was
$216,000. The balance in AOCI related to previous
revaluations of the land to fair value using the revaluation
method is not recycled or reclassified to income. Rather,
the balance is transferred to Retained Earnings directly.

$55,000 of the opening AOCI balance was related to

cumulative unrealized gains/(losses) related to the
measurement of debt investments at fair value through OCI
(FV-OCI). Pike sold the related FV-OCI debt investments in
2023, and upon sale, Pike would have captured any
unrealized gain for the year to date ($126,000 - $110,000) in
OCI, and transferred (recycled) the cumulative unrealized
gains/(losses) from OCI [$55,000 + ($126,000 - $110,000)] to
net income (according to company policy).

d. Under ASPE, other comprehensive income is not

recognized. The revaluation model is not permitted under
ASPE. Investments that are traded in an active market are
accounted for as FV-NI under ASPE.

Solutions Manual 4.29 Chapter 4

EXERCISE 4.2 (CONTINUED)

d. (continued)

Calculation of net income:

Income from operations $375,000

Other revenues and gains
Gain on disposal of equipment $27,000
Gain on disposal of land 74,0001
Gain on disposal of FV-NI
investments 49,0002 150,000
525,000
Other expenses and losses
Loss on disposal of building 68,000
Unrealized loss on FV-NI investments 54,000 122,000
Income before income tax 403,000
Income tax expense 99,000
Net income $304,000

Calculation of retained earnings:

Balance, January 1 $465,000
Add: Net income 304,000
Balance, December 31 $769,000
1
($216,000 - $142,000)
2
$33,000 + ($126,000 - $110,000)

Note: under ASPE, retained earnings at January 1, 2023 would

be $465,000 ($410,000 + $55,000), because all investments
designated as FV-OCI under IFRS would be accounted for as FV-
NI under ASPE. Under ASPE, no OCI exists and investments
traded in an active market are accounted for as FV-NI. Therefore,
all previously recognized unrealized gains/(losses) on those
investments ($55,000) would have been recorded in net income
and closed to retained earnings in previous years.

Solutions Manual 4.30 Chapter 4

EXERCISE 4.2 (CONTINUED)

e. The sum of the AOCI and Retained Earnings under IFRS

equal the balance of Retained Earnings under ASPE as
follows:

IFRS ASPE
Retained Retained
AOCI Earnings Earnings
$129,00
Balance Jan. 1, 2023 0 $410,000 $465,000
Unrealized gain FV-OCI debt
investments during 2023 16,000
Realized gain recycled to net income (71,000)
Transfer of accumulated revaluation
surplus on land (74,000) 74,000
Net income 285,000 304,000
Balance Dec. 31, 2023 0 $769,000 $769,000

LO 3,8 BT: AP Difficulty: C Time: 50 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.31 Chapter 4

EXERCISE 4.3

2023:
Loss Jan. 1 to Sep. 30 (net of tax $700,000) $1,900,000
Loss Sep. 30 to Dec. 31 (net of tax $250,000) 700,000
Estimated impairment loss on net assets (net of
tax $50,000) 150,000
Total loss from discontinued operations $2,750,000

Discontinued operations (2023):

Loss from operation of discontinued
subsidiary, net of tax $950,000 $2,600,000
Loss on impairment of net assets, net
of tax $50,000 150,000
Loss from discontinued operations $2,750,000

c. The difference between the actual selling price and the

amount used to calculate the gain or loss on disposal of the
subsidiary at December 31, 2023 is reported in 2024 in the
discontinued operations section of the income statement,
net of tax and with separate EPS disclosure, supported by
an explanation in a note to the financial statements. The
correction is treated as a change in estimate.

d. Under IFRS, all assets and liabilities related to the

discontinued subsidiary should be presented as held for
sale, and classified as current assets and current liabilities,
respectively.

Solutions Manual 4.32 Chapter 4

EXERCISE 4.3 (CONTINUED)

e. Under ASPE, the solution to parts a. through c. would

remain the same, except that earnings per share
calculations are not required under ASPE. On the Statement
of Financial Position, the assets and liabilities relating to the
discontinued subsidiary should be segregated according to
their nature (e.g. current assets related to the discontinued
subsidiary should be presented as current assets held for
sale/related to discontinued operations, and noncurrent
assets related to the discontinued subsidiary should be
presented as noncurrent assets held for sale/related to
discontinued operations).
LO 4,8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.33 Chapter 4

EXERCISE 4.4

a. The income statement and related footnote are as follows:

Income from continuing operations before income tax 1 $144,000
Income tax expense2 43,200
Income from continuing operations 100,800
Discontinued operations (Note XX)
Income from operations of the discontinued
Blue Division, less applicable
income tax of $1,8003 $4,200
Loss on impairment of assets of
discontinued operations, less applicable
income tax recovery of $6,0004 (14,000) (9,800)
Net income $91,000

1
Income from continuing operations before income tax:
Net income – given $91,000
Write down on assets 14,000
Operating income of Blue Division (4,200)
Income from continuing operations $100,800
÷ .70
Income from continuing operations before income tax $144,000
2
($144,000 x 30%)
3
($4,200 ÷ .7) x 30%
4
($25,000 - $5,000) x 30%

Note XX—Discontinued Operations. On October 5, 2023, the

board of directors decided to dispose of the Blue Division by
auction.

(Note that earnings per share calculations are not required

under ASPE)

Solutions Manual 4.34 Chapter 4

EXERCISE 4.4 (CONTINUED)

b. The office equipment would be shown separately on the

Statement of Financial Position as part of noncurrent
assets as “noncurrent assets held for sale/related to
discontinued operations”. The assets would be valued at
the lower of carrying amount and fair value less costs to
sell. In this case, this means the office equipment would be
remeasured to $5,000, which is its estimated selling price,
net of costs to sell.

c. Under IFRS, the office equipment should be presented as

held for sale and classified as current assets on the
Statement of Financial Position.

d. If Diamond did not have a formal plan in place to dispose

of Blue Division, Blue Division would not qualify for
treatment as a discontinued operation, and the related net
loss (after tax) of $9,800 should be included in income from
continuing operations. Based on that presentation and
disclosure, an investor would appropriately interpret that
the net loss relates to operations that are expected to
continue.

Without a formal plan in place to dispose of the Blue

Division, presenting the Blue Division as a discontinued
operation is not in compliance with GAAP and it would not
be faithfully representative. Diamond’s quality of earnings
would be low, as loss/earnings related to operations that
are expected to continue would be inappropriately
excluded from income from continuing operations.
LO 4,8 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.35 Chapter 4

EXERCISE 4.5

Calculation of net income:

Increase in assets: $76,000 + $59,000 + $140,000 – $23,000 = $252,000
Increase in liabilities: $(64,000) +$18,000 + $69,000 = 23,000
Increase in shareholders’ equity: $229,000

Change in shareholders’ equity accounted

for as follows:
Net increase $229,000
Increase in common shares $105,000
Increase in contributed surplus 63,000
Decrease in retained earnings due to
dividend declaration (16,000)
Net increase accounted for 152,000
Increase in retained earnings due to net income $ 77,000

LO 5 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.36 Chapter 4

EXERCISE 4.6

Jan. 1, Dec. 31, Chang

2023 2023 e
Cash $23,000 $ 20,000 ($ 3,000)
Accounts receivable 19,000 36,000 17,000
Other assets (derived) 33,000 45,000 12,000
Total assets 75,000 101,000 26,000
Liabilities (1/1/23 derived) (37,000) (41,000) (4,000)
Capital (12/31/23 derived) $38,000 $ 60,000 $22,000

Calculation of net income:

Capital account Dec. 31, 2023 $60,000
Capital account Jan. 1, 2023 38,000
Increase 22,000
Add: Withdrawals made $11,000
Less: Cash investment made 5,000 6,000
Net income $28,000

LO 5 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.37 Chapter 4

EXERCISE 4.7

a. Total net revenue:

Sales revenue $490,000
Less: Sales discounts $ 17,800
Sales returns and
allowances 22,400 40,200
Net sales revenue 449,800
Dividend revenue 91,000
Rent revenue 8,500
Total net revenue $549,300

b. Net income:
Net revenue (from a.) $549,300
Expenses:
Cost of goods sold 384,400
Selling expenses 79,400
Administrative expenses 82,500
Interest expense 2,700
Total expenses 549,000
Income before income tax 300
Income tax expense 100
Net income $ 200

c. Dividends declared:
Ending retained earnings $74,000
Beginning retained earnings 114,400
Net decrease (40,400)
Less: net income 200
Dividends declared $40,600

Solutions Manual 4.38 Chapter 4

EXERCISE 4.7 (CONTINUED)

c. (continued)

ALTERNATE SOLUTION

Beginning retained earnings $114,400

Add net income 200
114,600
Less: dividends declared (derived) 1 40,600
Ending retained earnings $74,000

1
Dividends declared must be $40,600
($114,600 – $74,000)
LO 5 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.39 Chapter 4

EXERCISE 4.8

a. Multiple-Step Form
Flett Tire Repair Corporation
Income Statement
For the Year Ended December 31, 2023

Sales Revenue
Sales revenue $930,000
Less: Sales returns and allowances 15,000
Net sales revenue 915,000

Cost of Goods Sold

Merchandise inventory, January 1, 2023 $120,000
Purchases $600,000
Less purchase discounts 10,000
Net purchases 590,000
Add freight in 14,000 604,000
Total merchandise available for sale 724,000
Less merchandise inventory, 137,00
December 31, 2023 0
Cost of goods sold 587,000
Gross profit 328,000

Operating Expenses
Service expenses
Service salaries and wages 71,000
Depreciation expense—garage 18,00
equipment 0
Garage supplies expense 9,000 98,000
Administrative expenses
Administrative salaries and
wages 39,000
Depreciation expense—building 28,500
Office supplies expense 9,500 77,000 175,000
Income from operations 153,000

Other revenues and gains

Dividend revenue 20,000
Gain on disposal of equipment 5,500
178,500

Solutions Manual 4.40 Chapter 4

EXERCISE 4.8 (CONTINUED)

a. (continued)
Other expenses and losses
Interest expense 9,000
Loss from flood damage 50,000 59,000

Income before income tax 119,500

Income tax expense 29,875

Net Income $89,625

b. Single-Step Form
Flett Tire Repair Corporation
Income Statement
For the Year Ended December 31, 2023

Revenues
Net sales revenue $915,000
Dividend revenue 20,000
Gain on disposal of equipment 5,500
Total revenues 940,500

Expenses
Merchandise inventory consumed* 587,000
Salaries and wages 110,000
Depreciation expense 46,500
Supplies expense 18,500
Loss from flood damage 50,000
Interest expense 9,000
Total expenses 821,000

Income before income tax 119,500

Income tax expense 29,875
Net income $ 89,625

* This is the same as cost of goods sold in this case since the
installation service expense is shown separately.

Solutions Manual 4.41 Chapter 4

EXERCISE 4.8 (CONTINUED)

c. Single-step:
1. Simplicity and conciseness.
2. Probably better understood by user.
3. Emphasis on total costs and expenses and net
income.
4. Does not imply priority of one expense over another.
5. Showing expenses by nature does not require
allocation between functions.
Multiple-step:
1. Provides more information through segregation of
operating and non-operating items.
2. Expenses are matched with related revenue.
3. Highlights components of income used for ratio
analysis (e.g., Cost of Goods Sold)
4. Showing expenses by function requires allocation of
costs between functions. More judgement is required.
LO 5 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.42 Chapter 4

EXERCISE 4.9

a. Biscay Inc.
Income Statement
for the Year Ended December 31, 2023

Revenues
Sales revenue $6,000,000
Rent revenue 130,000
Gain from expropriation 300,000
Total revenues 6,430,000

Expenses
Cost of goods sold 2,680,000
Selling expenses 950,000
Administrative expenses 750,000
Loss from flood damage 190,000
Total expenses 4,570,000

Income from continuing operations before income tax 1,860,000

Income tax expense 465,000
Income from continuing operations 1,395,000

Discontinued operation:
Loss from operation of discontinued Rochelle Division
(net of $60,000 income tax recovery) 180,000
Net income $1,215,000

Solutions Manual 4.43 Chapter 4

EXERCISE 4.9 (CONTINUED)

b. Biscay Inc.
Combined Income Statement and Statement of Retained Earnings
For the Year Ended December 31, 2023

Revenues
Sales revenue $6,000,000
Rent revenue 130,000
Gain from expropriation 300,000
Total revenues 6,430,000

Expenses
Cost of goods sold 2,680,000
Selling expenses 950,000
Administrative expenses 750,000
Loss from flood damage 190,000
Total expenses 4,570,000

Income from continuing operations before income tax 1,860,000

Income tax expense 465,000
Income from continuing operations 1,395,000

Discontinued operations:
Loss from operation of discontinued Rochelle
Division (net of $60,000 income tax recovery) 180,000
Net income 1,215,000
Retained earnings, January 1 1,900,000
3,115,000
Less: Cash dividends 220,000
Retained earnings, December 31 $2,895,000

LO 5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.44 Chapter 4

EXERCISE 4.10

a. Gottlieb Corp.
Statement of Financial Performance
For the Year Ended December 31, 2023

Sales revenue $1,300,000

Cost of goods sold 780,000
Gross profit 520,000

Operating expenses
Selling expenses $65,000
Administrative expenses 48,000 113,000
Income from operations 407,000

Other revenues and gains

Dividend revenue 20,000
Interest income 7,000 27,000
434,000
Other expenses and losses
Loss on inventory due to decline in
net realizable value 80,000
Loss on disposal of equipment 35,000
Loss from expropriation 60,000 175,000

Income before income tax 259,000

Income tax expense 64,750
Net income 194,250
Other comprehensive income
Items that will not be recycled
subsequently to net income or loss:
Unrealized gain on FV-OCI investments
(net of $10,5001 income tax) 31,500
Comprehensive income $225,750

1
($42,000 x 25%)

Solutions Manual 4.45 Chapter 4

EXERCISE 4.10 (CONTINUED)

b. Gottlieb Corp.
Excerpt from Statement of Changes in Equity
For the Year Ended December 31, 2023

Retained earnings balance, January 1, as reported $ 980,000

Correction for overstatement of net income in prior
period (depreciation error) (net of tax of $13,7501) (41,250)
Balance, January 1, as restated 938,750
Add: Net income 194,250
1,133,000
Less: Dividends declared 45,000
Retained earnings balance, December 31 $1,088,000
1
($55,000 x 25%)

c.
Retained Earnings…………………. 41,250
Income Tax Payable ………………. 13,750
Accumulated Depreciation -
Buildings………………………. 55,000
d.

Under ASPE, other comprehensive income is not recognized. All

investments designated as fair value through OCI (FV-OCI)
under IFRS would be accounted for as fair value through net
income (FV-NI) under ASPE as long as they trade in an active
market. Under ASPE, the unrealized gain on FV-OCI investments
of $42,000 would be included in net income for the year ended
December 31, 2023. As well, all previously recognized unrealized
gains/(losses) on the related investments would have been
recorded in net income and closed to retained earnings in those
prior years. This would result in a different balance in retained
earnings at December 31, 2022.
LO 5,6,8 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.46 Chapter 4

EXERCISE 4.11
a.
Geneva Inc.
Income Statement
For Year Ended December 31, 2023

Sales revenue $2,100,000

Expenses
Cost of goods sold 420,000
Selling expenses 336,000
Administrative expenses 84,000
Interest expense 35,000
Total expenses 875,000
Income before income tax 1,225,000
Income tax expense 306,250
Net income $ 918,750
Earnings per share $61.25

Determination of amounts:
Administrative expenses = 20% of cost of goods sold
$84,000 = 20% of $420,000
Sales X 4% = administrative expenses
Sales = ($84,000 / 4%) = $2,100,000

Selling expenses = 4/5 of cost of goods sold

= 4/5 X $420,000
= $336,000

Per share $61.25 ($918,750  15,000)

b. Price earnings ratio

Market price per share = $980.00 = 16 times

EPS $61.25
LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 4.47 Chapter 4

EXERCISE 4.12
a. Multiple-Step Format
P. Bride Company
Income Statement
For the Year Ended December 31, 2023
(In thousands, except earnings per share)

Sales revenue $ 96,500

Cost of goods sold 60,570
Gross profit 35,930
Operating expenses
Selling expenses
Sales commission expense $ 7,980
Depreciation - sales equipment 6,480
Freight out 2,690 $ 17,150
Administrative expenses
Officers’ salaries 4,900
Depreciation - office furniture
and equipment 3,960 8,860 26,010
Income from operations 9,920
Other revenues and gains
Rent revenue 17,230
27,150
Other expenses and losses
Interest expense 1,860
Income before income tax 25,290
Income tax expense 9,070
Net income $16,220

Earnings per share $0.531

1
($16,220  30,550)

Solutions Manual 4.48 Chapter 4

EXERCISE 4.12 (CONTINUED)

b. Single-Step Format
P. Bride Company
Income Statement
For the Year Ended December 31, 2023
(In thousands, except earnings per share)

Revenues
Sales revenue $ 96,500
Rent revenue 17,230
Total revenues 113,730

Expenses
Cost of goods sold 60,570
Selling expenses 17,150
Administrative expenses 8,860
Interest expense 1,860
Total expenses 88,440

Income before income tax 25,290

Income tax expense 9,070
Net income $16,220

Earnings per share1 $0.53

1
($16,220  30,550)

Solutions Manual 4.49 Chapter 4

EXERCISE 4.12 (CONTINUED)

c. An investor interested in information about operating vs.

non-operating items would prefer the multiple-step format
because income from operations is calculated before other
revenues and gains are added and before other expenses
and losses are subtracted. Both income statement formats
show the same amount of income before income tax and
net income. However, the single-step formats tend to be
more straightforward, requiring no judgement in allocating
revenues and expenses between operating and non-
operating categories. Further, it does not imply priority of
one revenue or expense item over another. The multiple-
step format matches expenses with related revenue and
tends to require more judgement.
LO 5,7 BT: AP Difficulty: S Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.50 Chapter 4

EXERCISE 4.13

Quality Fabrication Limited

Income Statement
For the Year Ended December 31, 2023

Sales revenue
Sales revenue $1,120,000
Less: Sales returns and allowances $118,000
Sales discounts 40,000 158,000
Net sales revenue 962,000

Cost of goods sold 504,000

Gross profit 458,000

Operating expenses
Selling expenses 160,000
Administrative expenses 80,000
Depreciation expense 50,000 290,000

Income from operations 168,000

Other revenues and gains
Interest revenue 70,000
238,000
Other expenses and losses
Interest expense 50,000
Loss from storm damage 124,000

Income before income tax 64,000

Income tax expense1 16,000

Net income $ 48,000

Earnings per share2 $0.32

1
($64,000 x 25%)
2
($48,000  150,000)
LO 5 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.51 Chapter 4

EXERCISE 4.14

Holland Rose Corporation

Income Statement
For the Year Ended December 31, 2023

Net sales revenue $4,162,000

Cost of goods sold 2,665,000
Gross profit 1,497,000
Selling expenses $636,000
Administrative expenses 491,000 1,127,000
Income from operations 370,000
Other revenues 240,000
Other expenses 246,000 6,000
Income before income tax 364,000
Income tax expense1 91,000
Net income $ 273,000

Earnings per share 2 $3.03

Supporting calculations:
1
Income tax expense ($364,000 x 25%) = $91,000
2
$273,000  90,000 common shares.

Sales Revenue
Sales revenue $4,275,000
Less: Sales discounts $34,000
Sales returns and allowances 79,000 113,000
Net sales revenue $4,162,000

Solutions Manual 4.52 Chapter 4

EXERCISE 4.14 (CONTINUED)

Cost of Goods Sold:

Inventory, Jan. 1, 2023 $535,000
Purchases $2,786,000
Less purchase returns and
allowances (15,000)
Less purchase discounts (27,000)
Net purchases 2,744,000
Add freight in 72,000 2,816,000
Total goods available for sale 3,351,000
Less inventory, Dec. 31, 2023 686,000
Cost of goods sold $2,665,000

Selling expenses:
Salaries and wages expense $284,000
Sales commission expense 83,000
Entertainment expense 69,000
Advertising expense 54,000
Freight out 93,000
Depreciation expense 36,000
Telephone and internet expense 17,000 $636,000

Administrative expenses:
Salaries and wages expense $346,000
Office expense 33,000
Insurance expense 24,000
Depreciation expense 48,000
Utilities expenses 32,000
Miscellaneous expense 8,000 $491,000

Other expenses:
Interest expense $176,000
Loss on disposal of equipment 70,000 $246,000
LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.53 Chapter 4

EXERCISE 4.15

Eddie Zambrano Corporation

Statement of Retained Earnings
For the Year Ended December 31, 2023

Balance, January 1, as reported1 $225,000

Correction for depreciation error in 2021 (15,0
(net of $10,0002 income tax recovery) 00)
Retroactive adjustment for change in inventory
method (net of $14,0003 income tax) 21,000
Balance, January 1, as adjusted 231,000
Add net income4 144,000
375,000
Deduct dividends declared 100,000
Balance, December 31 $275,000

1
($40,000 + $125,000 + $160,000) – ($50,000 + $50,000)
2
($25,000 x 40%)
3
($35,000 x 40%)
4
[$240,000 – (40% X $240,000)]
LO 6 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.54 Chapter 4

EXERCISE 4.16
a.
Rainy Day Umbrella Corporation
Statement of Changes in Equity
For the Year Ended December 31, 2023
(all amounts in thousands)

Preferred Common Contr. Retained Acc. Other

Shares Shares Surplus Earnings Comp. Inc. Total

Beginning Balance $3,375 $8,903 $3,744 $23,040 $2,568 $41,630

Comprehensive Income:
Net income 7,320 7,320
Other comprehensive income 585 585
Dividends to shareholders:
Preferred (30) (30)
Common (20) (20)
Issue of Common shares 285 285
Ending Balance $3,375 $9,188 $3,744 $30,310 $3,153 $49,770

Solutions Manual 4.55 Chapter 4

EXERCISE 4.16 (CONTINUED)

b.
Rainy Day Umbrella Corporation
Statement of Financial Position (Partial)
December 31, 2023
(all amounts in thousands)

Share capital:
Preferred shares $ 3,375
Common shares 9,188
Total share capital 12,563
Contributed surplus 3,744
Total paid-in capital 16,307
Retained earnings 30,310
Accumulated other comprehensive income 3,153
Total shareholders’ equity $49,770
LO 6 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.56 Chapter 4

EXERCISE 4.17

Calculation of net income:

2023 net income after tax $24,000,000
2023 net income before tax
[$24,000,000  (1 – .25)] 32,000,000
Add back loss from discontinued operations 15,000,000
Income from continuing operations 47,000,000
Income tax (25% X $47,000,000) 11,750,000
Income before discontinued operations 35,250,000
Discontinued operations
Loss from operations 15,000,000
Less applicable income tax reduction 3,750,000
11,250,000
Net income $24,000,000

Net income $24,000,000

Less cumulative preferred dividends
(8% of $4,500,000) 360,000
Income available for common 23,640,000
Common shares 10,000,000
Earnings per share $2.36

Income statement presentation

Earnings per share:
Continuing operations $3.491
Discontinued operations (1.13)2
Net income $2.36

1
$35,250,000 – $360,000
= $3.49
10,000,000
2
$15,000,000 x (1-.25)
= $1.13
10,000,000

LO 7 BT: AP Difficulty: S Time: 25 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 4.57 Chapter 4

EXERCISE 4.18

Net income:
Income from continuing operations
$23,650,000
before tax
Income tax expense (30%) 7,095,000
Income from continuing operations 16,555,000
Discontinued operations
Loss before tax $3,225,000
Less income tax recovery 967,500 2,257,500
Net income $14,297,500

Preferred dividend entitlement

($10,750,000 x 10%): $ 1,075,000

Weighted average common shares outstanding:

12/31/23–3/31/23 (3,600,000 x 3/12) 900,000
4/1/23–12/31/23 (4,000,000 x 9/12) 3,000,000
Weighted average 3,900,000

Earnings per share:

Income from continuing operations $3.971
Discontinued operations (.58)2
Net income $3.393

1
($16,555,000 – $1,075,000)  3,900,000.
2
$2,257,500  3,900,000.
3
($14,297,500 – $1,075,000)  3,900,000.
LO 7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 4.58 Chapter 4

*EXERCISE 4.19
a. b.
Accrual Basis Cash Basis
Service revenue $172,000 $154,000
Expenses
Operating expenses 81,000 77,500
Salaries and wages 64,000 61,500
expense 2,000 4,000
Insurance expense 147,000 143,000
25,000 11,000
Income before income tax 9,000 -
Income tax expense $16,000 $11,000
Net income

c. The accrual basis of accounting provides more useful

information for decision makers because it recognizes
revenue when the services are performed and expenses
when incurred. This provides a better measurement of
performance because it records what has happened
regardless of the movement of cash. This also enhances the
predictive ability of the income statement.
LO 9 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.59 Chapter 4

*EXERCISE 4.20

a. Canviar Corp.
Income Statement (Cash Basis)
For the Year Ended December 31,

2021 2022
Sales $320,000 $515,000
Expenses 225,000 247,000
Net income $ 95,000 $268,000

b. Canviar Corp.
Income Statement (Accrual Basis)
For the Year Ended December 31,

2021 2022
Sales* $510,000 $445,000
Expenses** 277,000 230,000
Net income $233,000 $215,000

*2021: $320,000 + $160,000 + $30,000 = $510,000

2022: $355,000 + $90,000 = $445,000
**2021: $185,000 + $67,000 + $25,000 = $277,000
2022: $40,000 + $135,000 + $55,000 = $230,000

LO 9 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.60 Chapter 4

EXERCISE 4.21

Solutions Manual 4.61 Chapter 4

EXERCISE 4.21 (CONTINUED)

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.
LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001, cpa-t007 Reporting and DAIS

Solutions Manual 4.62 Chapter 4

EXERCISE 4.22

Sales of camera lenses for 2023

$2,000

$7,200

$20,000

Zoom 7500 Zoom 8000 Zoom 9500

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

b. A pie chart is best-suited for this visualization. It allows a user

of the information to identify which product made up the
greatest/least amount of revenues. Out of the three products, it
is evident from the pie chart that Zoom 9500 made up more
than half of the total revenues. With data labels, more precise
percentages can be seen since the visual representation,
without data labels, of each product is difficult to determine.

Solutions Manual 4.63 Chapter 4

EXERCISE 4.22 (CONTINUED)

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

d. A multi-series line graph is best-suited for this visualization. It

outlines year-over-year trend on the X-axis, and Sales $ on the
Y-axis. Each line represents a product, and therefore, the
movement of the line represents an increase or decrease in
sales revenue. Zoom 7500 has been declining, whereas, Zoom
9500 has been increasing. This type of chart allows the viewer
to see the trend in revenues for each product over the course
of three years.
LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001, cpa-t007 Reporting and DAIS

Solutions Manual 4.64 Chapter 4

TIME AND PURPOSE OF PROBLEMS

Problem 4.1

Purpose—to provide the student an illustration of how earnings can be managed.

The case allows students to see the effects of warranty expense timing on the
trend of income and illustrates the potential use of accruals to smooth earnings.

Problem 4.2

Purpose—to provide the student with a discontinued operations problem that

requires discussion of the statement of financial position and income statement
disclosure along with an illustration of the income statement presentation. The
student is also required to discuss the factors applied to justify the use of the
discontinued operations treatment and the impact on users of financial information.

Problem 4.3

Purpose—to provide the student with an opportunity to prepare a statement of

financial performance. A number of special items such as loss from discontinued
operations, unusual items, and unusual losses are presented in the problem for
analysis purposes. The problem also requires calculating the tax effect of a special
item from a net-of-tax amount.

Problem 4.4

Purpose—to provide the student with an opportunity to analyze a number of

transactions and to prepare a partial income statement. The problem includes
discontinued operations, an unusual item, and earnings per share. The student
must also prepare a statement of retained earnings and then discuss the impact of
GAAP classification rules on the assessment of the quality of earnings.

Problem 4.5

Purpose—to provide the student with an opportunity to prepare an income

statement and statement of retained earnings using the single-step format.

Problem 4.6

Purpose—to provide the student with an understanding of conditions where

unusual item classification is appropriate. In this problem, it should be emphasized
that in situations where unusual item classification is not permitted, a classification
as an unusual item may still be employed.

Solutions Manual 4.65 Chapter 4

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 4.7

Purpose—to provide the student with the opportunity to comment on deficiencies in

a single-step income statement. This problem includes discussion of unusual
items, tax reassessments, and ordinary gains and losses. The problem provides a
broad overview to a number of items discussed in the textbook.

Problem 4.8

Purpose—to provide the student with the opportunity to prepare a multiple-step

and single-step income statement and a statement of retained earnings from the
same underlying information. The problem emphasizes the differences between
the multiple-step and single-step income statement.

Problem 4.9

Purpose—to provide the student with a problem on the income statement

treatment of (1) an usual but infrequently occurring charge, (2) an unusual item
and its related tax effect, (3) a change in estimate, and (4) earnings per share. The
student is required to identify the proper income statement treatment and to
provide the rationale for such treatment. A revised income statement must be
prepared.

Problem 4.10

Purpose—to provide the student the opportunity to distinguish between different

scenarios involving discontinued operations, unusual items and changes in
depreciation method. Three different scenarios are proposed and a combined
statement of income and retained earnings must be prepared. The problem
involves intraperiod tax allocation. This problem is comprehensive.

Problem 4.11

Purpose—to provide the student with the opportunity to correct a multi-step income
statement. The student must determine which of the items should be presented in
the income statement and must prepare a proper income statement. A combined
statement of income and retained earnings is also required. The student must also
discuss the purpose of intraperiod tax allocation.

Solutions Manual 4.66 Chapter 4

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 4.12

Purpose—to provide the student the opportunity to comment on the income

statement presentation of a number of special items. Presentation of the proper
earnings per share is also emphasized. A revised statement of financial
performance is required as well as a revised statement of retained earnings.

Problem 4.13

Purpose—to provide the student with a problem to determine the reporting of

several items, which may get special treatment as irregular items. This is a good
problem for a group assignment.

Problem 4.14

Purpose—to provide the student with the opportunity to comment on deficiencies in

an income statement format. The student is required to comment on such items as
inappropriate heading, incorrect classification of special items, proper net of tax
treatment, and presentation of per share data. The student is also required to
prepare a correct income statement.

Problem 4.15

Purpose—to provide the student with an opportunity to prepare a statement of

changes in equity. A number of special items must be reclassified and reported in
the income statement.

Problem 4.16

Purpose—to provide the student a real company context to identify factors that
make income statement information useful. The focus is on overly aggregated
information in a condensed income statement. Additional detail would seem to be
warranted either on the face of the statement or with reference to the notes.

*Problem 4.17

Purpose—to provide an opportunity for the student to prepare and compare a.

cash basis and accrual basis income statements, b. cash basis and accrual basis
statements of financial position, and c. to discuss the weaknesses of cash basis
accounting.

Solutions Manual 4.67 Chapter 4

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

*Problem 4.18

Purpose—to provide an opportunity for the student to determine income on an

accrual basis. The student is asked to write a letter indicating what was done to
arrive at an accrual basis net income.

Solutions Manual 4.68 Chapter 4

SOLUTIONS TO PROBLEMS

PROBLEM 4.1

a. Earnings management may be defined as the process of targeting

certain earnings levels (whether current or future) or desired
earnings trends and then working backwards to determine what
has to be done to ensure that these targets are met. Earnings
management often involves planned timing of revenues, expenses,
gains and losses to smooth out bumps in earnings. In many cases,
earnings management is used to increase income in the current
year at the expense of income in future years. For example,
companies inappropriately recognize revenue before it is earned in
order to boost income. Earnings management can also be used to
decrease current income in order to increase income in the future.
This is done through the creation of inappropriate reserves using
unrealistic assumptions to estimate liabilities for items such as
sales returns, loan losses, and warranty returns.

b. Proposed Accounting Income:

2020 2021 2022 2023 2024
Income before $43,00 $43,00
warranty expense 0 0
Warranty expense 8,000 2,000
Income $20,000 $25,000 $30,000 $35,000 $41,000

Assuming the same income before warranty expense for both 2023
and 2024 and total warranty expense over the 2-year period of
$10,000, this proposed accounting results in steadily increasing
income over the five-year period.

Solutions Manual 4.69 Chapter 4

PROBLEM 4.1 (CONTINUED)

c. Appropriate Accounting Income:
2020 2021 2022 2023 2024
Income before $43,00 $43,00
warranty expense 0 0
Warranty 5,000 5,000
Expense
Income $20,000 $25,000 $30,000 $38,000 $38,000

The appropriate accounting would be to record $5,000 in 2023,

resulting in income of $38,000. However, with the same amount of
warranty expense in 2024, Grace no longer shows an increasing trend
in income. Thus, by taking more expense in 2023, Grace can maintain
its growth trend in income.
d. If Grace records a larger, more conservative warranty expense
this year, and provides full disclosure of the warranty accrual, a
potential investor should see through the company’s attempts to
mask the underlying economic reality that the growth trend in
income may not be maintained. The investor may view the
company’s larger warranty accrual as an attempt to manage
earnings. The investor may be wary of the company’s accounting
practices and quality of earnings. The investor may discount the
value of the company’s shares or forego investing in the
company altogether.
LO 2 BT: C Difficulty: M Time: 25 min. AACSB: Ethics CPA: CPA: cpa-t001 cpa-e001 Reporting and Ethics

Solutions Manual 4.70 Chapter 4

PROBLEM 4.2

a. The Rocketeer Division’s assets should be identified separately

on Campbell Corporation’s Statement of Financial Position as of
May 31, 2023 as held for sale current assets and carried at fair
value less costs to sell of $36 million.

b. The operating loss must be reported as a separate component

after income from continuing operations. The operating loss up to
year end is presented as a loss from discontinued operations on
a net of tax basis. The division assets would be measured at the
lower of carrying value and fair value less costs to sell. The
related loss would be presented as a separate component of
discontinued operations, on a net of tax basis. Separate earnings
per share figures for the discontinued operations are also
required under IFRS.

All figures in thousands, except earnings per share:

Income from continuing operations (Note–): $XXX

Loss from operation of the Rocketeer

Division less applicable income tax recovery of $1,0251 $(3,075)
Loss on impairment of Rocketeer Division
assets less applicable income tax recovery of $1,5002 (4,500)
$(7,575)
Net income $XXX

1
($2,500,000 + $1,600,000) x 25%
2
Book value of assets $42,000,000
Fair value less costs to sell 36,000,000
Impairment loss $(6,000,000 )
Applicable tax (25%) 1,500,000
After-tax loss $(4,500,000 )

(Note to instructor: We have presented the calculations in this format in

order for the student to better understand how the loss on impairment was
calculated. Other formats are acceptable.)

Solutions Manual 4.71 Chapter 4

PROBLEM 4.2 (CONTINUED)

c. The operating loss from June 1- July 5, 2023 is reported as a

separate component after income from continuing operations.
The operating loss is presented as a loss from discontinued
operations on a net of tax basis. The gain on the disposal of the
division assets would be presented as a separate component of
discontinued operations, on a net of tax basis. The amounts
would be disclosed on a comparative basis with the results of the
year ended 2023. Separate earnings per share figures for the
discontinued operations are also required under IFRS.

All figures in thousands, except earnings per share:

Income from continuing operations (Note–): $XXX

Loss from operation of the Rocketeer

Division less applicable income tax recovery of $751 $(225)
Gain on disposal of the Rocketeer Division
assets less applicable income tax of $1,0002 3,000 $2,775

Net income $XXX

1
($300,000 x 25%)
2
($40 million less $36 million previously recorded) x 25%

d. The Rocketeer Division financial results should be shown as a

discontinued operation according to the following factors:
 Management has “formally” decided to dispose of the
Rocketeer Division
 The division represents a separate major line of business
(as noted – it is a major portion of the company’s
operations). It is a separate component of the entity and is
operationally distinct, where the operations, cash flows, and
financial elements are clearly distinguishable from the rest
of the enterprise (as evidenced by the measurement of the
division losses) – thus the accountants will be able to
measure the loss from operations and disposition of the
assets.
 There is an active program to find a buyer (negotiations are
in process)

Solutions Manual 4.72 Chapter 4

PROBLEM 4.2 (CONTINUED)

d. (continued)
Management could argue the following points against using
discontinued operations treatment:
 Changes to the plan are possible or likely, and
 The assets are not available for immediate sale in their
current state

Management would usually prefer using the discontinued operations

treatment. This separates the financial results of the division from
continuing operations and allows users to concentrate on continuing
financial results and to assess management performance on the more
profitable parts of the business. This also allows users to see the
unprofitable impact of the Rocketeer Division on prior years’ results
since comparative figures are presented. For a user, showing
discontinued operations at the bottom of the income statement after
income tax expense and with its own earnings per share information
provides more information about the quality and recurrence of
earnings.
LO 4,7 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 4.73 Chapter 4

PROBLEM 4.3

Rolling Thunder Corp.

Statement of Financial Performance
For the Year Ended December 31, 2023

Sales revenue $36,500,000

Less cost of goods sold 28,500,000
Gross profit 8,000,000
Less selling and administrative expenses 4,700,000
Income from operations 3,300,000
Other revenues and gains
Interest income $170,000
Gain on disposal of FV-NI investments 110,000 280,000
3,580,000
Other expenses and losses
Loss on impairment of goodwill 520,000
Loss from flood damage 390,000 910,000
Income from continuing operations before income tax 2,670,000
Income tax expense:
For the current year 797,500
Tax assessment related to 2021 500,000 1,297,500
Income from continuing operations 1,372,500
Discontinued operations
Loss from operations, net of income tax
recovery of $55,000 165,000
Loss on disposal, net of income tax
recovery of $87,500 262,500 427,500
Net income $ 945,000
Other comprehensive income
Items that will not be recycled subsequently
to net income or loss:
Unrealized gain on FV-OCI investments, net of
income tax of $80,0001 240,000
Comprehensive income $ 1,185,000

1
($320,000 x 25%)

Solutions Manual 4.74 Chapter 4

PROBLEM 4.3 (CONTINUED)

Earnings per share:

Income from continuing operations $ 1.62a
Discontinued operations (0.53)b
Net income $ 1.09c

a
$1,372,500 – $70,000
= $1.62*
800,000 shares
b
($427,500)
= ($0.53)
800,000 shares
c
$ 945,000 – $70,000
= $1.09
800,000 shares
*rounded to make it add
LO 4,5,7 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

Solutions Manual 4.75 Chapter 4

PROBLEM 4.4

a. Wavecrest Inc.
Income Statement (Partial)
For the Year Ended December 31, 2023

Income from continuing operations before income tax $1,738,5001

Income tax expense 505,3502
Income from continuing operations 1,233,150
Discontinued operations:
Loss on disposal of recreational division $115,000
Less applicable income tax reduction3 34,500 80,500
Net income $1,152,650

Earnings per share:

Income from continuing operations4 $15.41
Discontinued operations5 (1.00)
Net income $14.41
*
Calculation of income from continuing operations before income tax:
As previously stated $1,790,000
Loss on disposal of FV-NI investments (107,000)
Gain on proceeds of life insurance policy
($100,000 – $46,000) 54,000
Error in calculation of depreciation:
As calculated ($54,000  6) $9,000
Corrected ($54,000 – $9,000)  6 7,500 1,500
As restated $1,738,500
2
Calculation of income tax:
Income from continuing operations before income tax $1,738,500
Non-taxable income (gain on life insurance) (54,000)
Taxable income 1,684,500
Tax rate X 30%
Income tax expense $505,350
3
($115,000 x 30%)
4
($1,233,150 ÷ 80,000)
5
($80,500 ÷ 80,000)

Solutions Manual 4.76 Chapter 4

PROBLEM 4.4 (CONTINUED)

b. Wavecrest Inc.
Excerpt from Statement of Changes in Equity
For the Year Ended December 31, 2023

Retained earnings, January 1, 2023, as reported $2,540,000

Correction of depreciation overstatement
(net of tax of $900) 1 $ 2,100
Retroactive adjustment for change in inventory
method (net of tax of $6,000) 2 (14,000) (11,900)
Retained earnings, January 1, 2023, as adjusted $2,528,100
Add: Net income 1,152,650
3,680,750
Less: Dividends declared 175,000
Retained earnings, December 31, 2023 $3,505,750

1
Error in calculation of depreciation:
As calculated ($54,000  6) $9,000
Corrected ($54,000 – $9,000)  6 7,500
Understatement of net income per year 1,500
X2
Total understatement of beginning retained earnings $3,000
After-tax understatement ($3,000 X [1-30%]) $2,100

2
After-tax overstatement ($20,000 X [1-30%]) ($14,000)

Solutions Manual 4.77 Chapter 4

PROBLEM 4.4 (CONTINUED)

c. Proper classification of items on the income statement includes

appropriate separation of discontinued operations from continuing
operations. Discontinued operations are presented separately to
provide predictive value. By separating the results of operations
that are being discontinued from ongoing operations, users can
assess ongoing operations and more easily predict future
performance. Results from continuing operations usually have
greater significance for predicting future performance than do
results from nonrecurring activities.

Appropriate separation of operating from non-operating items (e.g.

separation of revenues and expenses from gains and losses) also
helps users to assess past performance and profitability based on
recurring, regular transactions, and to predict sustainability of
earnings.

Proper disclosure of other items on the income statement (e.g.

government assistance, loss on impairment of goodwill, loss on
inventory due to decline in NRV, income tax) also helps users to
assess the quality, recurrence, and sustainability of earnings, and
management’s performance.
LO 2,4,7 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

Solutions Manual 4.78 Chapter 4

PROBLEM 4.5

Thompson Corporation
Income Statement
For the Year Ended December 31, 2023

Revenues
Net sales revenue1 $1,068,000
Gain on disposal of land 30,000
Rent revenue 18,000
Total revenues 1,116,000

Expenses
Cost of goods sold2 645,000
Selling expenses 232,000
Administrative expenses 99,000
Total expenses 976,000

Income before income tax 140,000

Income tax expense 53,900
Net income $ 86,100
1
($1,100,000 – $14,500 – $17,500 = $1,068,000)
2
Cost of goods sold:
Inventory, January 1 $ 89,000
Purchases $610,000
Less purchase discounts 10,000
Net purchases 600,000
Add freight in 20,000 620,000
Cost of goods available for sale 709,000
Less inventory, December 31 64,000
Cost of goods sold $645,000

Solutions Manual 4.79 Chapter 4

PROBLEM 4.5 (CONTINUED)

Thompson Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2023

Retained earnings, January 1 $ 160,000

Plus net income 86,100
246,100
Less: cash dividends 45,000
Retained earnings, December 31 $201,100

LO 5,6 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.80 Chapter 4

PROBLEM 4.6

1. Present loss separately because it is material and the users of the

financial statements would not expect losses from earthquakes.

2. Since the company appears to issue bonds/shares frequently and

since finance costs are generally separately presented, these
might be grouped and presented with finance costs.

3. Present loss separately if material, because hail storms and

therefore losses due to hailstorms are rare in the locality.

4. The cumulative unrealized holding gain/(loss) – OCI previously

reported for these investments would not be recycled from AOCI to
net income because the investments are in shares. The gain/loss
on disposal of investments is not classified as unusual.

5. The cumulative unrealized holding gain/(loss) – OCI for this

investment would not be recycled from AOCI to net income
because the investments are in shares. The gain/loss on disposal
of investments is not classified as unusual.

6. Present related gain/(loss) on sale of land separately if material,

because the company is not in the business of selling land.
7. May present costs separately since the company does not
frequently relocate. This would provide greater transparency since
relocation is not a normal part of operations.

8. Loss might be grouped with finance costs since the company

appears to enter into this type of transaction frequently.

9. The loss is not an infrequent occurrence when taking into account

the environment in which the entity operates. Whether this is
separately presented would be a judgement call since these floods
happen every three years. The entity knows this and could avoid
the loss by insuring itself against this type of loss. If insured, the
insurance expense would be booked every year as an ongoing cost
of doing business.

Solutions Manual 4.81 Chapter 4

PROBLEM 4.6 (CONTINUED)

10. Present gain/(loss) on sale of land separately if material, because

sale of land is not part of normal recurring activities.

Note that as a general rule, if the item is unusual and material,

(consider size, nature and frequency), the item is presented separately
but included in income from continuing operations. If the item is
unusual and immaterial, the item is combined with other items in
income from continuing operations. There is a trade-off here between
additional disclosures of relevant information and too much disclosure
which might result in information overload. Certain items are already
separately disclosed as part of other comprehensive income. These
items are presented net of tax whereas unusual items are presented
before tax. Care should be taken to review the current accounting
standards as certain specific items may be required to be presented
separately. Note that IFRS and ASPE mandate different items that
must be separately presented. These standards change over time.

LO 1,7 BT:C Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.82 Chapter 4

PROBLEM 4.7

The Income Statement of Klein Corporation contains the following

weaknesses in classification and disclosure:

1. Sales taxes: sales taxes have been erroneously added to gross

sales revenue. Failure to deduct these taxes directly from customer
billings results in a deceptive inflation of the amount of sales
revenue. These taxes should be deducted from gross sales
revenue because the Corporation acts as an agent in collecting
and remitting such taxes to the government.

2. Purchase discounts: purchase discounts should not be treated as

revenue by being lumped with other revenue such as dividend
revenue and interest income. A purchase discount is more logically
a reduction of the cost of purchases because revenue is not
created by purchasing goods and paying for them. In a cash
transaction, cost is measured by the amount of the cash paid. In a
credit transaction, however, cost is measured by the amount of
cash required to settle the obligation immediately. The discount
should reduce the cost of goods purchased to the amount of cash
that would be required to settle the obligation immediately.

3. Recoveries of accounts written off in prior years: these collections

should be credited to allowance for doubtful accounts unless the
direct write-off method was used in accounting for bad debt
expense, in which case the recovery would offset the current year’s
bad debt expense. Generally, the direct write-off method is not
allowed, as it does not result in faithfully representative valuation of
accounts receivable (net).

Solutions Manual 4.83 Chapter 4

PROBLEM 4.7 (CONTINUED)

4. Freight in and freight out: freight out is an expense of selling and is

therefore reported properly in the statement, although freight in is a
cost related to the acquisition of merchandise for resale, and
should have been included in the calculation of cost of goods sold.
The value assigned to inventory should represent the value of the
economic resources given up in obtaining goods and readying
them for sale.

5. Loss on discontinued styles: this type of loss, though often

substantial, should not be treated as an unusual item because it is
apparently typical of the customary business activity of the
corporation. It should be reported and included as an operating
expense.

6. Loss on disposal of FV-NI investments: this item should be

presented as a separate component of income from operations. As
the company appears to trade investments frequently, the loss
should not be labelled as unusual.

7. Loss on disposal of warehouse: this item may be presented

separately since the company is not in the business of selling
warehouses. However, it should be shown at the pre-tax amount.

8. Tax reassessments for 2022 and 2021: the company may wish to
show this as a separate line item within income tax expense for
greater transparency. Reassessments are not uncommon as
companies often have to interpret the income tax act. These
interpretations are audited by the government and the tax auditors
may have differing interpretations which may result in
reassessments.

Solutions Manual 4.84 Chapter 4

PROBLEM 4.7 (CONTINUED)

9. Income tax: the income statement is missing income tax as an

expense.

10. The amount identified as income before unusual items should be

labelled income from operations.
LO 1,7 BT:C Difficulty: M Time: 40 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.85 Chapter 4

PROBLEM 4.8

a. Reid Corporation
Income Statement
For the Year Ended June 30, 2023

Sales revenue $1,835,050

Cost of goods sold 1,071,770
Gross profit 763,280
Operating expenses
Selling expenses
Sales commissions expense $97,600
Salaries and wages expense 56,260
Advertising expense 28,930
Entertainment expense 14,820
Freight out 21,400
Telephone and internet expense 9,030
Depreciation expense 4,980
Repairs and maintenance expense 6,200
Supplies expense 4,850
Miscellaneous expense 4,715 248,785
Administrative expenses
Salaries and wages expense 7,320
Repairs and maintenance expense 9,130
Depreciation expense 7,250
Supplies expense 3,450
Telephone and internet expense 2,820
Miscellaneous expense 6,000 35,970 284,755
Income from operations 478,525
Other revenues
Dividend revenue 38,000
516,525
Other expenses
Interest expense 18,000
Income before income tax 498,525
Income tax expense 133,000
Net income $ 365,525
Earnings per share1 $1.98
1
($365,525 - $9,000)  180,000 shares

Solutions Manual 4.86 Chapter 4

PROBLEM 4.8 (CONTINUED)

b.
Reid Corporation
Excerpt from Statement of Changes in Equity
For the Year Ended June 30, 2023

Retained earnings, July 1, 2022, as reported $292,000

Correction of depreciation understatement
(net of tax of $3,300) 17,700
Balance July 1, 2022 adjusted $274,300
Add: Net income 365,525
639,825
Deduct:
Dividends declared on preferred shares $ 9,000
Dividends declared on common shares 32,000 41,000
Retained earnings, June 30, 2023 $598,825

Solutions Manual 4.87 Chapter 4

PROBLEM 4.8 (CONTINUED)

c. Reid Corporation
Income Statement
For the Year Ended June 30, 2023

Revenues
Sales revenue $1,835,050
Dividend revenue 38,000

Total revenues 1,873,050

Expenses
Raw materials and supplies consumed1 $482,970
Increase in work-in-process and finished
goods inventories (see note) (112,900)
Employee benefit expense2 871,180
Advertising expense 28,930
Transportation expense 21,400
Repairs an maintenance expense 15,330
Entertainment expense 14,820
Depreciation expense 12,230
Telephone and internet expense 11,850
Miscellaneous expense 10,715
Finance costs 18,000

Total expenses 1,374,525

Income before income tax 498,525

Income tax expense 133,000

Net income $365,525

Earnings per share3 $1.98

1
$474,670 + $3,450 + $4,850 = $482,970
2
$97,600 + $56,260 + $7,320 + $710,000 = $871,180
3
($365,525 - $9,000)/ 180,000 shares

d. Price earnings ratio

Market price per share = $31.70 = 16 times

EPS $1.98

Solutions Manual 4.88 Chapter 4

PROBLEM 4.8 (CONTINUED)

Note: The functional classification includes the salaries and wages and
all overhead costs incurred by function as well as the raw materials
that went into production. However, to the extent that there are more of
these costs in ending work-in-process and finished goods inventory
than at the beginning of the period, the increase in those inventories
must be deducted from the costs going into production to bring the
amounts back to the cost of goods sold in the period. If the work-in-
process and finished goods inventories at the end of the period are
lower than at the beginning of the period, then the additional costs
must have been included in cost of goods sold – therefore, a decrease
in those inventories is added to the raw materials and other supplies
consumed and the production salary and wage costs incurred to come
to the cost of goods sold amount. Note that the change in raw
materials inventory is not required as an adjustment because the figure
we’re adjusting is raw materials consumed or used in the period, not
the cost of materials purchased.
LO 5,6 BT: AP Difficulty: M Time: 55 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 4.89 Chapter 4

PROBLEM 4.9

1. The usual but infrequently occurring charge of $10,500,000

should be disclosed separately, assuming it is material. This
charge should be shown as part of income from continuing
operations and would not be reported net of tax. This item should
be separately disclosed to inform the users of the financial
statements that this item is not frequently recurring and therefore
may not impact next year's results. Furthermore, trend
comparisons may be misleading if such an item is not highlighted
and adjustments made. The item should not be considered
unusual because it is usual in nature.

2. The loss of $9,000,000 from discontinued operations should be

reported net of tax in a separate section following income from
continuing operations. The $3,000,000 tax effect related to the
discontinued operations should be reflected as part of the
discontinued operations. The reason for the separate disclosure
is much the same as that given above for the separate disclosure
of the usual, but infrequently occurring item. Readers must be
informed that certain revenue and expense items are not part of
the future operations of the business and thus should be
segregated from the results of operations that are continuing.

Under ASPE, the assets and liabilities related to the discontinued

component should be segregated on the Statement of Financial
Position according to their nature (e.g. current assets related to
the discontinued component should be presented as current
assets held for sale/related to discontinued operations, and
noncurrent assets related to the discontinued component should
be presented as noncurrent assets held for sale/related to
discontinued operations). Under IFRS, all assets and liabilities
related to the discontinued component should be presented as
held for sale, and classified as current assets and current
liabilities, respectively.

Solutions Manual 4.90 Chapter 4

PROBLEM 4.9 (CONTINUED)

a. (continued)

3. The “Adjustment required for correction of an error” is

inappropriately labelled and also should not be reported in the
statement of retained earnings. Changes in estimate should be
handled in current and prospective periods through the income
statement. Catch-up adjustments are not permitted. The
depreciation expense for the current year would also have to be
adjusted (although there is insufficient information given to do
so).

4. Under ASPE, EPS is not required to be disclosed since the

shares are often held by one or a few shareholders who are
closely related to the company and therefore have access to
information beyond the financial statements. Having said this,
the entity may choose to provide additional disclosures (beyond
what is required by ASPE). Under IFRS, where discontinued
operations are reported, IAS 33 states that basic EPS and
diluted EPS may be presented on the statement of
comprehensive income or in the notes. Because such
importance is ascribed to this ratio, the profession believes it
necessary to highlight the earnings per share figure. In this case
it should report earnings per share for both income from
continuing operations and discontinued operations.

Solutions Manual 4.91 Chapter 4

PROBLEM 4.9 (CONTINUED)

b.
California Tanning Salon Corp.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2023

($’000s omitted)
Net sales revenue $640,000

Cost and expenses:

Cost of goods sold 500,000
Selling, general and administrative expenses1 55,500
Loss on inventory due to decline in NRV 10,500
Other2 8,000
574,000
Income before income tax and discontinued operations 66,000
Income tax expense 22,400
Income before discontinued operations 43,600
Discontinued operations
Loss from discontinued operations (net of tax of $3,0003) 6,000
Net income 37,600
Retained earnings, January 1 141,000
178,600
Less: Dividends on common shares 12,200
Retained earnings, December 31 $166,400

1
$66,000 - $10,500 = $55,500
2
$17,000 - $9,000 = $8,000
3
($22,400 - $19,400)
LO 4,5,6,8 BT:AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.92 Chapter 4

PROBLEM 4.10

SITUATION 1:
DC 5 Ltd.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2023

Sales revenue ($7,300,000 - $1,500,000) $5,800,000

Cost of goods sold ($3,700,000 - $750,000) 2,950,000
Gross profit 2,850,000
Selling, general and administrative expenses
($2,300,000 - $580,000 - $790,000) 930,000
Income from operations 1,920,000
Other expenses and losses
Loss from tornado ($630,000 + $270,0001) 900,000
Income before income tax and discontinued operations 1,020,000
Income tax expense2 306,000
Income before discontinued operations 714,000
Discontinued operations
Income from operations of apparel
division (net of tax of $51,0003) $119,000
Loss from disposal of apparel division
(net of tax of $237,0004) 553,000 434,000
Net income 280,000
Retained earnings, January 1 1,250,000
Retained earnings, December 31 $1,530,000
1
Tax on ($630,000 ÷ [100% - 30%]) X 30% = $270,000
2
$1,020,000 X 30%
3
$1,500,000 - $750,000 - $580,000 = $170,000
($170,000 X 30%)
4
($790,000 X 30%)

Solutions Manual 4.93 Chapter 4

PROBLEM 4.10 (CONTINUED)

SITUATION 2:
DC 5 Ltd.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2023

Sales revenue $7,300,000

Cost of goods sold 3,700,000
Gross profit 3,600,000
Selling, general and administrative expenses1 2,402,200
Income from operations 1,197,800
Other losses:
Loss from tornado ($630,000 + $270,000) 900,000
Income before income tax 297,800
Income tax expense2 89,340
Net income 208,460
Retained earnings, January 1 1,250,000
Retained earnings, December 31 $1,458,460
1
The amount recorded as bad debt expense represents
the 1.2% rate
($87,600 / $7,300,000 = 1.2%)
Revised bad debt expense = $7,300,000 X 2.6% = $189,800
Bad debt expense recorded to date 87,600
Increase in bad debt expense 102,200
Original selling, general and administrative expenses 2,300,000
Revised selling, general and administrative expenses $2,402,200
2
($297,800 x 30%)

Solutions Manual 4.94 Chapter 4

PROBLEM 4.10 (CONTINUED)

SITUATION 3:
DC 5 Ltd.
Combined Statement of Income and Retained Earnings
For the Year Ended December 31, 2023

Sales revenue $7,300,000

Cost of goods sold 3,700,000
Gross profit 3,600,000
Selling, general and administrative expenses1 2,300,000
Income from operations 1,300,000
Other expenses:
Loss from tornado ($630,000 + $270,000) 900,000
Income before income tax 400,000
Income tax expense 120,000
Net income 280,000
Retained earnings, January 1 1,250,000

Retained earnings, December 31 $1,530,000

1
Note: change in method of depreciation is a change in estimate and
is accounted for prospectively.
LO 4,5,6 BT:AP Difficulty: M Time: 50 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.95 Chapter 4

PROBLEM 4.11

a.
Zephyr Corporation
Income Statement
For the Year Ended December 31, 2023

Sales revenue $9,500,000

Cost of goods sold 5,900,000
Gross profit 3,600,000
Selling and administrative expenses1 $1,280,000
Loss on inventory due to decline in NRV 112,000
Total operating expenses 1,392,000
Income before income tax and discontinued operations 2,208,000
Income tax expense2 662,400
Income before discontinued operations 1,545,600
Discontinued operations
Loss from operation of discontinued
segment (net of tax of $69,4293) 162,000
Net income $1,383,600

1
The 2022 sales commissions of $20,000 are deducted.
2
(30% of $2,208,000).
3
The loss from operation of discontinued segment before tax =
$162,000 / [100% - 30%] = $231,429. Income tax = $231,429 x 30%
= $69,429.

Solutions Manual 4.96 Chapter 4

PROBLEM 4.11 (CONTINUED)

b.
Zephyr Corporation
Statement of Income and Retained Earnings
For the Year Ended December 31, 2023

Sales revenue $9,500,000

Cost of goods sold 5,900,000
Gross profit 3,600,000
Selling and administrative expenses $1,280,000
Loss on inventory due to decline in NRV 112,000
Total operating expenses 1,392,000
Income before income tax and discontinued operations 2,208,000
Income tax expense 662,400
Income before discontinued operations 1,545,600
Discontinued operations
Loss from operation of discontinued segment
(net of income tax recovery of $69,429) 162,000
Net income $1,383,600
Retained earnings, January 1, .........................
$2,800,000
Less: Decrease in prior year income
due to error in recording sales
commissions (net of tax of $6,0001) 14,000
Retained earnings, January 1, as restated 2,786,000
4,169,600
Less: Cash dividends 700,000
Retained earnings, December 31 $3,469,600

Note: change in method of depreciation is a change in estimate and is

accounted for prospectively.
1
($20,000 x 30%)

Solutions Manual 4.97 Chapter 4

PROBLEM 4.11 (CONTINUED)

c. The income tax is allocated in the same manner as the

underlying irregular item or adjustment to opening retained
earnings. Since income tax is a major expense for companies, it
is important to reflect the individual impact of tax for discontinued
operations, and corrections of prior year errors. This helps users
assess the quality of earnings and their related tax impact.
Intraperiod tax allocation also helps readers in trend analysis of
income tax expense and income from continuing operations, by
placing the current year amount on a comparable basis with prior
years.
LO 2,4,5,6 BT:AP Difficulty: M Time: 45 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.98 Chapter 4

PROBLEM 4.12

a.
ON TIME CLOCK COMPANY INC.
Statement of Financial Performance
For the Year Ended December 31, 2023

Sales revenues $358,675

Cost of goods sold 198,112
Gross profit 160,563
Selling expenses $41,850
Administrative expenses 32,142 73,992
Operating income before income tax 86,571
Other revenues and gains
Dividend revenue 40,000
Gain on disposal of long-term investments 31,400 71,400
157,971
Other expenses and losses
Loss on expropriation 13,000
Income before income tax 144,971
1
Income tax expense 50,740
Net income 94,231
Other comprehensive income
Items that will not be recycled subsequently
to net income or loss:
Unrealized gain on FV-OCI
investments (net of tax of $12,6002) 23,400
Comprehensive income $117,631
1
$56,900/$162,571 = 35% tax rate from original income statement
($144,971 x 35% = $50,740)
2
($36,000 x 35% = $12,600)

Solutions Manual 4.99 Chapter 4

PROBLEM 4.12 (CONTINUED)

b.
ON TIME CLOCK COMPANY INC.
Statement of Changes in Equity
For the Year Ended December 31, 2023

Accumulated
Other
Compre-
Retained hensive
Earnings Income

Balance January 1 as reported $216,000 $120,000

Correction of prior year error (net of
tax of $9,2541) (17,186)
Balance January 1 restated 198,814
Net income 94,231
Unrealized gain on FV-OCI
investment* _______ 23,400

Balance December 31 $293,045 $143,400

1
($17,186 / (1-.35) = $26,440 before tax
$26,400 x 35% = $9,254

*Will not be recycled subsequently to net income or loss.

($36,000 x (1-.35)

Solutions Manual 4.100 Chapter 4

PROBLEM 4.12 (CONTINUED)

c. The sum of the balances in the Accumulated Other Comprehensive

Income and Retained Earnings as originally reported will not equal
the sum of these accounts as revised. The difference lies in the
amount tax applicable to two items which were misclassified as
items appearing as elements of retained earnings, when they
belonged on the statement of income and subject to tax.
Consequently, income tax payable was understated by a net
amount of $6,440 as outlined below.

Income
Tax Retained
Payable AOCI Earnings
Balance Dec. 31, 2023 as $120,00 $322,88
originally reported 0 5
Reclassification of unrealized 23,40 (23,400
gain on FV-OCI Investments 0 )
Gain on disposals of long-term $10, (10,990
investment ($31,400 x 35%) 990 )
Loss on expropriation ($13,000 x (4, 4,55
35%) 550) 0
Balance Dec. 31, 2023 as $6, $143,40 $293,04
revised 440 0 5

LO 5,6 BT:AP Difficulty: M Time: 45 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.101 Chapter 4

PROBLEM 4.13

Faldo Corp.
Income Statement (Partial)
For the Year Ended December 31, 2023

Income from continuing operations before income tax1 $3,272,000

Income tax expense2 818,000
Income from continuing operations 2,454,000
Discontinued operations
Loss from operation of
discontinued subsidiary3 $ 90,000
Less applicable income tax
reduction 22,500 $67,500
Loss on disposal of subsidiary 200,000
Less applicable income tax
reduction 50,000 150,000 217,500
Net income $2,236,500

Earnings per share:

Income from continuing operations4 $24.54
Discontinued operations5 (2.18)
Net income $22.36

1
Income from continuing operations before income tax:
As previously stated $2,710,000
Write-off of accounts receivable (54,000)
Gain on disposal of equipment 96,000
Settlement of lawsuit 520,000
Revised $3,272,000

2
Income tax expense: $3,272,000 X .25 = $818,000
3
($290,000 - $200,000)
4
($2,454,000 ÷ 100,000)
5
(-$217,500 ÷ 100,000)

Note: The prior year error related to the intangible asset was correctly charged to
retained earnings.
LO 4,5 BT:AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.102 Chapter 4

PROBLEM 4.14

The deficiencies of the Amos Corporation income statement are as

follows:

a.
1. The heading is inappropriate. The heading should include the
period of time for which the income statement is presented.

2. The unrealized holding gain on FV-OCI investments should

be shown after net income as part of other comprehensive income,
on a net of tax basis. The unrealized holding gain on FV-OCI equity
investments will not be recycled subsequently to net income or
loss.
3. Cost of goods sold is usually listed as the first expense, followed by
selling, administrative, and other expenses.
4. Advertising expense is a selling expense and should usually
be classified as such.
5. Loss on inventory due to decline in NRV might be classified as an
unusual item and separately disclosed if it is unusual or infrequent,
and material.
6. Loss on discontinued operations requires a separate classification
after income from continuing operations and is shown net of tax.
7. Intraperiod income tax allocation is required to relate income tax
expense to income from continuing operations and loss on
discontinued operations.
8. Under IFRS, earnings per share data is a required presentation for
income from continuing operations, loss from discontinued
operations and net income.

Solutions Manual 4.103 Chapter 4

PROBLEM 4.14 (CONTINUED)

b.
Amos Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 2023
Revenues
Sales revenue $850,000
Dividend revenue 32,300
Gain on recovery of earthquake loss 27,300
Total revenues 909,600
Expenses
Cost of goods sold 510,000
Selling expenses1 113,800
Administrative expenses 73,400
Loss on inventory due to decline in NRV 34,000
Total expenses 731,200
Income from continuing operations before income tax 178,400
Income tax expense2 44,600
Income from continuing operations 133,800
Discontinued operations
Loss from operations, (net of income tax recovery of
$12,1503) 36,450
Net income 97,350
Other comprehensive income
Items that will not be recycled subsequently to net income
or loss:
Unrealized holding gain, (net of tax of $1,2504) 3,750
Comprehensive income $101,100

Earnings per share:

Income from continuing operations5 $1.34
Discontinued operations6 (0.36)
Net income 7 $0.98
1
($100,100 + $13,700)
2
($178,400 X 25%)
3
($48,600 X 25%)
4
($5,000 X 25%)
5
$133,800  100,000 shares
6
($36,450)  100,000 shares
7
$97,350  100,000 shares (rounded to show correct add down)
LO 4,5 BT:AP Difficulty: S Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.104 Chapter 4

PROBLEM 4.15
Good Karma Corp.
Statement of Changes in Equity
For the Year Ended December 31, 2023
Acc.
Other
Preferred Common Contr. Retained Comp.
Shares Shares Surplus Earnings Income Total

$1,932,60
Beginning Balance $250,000 $600,000 $300,000 $257,600 $525,000 0
Adjustment to correct prior error 48,00
(net of tax of $20,000) 0 48,000
$305,60 $1,980,6
0 00
Beginning Balance, as adjusted
Comprehensive Income:
Net income 325,000 325,000
Other comprehensive income 82,000 82,000
Dividends to shareholders:
Preferred (62,000) (62,000)
Common (120,000) (120,000)
Issue of equity:
Preferred shares 5,000 5,000
Common shares _______ 300,000 _______ _______ _______ 300,000

Solutions Manual 4.105 Chapter 4

$2,510,60
Ending Balance $255,000 $900,000 $300,000 $448,600 $607,000 0
LO 6 BT:AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.106 Chapter 4

PROBLEM 4.16

a. The main deficiency in the Graben statement is that important

information is being aggregated, particularly in the “Costs and
Expenses” line item. Cost of goods sold disclosure is required
and may be found elsewhere in Graben’s published financial
statements. However, the condensed income statement may be
the statement that investors and creditors rely upon. Also, the
statement is missing earnings per share information and a proper
heading noting the period for which the income statement was
prepared.

b. When material, Graben should provide additional details

regarding the expenses included in Costs and Expenses on the
face of the income statement. Alternatively, the company could
provide the information in the notes to the financial statements,
which should be referenced on the face of the income statement.
The company may provide detailed information about the
expenses classified by nature of expense (payroll, depreciation,
changes in inventories etc.) or by function (cost of sales,
distribution costs, administrative costs, and other). If the latter is
chosen, additional information about the nature should be
presented as well. The company could present the financial
information in billions of dollars since amounts are already
rounded.

c. Companies may provide minimal disclosure so that competitive

or sensitive financial information is not revealed. Management
may also not be aware of the type of detailed information users
would find useful since financial information is prepared by
management based on their assessment of users’ needs.
Company management may also mistakenly view IFRS
requirements as the required disclosure rather than the minimum
disclosure required. Management may also use minimal
disclosure to avoid questions on its management practices and
assessment of its stewardship abilities, or to hide financial
engineering transactions that could prove embarrassing.
LO 1,7 BT:C Difficulty: S Time: 25 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.107 Chapter 4

*PROBLEM 4.17

a. Razorback Sales and Service

Income Statement
For the Month Ended January 31, 2023

Cash Accrual
Basis Basis
Sales revenue $75,000 $105,7501

Expenses
Cost of computers & printers:
Purchased and paid 89,2502
Sold 63,7503
Salaries and wages 9,600 12,600
Rent 6,000 2,000
Other Expenses 8,400 10,400
Total expenses 113,250 88,750
Net income (loss) $(38,250) $17,000

1
($2,550 X 30) + ($4,500 X 4) + ($750 X 15)
2
($1,500 X 40) + ($3,000 X 6) + ($450 X 25)
3
($1,500 X 30) + ($3,000 X 4) + ($450 X 15)

Solutions Manual 4.108 Chapter 4

*PROBLEM 4.17 (CONTINUED)

b. Razorback Sales and Service

Statement of Financial Position
As of January 31, 2023

Cash Accrual
Basis Basis
Assets
Cash1 $51,750 $ 51,750
Accounts Receivable 30,750
Inventory2 25,500
Prepaid rent ______ 4,000
Total assets $51,750 $112,000

Liabilities and Owners’ Equity

Accounts payable $ 2,000
Salaries and wages payable 3,000
Owners’ equity $51,7503 107,0004
Total liabilities and owners’ $51,75 $112,00
equity 0 0
1
Original investment $ 90,000
Cash sales revenue 75,000
Cash purchases (89,250)
Rent paid (6,000)
Salaries and wages paid (9,600)
Other expenses (8,400)
Cash balance Jan. 31 $ 51,750

2
(10 X $1,500) + (2 X $3,000) + (10 X $450).
3
Initial investment minus net loss: $90,000 – $38,250.
4
Initial investment plus net income: $90,000 + $17,000.

Solutions Manual 4.109 Chapter 4

*PROBLEM 4.17 (CONTINUED)

c. 1. The $30,750 in receivables from customers is an asset and a

future cash flow resulting from sales revenue that is ignored.
The cash basis understates the amount of sales revenue and
inflow of assets in January from the sale of computers and
printers by $30,750.

2. The cost of computers and printers sold in January is

overstated by $25,500. The unsold computers and printers
are an inventory asset of $25,500.

3. The cash basis ignores $3,000 of the salaries that have been
earned by the employees in January and will be paid in
February.

4. Rent expense on the cash basis is overstated by $4,000. This

prepayment is an asset in the form of two months’ future right
to the use of office, showroom, and repair space and should
appear on the Statement of Financial Position.

5. Other operating expenses on the cash basis are understated

by $2,000 as is the liability for the unpaid portion of these
expenses.
LO 9 BT:AP Difficulty: M Time: 40 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.110 Chapter 4

*PROBLEM 4.18

Dear Dr. Armstrong:

Last week, you asked me to calculate net income on the accrual basis
for Blood Sugar Clinic. For the year ending December 31, 2023, Blood
Sugar Clinic earned $99,610. The following explanation, as well as the
attached schedule, should help you to understand how I derived this
amount.

First, I determined how much of your cash collections resulted from

work which you actually performed during 2023. Obviously, the fees
receivable existing on January 1, 2023 could not have been earned
during 2023. Likewise, your ending receivables represent revenue,
which you earned during 2023 but for which you were not paid.
Because cash collections include payments made on beginning
receivables but not on year-end receivables, beginning fees receivable
must be subtracted from your cash collections while year-end fees
receivable must be added.

The same logic applies to your unearned fees. As of January 1, 2023,

the fees of $2,840 represented treatment that your patients had paid
for but had not yet received. At year-end, a $1,620 balance in this
account indicates revenue, which you collected but have not yet
earned. Because the beginning unearned fees were eventually earned
during 2023, they must be added to 2023 cash collections while the
ending fees must be deducted.

Next, I calculated your 2023 expenses. Accrued liabilities at the

beginning of the year represent those incurred but not paid during
2022. Likewise, those at year-end were incurred during 2023 but not
yet paid at year-end. Because cash disbursements include payments
made on 2022 year-end liabilities but not on 2023 liabilities existing at
year-end, your 2023 disbursements must be adjusted for these items.
To determine expenses resulting from operations during 2023, I
subtracted the beginning accrued liabilities balance and added the
ending accrued liabilities balance.

Solutions Manual 4.111 Chapter 4

*PROBLEM 4.18 (CONTINUED)

Finally, prepaid expenses represent money paid in advance for

services, which you have not yet received. Your beginning prepaid
expenses represent 2023 expenses paid in advance while ending
prepaid expenses indicate 2024 expenses paid in advance. Thus, I
added beginning prepaid expenses and subtracted the ending ones to
derive 2023 expenses.

As a result, your gross revenue for 2023 is $154,070, and your

operating expenses are $54,460, amounting to net income of $99,610.
The enclosed schedule provides supporting computations.

I hope that this information helps you. Thank you for giving me the
opportunity to serve you.

Sincerely,

Your Name, CPA.

Solutions Manual 4.112 Chapter 4

*PROBLEM 4.18 (CONTINUED)

Blood Sugar Clinic

Conversion of Income Statement
From Cash Basis to Accrual Basis
For the Year 2023

Adjustments
Cash Accrual
Basis Add Ded. Basis
Receipts from fees: $146,000
–Fees receivable, Jan. 1 $9,250
+Fees receivable, Dec. 31 $16,100
+Unearned fees, Jan. 1 2,840
–Unearned fees, Dec. 31 1,620
Revenue from fees $154,070
Disbursements: 55,470
–Accrued liabilities, Jan. 1 3,435
+Accrued liabilities, Dec. 31 2,200
+Prepaid expenses, Jan. 1 2,000
–Prepaid expenses, Dec. 31 1,775
Operating expenses ______ 54,460
Receipts over disbursements
—cash basis $90,530 ______
Net income—accrual basis $ 99,610

LO 9 BT:C Difficulty: M Time: 40 min. AACSB: Communication CPA: CPA: cpa-t001 Reporting

Solutions Manual 4.113 Chapter 4

CASES

See the Case Primer on the Student Website as well as the summary case primer
in the front of the text. Note that the first few chapters of the text lay the foundation
for financial reporting decision-making. Therefore, the cases in the first few
chapters (1-5) are shorter with less depth. As such, they may not cover all aspects
of a full-blown case analysis.

CA 4.1 OSC

Overview

As a member of the OSC, your role is to ensure that company financial statements
provide complete and useful information to suppliers of capital so that they can make
decisions about where to invest. IFRS is a constraint since all the companies must be
public companies if they are required to file financial statements with the OSC.
It is not possible to identify reporting biases for all these companies.

Analysis and Recommendations

Description Discussion
1. Material overstatement of The error would have “self-corrected”;
inventory on the statement of that is, the subsequent income
financial position two years ago. statement compensated for the error.
However, prior year income
statements should be restated if
presented for comparative purposes
and a discussion of the error should
be reported in the notes, since the
prior year’s information has been
restated.

2. A car dealership sells an extremely May be treated as unusual due to the

rare car for a large gain. This transaction size and the infrequency
should be treated as an unusual of transactions of this type.
item.
3. The depreciation period for drilling Changes in estimates are handled
equipment is extended, resulting in using the prospective treatment. The
a material change in the current and future years’ net income
depreciation expense. will be increased from the reduced
charge for depreciation. Note
disclosure is important since the
depreciation expense is materially
lower. Care should be taken to watch
for a possible bias to overstate net
income.
Solutions Manual 4.114 Chapter 4
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

CA 4.1 OSC (CONTINUED)

Description Discussion
4. Change in the estimate for bad A change in estimate is considered
debt percentage (lower). part of normal business activity and
given prospective treatment. Care
should be taken to watch for a
possible bias to overstate net income.

5. Potential discontinued operations Gains or losses on discontinued

through the sale of a foreign operations are reported on the income
subsidiary engaging in uranium statement, net of taxes and with a
mining. The company continues to separate earnings per share
engage in uranium mining disclosure, if the criteria for
elsewhere in the world. discontinued operation accounting are
met. As a separate subsidiary within a
separate geographical area, it is
viewed as a separate component with
separately distinguishable operations
and financial information. Therefore, it
qualifies for separate presentation.

6. Change in accounting policy A change in depreciation methods is

related to the calculation of a change in an accounting estimate.
depreciation expense. The change is applied prospectively.

7. Expenses related to failed Consideration may be given to

proposal. treating as this as an unusual
operating expense as part of
continuing operations.

8. Employee strike earlier in the Strikes are typical business risks for
current period. companies that are unionized.
A strike may be seen as atypical if
there is no union and no history of
strikes. Any losses will be reported in
the body of the income statement,
possibly as an unusual item (in
continuing operations).

9. Correction of error, depreciation Corrections of errors relating to prior

expense was understated in a prior years must be adjusted to prior years’
period. income though the retained earnings
statement. This is done by adjusting
beginning retained earnings, net of
any tax effect.

Solutions Manual 4.115 Chapter 4

CA 4.1 OSC (CONTINUED)

Description Discussion
10. Costs associated with loss due to Material and unusual in nature
government decree. (atypical), therefore, this should be
treated as an unusual expense item.

11. Discontinued operations of a Provided the business is a separate

business segment focused on a component (could argue this since
particular customer type not major classes of customers) and is
activity type. operationally distinct (financial records
separate), this segment may be
treated as discontinued per IFRS 5. In
addition to being a separate
component, the assets must meet the
definition of being held for sale.
Assuming all criteria are met for
treating as discontinued operations,
the gain or loss on discontinued
operations would be reported on the
income statement, net of taxes and
with separate earnings per share
disclosure.

Solutions Manual 4.116 Chapter 4

INTEGRATED CASES
IC 4.1 SNOW SPRAY CORP.
Case Overview

- The company is in bankruptcy proceedings and needs cash to effect a

change in strategy. Market demand for skis is waning, while the demand for
snowboards and ski tubes is rising. The company recognizes it needs to
shift its focus from ski manufacturing to snowboard and tube manufacturing.
However, it requires financing to do so. Therefore, the bank is a key
financial statement user and will look to assess the ability of the company to
repay any future loans with interest. The higher the perceived risk, the
higher the interest rate that will be charged. Due to the current bankruptcy
proceeding, SSC expects to be charged an interest rate of at least 15% on
any new debt.
- Management wishes to present the company as favourably as possible
since there a concern that the bank will turn down the loan request. Note
that management will want to ensure transparency as well.
- The overall reporting objective of the company will likely be more
aggressive, while maintaining ASPE standards and transparency.

Solutions Manual 4.117 Chapter 4

IC 4.1 SNOW SPRAY CORP. (CONTINUED)

Analysis and Recommendations

Issue: SSC sold its entire inventory of ski bindings to Cashco Ltd. prior to year-
end. The bindings were sold at a profit, although the company overall is operating
at a $20 M loss for the year. A separate agreement was made for SCC to buy back
all the bindings from Cashco in the new year, but at a price higher than what the
bindings were sold for originally.

Recognize the transaction as a sale. Do not recognize the transaction as a

sale, but as financing.
- This is a $10 million sale that - The economic substance of the
has generated a $4 million transaction is that this is a loan.
profits. This is material (since The company is short of cash
5% of the $20 million loss = $1 and this is an alternate means of
million). unlocking the cash that is tied
- The legal title and possession, up in the inventory.
including control, has passed to - No profit should be recognized,
Cashco. Therefore, the since the company has agreed
performance obligation has to buy back the inventory in
been satisfied. January. It has an obligation that
- The transaction is measurable cannot be avoided. Therefore,
at $10 million, and the cash is this represents a liability.
already collected. - The inventory value is unknown.
- This is persuasive evidence that Management is unsure as to
a contract, an= agreement how much they can resell it for
exists. and so the $6 million inventory
cost should be written down.
- This is a material loss and will
make the company look even
worse.

Even though it is tempting to record the transaction as a sale to make the company
look better, the economic substance indicates this is a financing transaction.

Solutions Manual 4.118 Chapter 4

IC 4.1 SNOW SPRAY CORP. (CONTINUED)

Issue: SCC purchased $10 million in snow tubes for $7 million prior to its
bankruptcy proceedings. Prior to year-end SCC sold the snow tubes to AGL for $8
million. The tubes were shipped FOB shipping point and arrived at AGL on
January 5. SCC pays for any damages to inventory during the shipping period and
has agreed to buy back any unsold snow tubes after 6 months. The buy-back price
includes any storage and insurance costs of the snow tubes incurred by AGL.

Recognize the transaction as a sale. Do not recognize the transaction as a

sale, but as financing.
- Since the goods are shipped - Even though the goods were
FOB shipping point in shipped FOB shipping point, the
December, a sale has occurred. company still retains the risk of
- Legal title, possession and loss since it reimburses the
control has been passed to customer if there is damage.
AGL. Therefore, the - Since SSC will take back any
performance obligation has unsold merchandise, the
been satisfied. company still has the risk of loss
- The transaction is measurable on the goods.
at $8 million. - The fact that SCC would pay
- Persuasive evidence of a storage and insurance costs is
contract, an agreement exists. further evidence that it has
- The $1 million profit is material, retained the risks of loss. This
since it is equal to 100% of the also supports the fact that the
materiality threshold noted transaction is like a parking
earlier. transaction only.
- There is a bona fide reason for - Although the future buyback
selling the inventory – i.e. need price is unclear, if the buyback
the space as well as the cash price reflects the original
generated. transaction price, then this
- The buyback price is unclear. If supports the fact that the
the future price is market price, transaction is a financing
then this is a separate deal. transaction.
- If the value of the returns is
estimable, the company may
have an argument for
recognizing the sale as well as
an allowance for returns.

In conclusion, this appears to be a legitimate sale transaction and should be

recorded as such. The only issue is how, if at all, to record the potential obligation
for buyback. If it is measurable, SSC could accrue any potential liability for items
not sold by AGL. Detailed disclosures should be provided.

Solutions Manual 4.119 Chapter 4

IC 4.1 SNOW SPRAY CORP. (CONTINUED)

Issue: Given changing consumer demand, SCC recognizes it must restructure its
operations. It plans to shift its operations from ski manufacturing to snow board
and snow tube manufacturing. SCC will repurpose its existing resources, including
its facility, machinery, and human capital for this purpose.

Present the loss/costs of the shift from Present the loss/costs of the shift from
ski manufacturing as discontinued ski manufacturing as part of continuing
operations. operations.
- The ski business is separate - SCC is retaining the facilities,
and distinct from snow boarding machinery, and people.
and snow tubing. Therefore, all existing resources
- The cash flows and records are will be used and have a
separate and measurable ($20 continuing involvement in the
million loss). assets and related cash flows of
- SCC will no longer be involved SCC.
in selling skis. - This is not a separate division or
- The company wants to present subsidiary. This represents the
this as separate and distinct whole income statement;
from the new business activities, therefore, it is not a separate
since the bank is interested in component.
SSC’s ability to generate profits
and cash flows in future.

Recommendation: This is not a disposition of a division but rather the transitioning

of the whole business. Therefore, it should not be shown as discontinued
operations.

Minor issue — costs to refurbish the machinery. This may be capitalized since it
creates future benefits.

Solutions Manual 4.120 Chapter 4

IC 4.2 BMI
Case Overview:

BMI is experiencing pressure from the current economic conditions and has
incurred losses from one of its segments. The company anticipates further losses
within the upcoming period. BMI would like to sell this unprofitable segment and
has received authorization from its board to do so. Management would like to
expand the company’s more profitable divisions but is unable to obtain the
necessary funding from the bank. Despite being a private company, BMI is
contemplating taking the company public to raise the necessary equity funding
required for such an expansion. Given this the company is considering an initial
public offering (IPO), IFRS should be a constraint.

BMI's management is an important user of the financial statements. As a result of

the economic environment and future IPO offering, management may have an
increased bias to smooth earnings, separately disclose losses outside of
continuing operations and defer the recognition of liabilities to artificially inflate
BMI's share price.

Future investors will also be analyzing the statements very carefully to determine if
BMI's share price is overpriced.

The auditor will want the financial statements to be transparent and neutral.

Solutions Manual 4.121 Chapter 4

IC 4.2 BMI (CONTINUED)

Issue: BMI would like to sell the facility and equipment currently used for
production and manufacturing of automobiles and parts. This segment is currently
losing money and future losses are also expected. The equipment requires
significant modifications to make it “saleable”. This was not completed by year-end.
BMI must determine whether or not to classify the automotive division as held for
sale.

Classify the assets as Held for Sale. No separate classification for these
assets.
- Given the sale of the automobiles - The assets are not available for
and automotive parts division has immediate sale, since BMI must
not yet been completed, the assets spend $500,000 to remove previous
must meet the held for sale criteria modifications made to the
to be designated as discontinued equipment in order to make the
operations. equipment available use by
- Any future expected losses, in this a third party.
case the estimated additional - The sale has a contingency
$1million, are not allowed to be provision; whereby, BMI must
classified as discontinued remove the existing modifications to
operations. the purchaser's satisfaction.
- The automobiles and automotive - It is unclear whether management
parts can be identified as a separate believes that 90% of its asking price
component of BMI because the is representative of fair value. BMI
cash-flows can be easily may be unwilling to accept the
distinguished. Specifically, supplier's bid as fair value for the
management is able to separately equipment.
track the profitability of the - There is no evidence that the sale
automobiles and automotive parts. will be completed within one year
- The sale is highly probable as a from the balance sheet date (initial
formal plan has been approved by date of held for sale classification).
the Board of Directors prior to year
end.

Solutions Manual 4.122 Chapter 4

IC 4.2 BMI (CONTINUED)

Classify the assets as Held for Sale. No separate classification for these
assets.
- The negotiation with the supplier is
evidence that management is
actively seeking a buyer for the
assets.
- Management has already committed
to a plan to disassemble the
previous modifications before the
end of the year by hiring a
contractor.
- Measurement of the plant (including
the equipment) should remain at CV,
since there is no indication that FV is
lower than CV at year end.

Recommendation: The criteria for held for sale assets is not met by the end of
the year. Therefore, the assets of the automobiles and automotive parts cannot be
classified separately as held for sale on the balance sheet and the losses from the
division ($1million) cannot be separated as discontinued operations on the income
statement. Provided the modifications are completed and BMI can come to an
agreement with the purchaser on a fair price before the Board authorizes the
financial statements, the transaction will be disclosed in the notes.

Solutions Manual 4.123 Chapter 4

IC 4.2 BMI (CONTINUED)

Issue: BMI has a 3-year contract with a truck parts supplier that requires BMI to
purchase $500,000 of truck parts annually to receive discounted pricing. There is a
contract provision that enforces a $250,000 penalty if BMI to refuses delivery. BMI
refused delivery in year two of the contract in response to the parts not meeting
current safety standards. The company must decide whether to record a liability
for the purchase commitment and/or the contract penalty.

Record the contract liability. Do not record the contract liability.

- A contract exists. Payment is - The purchase commitment
enforceable. represents an executory contract
- The $250,000 represents a minimal that does not have to be recorded as
cash obligation to BMI for the a liability.
current and following year. - BMI's lawyers believe that BMI will
- There are unavoidable costs that not have to pay the penalty because
BMI will be responsible for despite of a required change in parts
not taking delivery of the parts from specifications.
the truck supplier - this represents - The supplier is willing to make
an onerous obligation. modifications to its spare parts in
order to comply with BMI's new
safety standards and to support BMI
accepting future deliveries.

Solutions Manual 4.124 Chapter 4

IC 4.2 BMI (CONTINUED)

Record the contract liability. Do not record the contract liability.

- The case does not specify whether
the supplier has a legal obligation to
make any changes to its goods in
order to appease BMI into taking
future delivery, but the supplier is
willing to make the necessary
changes.

Recommendation: Since the supplier obligation related to the new parts

standards is unclear (for example, does the supplier have the operational
capability, a legal obligation or is the supplier just willing to adjust the spare part to
conform to BMI's new safety standard) the minimum penalty (unavoidable cost)
should be accrued i.e., $250,000 in both the current year and the final year of the
contract.

Minor Issue: How to classify the new building: as an investment property or as

property, plant, and equipment.

BMI has independent evidence that the building can be clearly segregated into two
distinct components - 50% for operational use and 50% that can be separately
leased out or sold. Both sections of the building must initially be recorded at cost.

For the 50% that will be leased out and used as an investment property, BMI has
the choice of subsequently accounting for the property at fair value or to continue
to account at cost. Irrespective of the accounting policy choice, BMI must disclose
the fair value of the property in the notes of the statements. The 50% that will be
used in the operations of the business must be classified as property, plant, and
equipment. BMI has the option of using the revaluation model or continue to
account for that 50% of the building at cost.

Fair value changes for only the 50%, which is classified as investment property
must flow through net income. Changes in fair value for the 50% classified as
property, plant and equipment must flow through a revaluation surplus in other
comprehensive income under IFRS. This flow through OCI will not impact net
income unless a change in use occurs or BMI sells the building.

Solutions Manual 4.125 Chapter 4

RESEARCH AND ANALYSIS

RA 4.1 KIRKLAND LAKE GOLD LTD.

a. Kirkland Lake Gold uses a condensed multiple-step statement of income. The

company reports subtotals for earnings from mine operations and earnings
from operations.

b. Kirkland Lake Gold is a growing gold producer with mining and exploration
operations in Canada and Australia. The company operates 3 wholly owned
mines, four wholly owned mines that are on care and maintenance and
exploration properties. (Note 1 of the financial statements). There was a recent
acquisition of another gold company, Detour Gold Corporation, with the details
provided in Note 6.

c. The financial statements presented are consolidated financial statements for all
mining operations. This means that all the revenues and expenses of each
location are accounted for in Kirkland Lake Gold’s statement of operations, and
the assets and liabilities of the subsidiaries are reported on the statement of
financial position.

The statement of financial position as at December 31, 2020 reflects Kirkland

Lake Gold’s business with the Mining interests and plant and equipment line
item. This long-term asset makes up a significant portion of the total assets,
reflecting the various mining operations of the business. It is interesting to note
that Kirkland Lake Gold reports both a deferred tax assets and deferred tax
liabilities account. This is because these accounts cannot be netted out against
one another if they belong to different subsidiaries. Also, Kirkland Lake Gold
does not present any non-controlling interest from its subsidiaries, which is
usually present in the statement of financial position of a parent company. This
is because all the subsidiaries are 100% owned by Kirkland Lake Gold.

The income statement (statement of operations and comprehensive income)

also reflects all businesses as information is provided on revenues and
expenses for the consolidated entity. While there is only one line for Revenue,
line items for Production costs, Royalty expense, Depletion and depreciation,
and Exploration Expenses provide a clear indication that this a resource based
company that is involved in multiple businesses.

Solutions Manual 4.126 Chapter 4

RA 4.1 KIRKLAND LAKE GOLD LTD. (CONTINUED)

d. The company presents its expenses initially on a functional basis as is

common with the multi-step format of income statements but ends up with a
mixed presentation model: general and administrative expenses, exploration,
care and maintenance, rehabilitation costs, and other items affecting the
results for the year from continuing operations. Some of the significant
expenses are disclosed directly according to their nature: depreciation and
depletion, royalty expense and finance income and costs.

This mixed presentation model is likely used because the company is a mining
company and the nature of some of the operating costs such as production
costs, depletion and depreciation, and exploration are important to examine in
any ongoing evaluation of operations. However, items such as finance costs,
income taxes, and other expenses and income are difficult to allocate to basic
operating functions and are far more useful by being identified separately on
the face of the statement.

Solutions Manual 4.127 Chapter 4

RA 4.1 KIRKLAND LAKE GOLD LTD. (CONTINUED)

e. The company included the following gains and losses in other comprehensive
income: (all in thousands of US$)
 Changes in fair value of investments in equity securities, net of tax –
$(15,222)
 Exchange differences on translation of foreign operations – $236,360

Total other comprehensive income reported = $221,138

Comprehensive income for the current year = $1,008,843

f. The EPS is calculated on net earnings of the Company and the weighted
average number of shares outstanding. As Kirkland Lake Gold has only
common shares, all the earnings accrue to them. A total of four EPS numbers
are presented for 2020 and 2019. Two types of EPS numbers are calculated
and described in the financial statements, basic and diluted earnings per share.
The basic EPS and diluted EPS are presented on the face of the income
statement, both for the current year and the previous comparative year for
continued operations, discontinued operations (if there are any, this reporting
period there are none), and overall. Note 20(c) describes how each was
calculated. When calculating diluted EPS, the company considered the effects
of outstanding stock options, performance shares, and restricted shares.

g. As referenced on page 10 of Kirkland Lake Gold’s 2021 Sustainability Report,

the company states that it is committed to mining in an environmentally and
socially responsible way in order to be operationally and financially successful.
Specifically, the report references the following points articulating what this
means to the company:

“• ensuring we provide a safe working environment;

• implementing responsible environmental practices and effective
environmental management systems throughout our organization;
• creating meaningful opportunities for local employment and training;
• developing community relationships based on open and honest
communication; and
• ensuring that the communities in which we operate benefit from our
presence.”

Kirkland reviews these commitments regularly. These commitments are

implemented through an Integrated Management System that encompasses
various functions of the organization. This commitment contributes to the
company’s responsible gold mining principles.

Solutions Manual 4.128 Chapter 4

Solutions Manual 4.129 Chapter 4

RA 4.2 ROYAL BANK OF CANADA

a. The core business activities of the bank are, and have traditionally been, to
lend money to businesses, individuals, and governments. Increasingly banks
have expanded their core operations to include “wealth management,
insurance, investor and treasury services and capital market products and
services” all on a global basis. (See Note 1 to the Royal Bank’s financial
statements.)

Interest income from loans and other sources is the single main source of
revenue for the Royal Bank. The financial statements also provide the
amounts generated from 13 other related sources (entitled “non-interest
income”) that account for an increasing proportion of total bank revenues.
The direct costs related to the earning of interest income are interest expense
and provision for credit losses. Other expenses incurred to generate revenue
include human resources (labour), occupancy, equipment, communication,
and professional fees (see Consolidated Statements of Income).

b. The presentation of the statement of income of Royal Bank highlights the

sub-total between revenue from its core activities, less the direct interest
expense incurred in generating that income. The caption is “Net interest
income”. This caption is highlighted in the income statement to make
comparisons easier between years and between banks. Other revenue
sources, which are of lesser significance in size, are itemized together as
“non-interest income”. Net interest income and the non-interest income
together make up the total revenue reported. The bank then deducts three
types of major expenses; the provision for credit losses that apply to all the
revenues reported, costs specific to its insurance operations, and a variety of
non-interest expenses. The statement then arrives at income before income
taxes.

Solutions Manual 4.130 Chapter 4

RA 4.2 ROYAL BANK OF CANADA (CONTINUED)

c. The primary sources of income for the last two fiscal years for the Royal Bank
appear below (in millions of Canadian dollars).

ROYAL BANK OF CANADA

2020 % of total 2019 %

Primary sources Interest income:
Loans 23,420 38.25 24,863 36.79
Securities 6,488 10.60 6,827 10.10
Reverse repurchase agreements 4,668 7.62 8,960 13.26
Deposits and other 307 0.50 683 1.01
Sub-total 56.97% 61.16%
Primary sources Non-interest revenue:
Insurance premiums 5,361 8.76 5,710 8.45
Trading revenue 1,239 2.02 995 1.47
Investment management and custodial fees 6,101 9.96 5,748 8.50
Mutual fund revenue 3,712 6.06 3,628 5.37
Securities brokerage commissions 1,439 2.35 1,305 1.93
Service charges 1,842 3.01 1,907 2.82
Underwriting and other advisory fees 2,319 3.79 1,815 2.69
Foreign exchange other than trading 1,012 1.65 986 1.46
Card service revenue 969 1.58 1,072 1.59
Credit fees 1,321 2.16 1,269 1.88
Net gains on investment
90 0.15 125 0.18
securities
Share of profit in joint ventures and
77 0.13 76 0.11
associates
Other 864 1.41 1,617 2.39
Sub-total 43.03% 38.84%
Total 61,229 100% 67,586 100%

Solutions Manual 4.131 Chapter 4

RA 4.2 ROYAL BANK OF CANADA (CONTINUED)

The primary source of revenue continues to be interest income and

specifically, interest from loans. The primary sources of non-interest
revenues are insurance premiums, management fees, mutual fund revenues,
and underwriting and other advisory fees. The percentages of total
income/revenues coming from these non-interest sources are relatively
consistent. Fluctuations in the interest income are due to interest rates in the
economy.

d. The following transactions were included in the Royal Bank’s Consolidated

Statement of Changes in Equity:

 issuances of share capital

 redemptions of preferred shares
 purchases and cancellations of common and preferred shares
 sales of treasury shares (both preferred and common)
 purchases of treasury shares (both preferred and common)
 share-based compensation awards
 net income for the year
 dividends declared on common shares
 dividends declared on preferred and other shares
 gains and losses recognized in Other Comprehensive Income
i. changes in FVOCI securities and loans
ii. changes in foreign currency translation amounts
iii. changes in gains and losses on derivatives designated as
cash flow hedges
iv. changes in other components of equity
v. changes in value attributable to shareholders, and non-
controlling interests

Solutions Manual 4.132 Chapter 4

RA 4.3 CANADIAN SECURITIES ADMINISTRATION

a. The documents that can be found on the SEDAR website listed for the Bank
of Montreal and the Royal Bank of Canada include:

1. Notices of annual filing

2. Auditors’ consent letters
3. Consent letters of issuer’s legal counsel
4. Consent letters of underwriters’ legal counsel
5. Prospectuses and related documents
6. Decision Documents
7. News releases
8. Interim financial statements/reports
9. Annual reports
10. Annual information form
11. Marketing materials
12. Certification of filings
13. Underwriting or agency agreements
14. Proxy forms
15. Meeting notices
16. Code of Conduct

b. The annual information form provides reference to some of the information

required by National Policy Statement No. 47 of the Canadian Securities
Administrators and Schedule IX of the Quebec Securities Act Regulation for
filing various regulatory authorities in Canada.
The Annual Information Form (AIF) provides information on the recent
history of the business, description of the current business, names of
directors and executive officers, the interest of management and others in
material transactions, the composition and mandate of the audit committee
and fees paid to the auditors, a history of the share price and dividends
paid, the capital structure, and credit rating of the company.

Solutions Manual 4.133 Chapter 4

RA 4.3 CANADIAN SECURITIES ADMINISTRATION (CONTINUED)

b. (continued)

Some of the information is found in the company’s Management Discussion

& Analysis and is incorporated in the AIF by virtue of being cross-referenced
in the AIF itself.

Since most of the information provided is financial in nature, it would most

certainly be of interest to a financial statement analyst. Although the
information can be located through other means, the AIF is less likely to
have missing information. It can be relied upon for completeness and
accuracy since it is also closely monitored and used by the regulatory
authorities.

c. The auditor of the Bank of Montreal is KPMG LLP. The auditor of Royal
Bank of Canada is PricewaterhouseCoopers LLP.

d. The stock of Bank of Montreal is traded on the Toronto Stock Exchange and
the New York Stock Exchange. The stock of the Royal Bank of Canada is
traded on the Toronto Stock Exchange and the New York Stock Exchange.

e. The banks’ web sites with links for investor relations provide the most
current announcements and notices of the banks, and provide information
such as the Annual Reports, but in segments. For example, the web user
can select to read only the notes to the financial statements. While the
information is and should be the same as what is filed with the securities
authorities, it is being presented in a more user-friendly format, considering
the many possible users that gain access to this information through the
web site. The web presentation can also take advantage of some multi-
media presentation techniques such as webcasts of the Annual General
Meetings that are not necessarily appropriate for the formal annual filings.
Information of a more promotional nature is being emphasized for marketing
and other purposes. Up-to-date information of company share prices on the
stock exchanges are available, as are the answers to “frequently asked
questions” (FAQs).

Solutions Manual 4.134 Chapter 4

RA 4.4 QUALITY OF EARNINGS ASSESSMENT

Student responses will vary depending on their sources. In short, the

assessment is required to determine how and when a company will generate
cash flows in the future. This is not obvious from a quick review of the
company’s GAAP financial statements. This information is a necessary input
in determining the fair value of a company and its shares, and in pricing its
debt instruments. The key issue to keep in mind when assessing earnings
quality is that the higher its quality, the better the ability to predict the
company’s future cash flows. Recurring issues in the literature are as follows:

 the closer the earnings reflect underlying economic reality, the higher
the quality

 earnings that are replicable or sustainable are higher quality than

unsustainable earnings

 earnings that can be converted to positive cash flow more quickly are
higher quality than those that have a longer time lag or more
uncertainty with respect to the ultimate conversion to cash flow

 the less risky the business environment and the better the risks are
managed, the higher the quality of earnings

 more objectively determined earnings are higher quality than earnings

which involve a high degree of estimation, accounting alternative
choices and management bias

 the more transparent and straightforward the presentation, the higher

the quality of earnings

Solutions Manual 4.135 Chapter 4

RA 4.5 BCE INC.

Management reporting of non-GAAP earnings numbers, outside of the traditional

audited financial statements, provides additional information that would not
otherwise be presented, or in some cases available, to investors and other users.
The presentation of such information can assist users in assessing results of
operations and financial position, and in predicting future earnings potential from a
management perspective. It allows users to focus specifically on what
management sees as relevant information, since it is tailored to that specific
company and its circumstances. In the case of BCE, the company has explained,
in considerable detail, their reasons for using these measures and the reasoning
seems to be valid. Internally, employees have little control over interest,
depreciation, and taxes. Therefore, EBITDA is often a calculation used. Analysts
and users can then see how the company measures internal results.

The problem with reporting supplemental earnings numbers is not so much with
the practice itself, but rather with how it is done. If the calculations and reasons for
the items selected for adjustment are not clearly disclosed, and if a reconciliation
with the GAAP net income is not provided, the additional information may be
confusing and/or misleading rather than aiding users in their decision- making
process.

In the case of BCE, all of these non-GAAP measures have been reconciled to
GAAP measurements. The other problem with these numbers is that no standards
exist to ensure that they are calculated consistently, which means that it is risky to
make comparisons between companies based on these numbers. BCE alerts
readers to this shortcoming as part of its non-GAAP financial measures note.
Therefore, with details of the calculations provided, the weaknesses can be
overcome.

BCE’s presentation provides good, useful information because the company has
provided detailed reconciliations and reasoning supporting the usage of these non-
GAAP measures.

Solutions Manual 4.136 Chapter 4

RA 4.6 FINANCIAL REPORTING

a. In searching SEDAR for merchandising companies, you can enter the

following search parameters:
- Industry Group: Merchandising
- Document Type: Financial Statements
- Date of Filing: January 1, 2020 to December 31, 2020
This search yields 226 search results for a total of 31 companies. Some
company names show up several times as they have an English and French
version and interim and other filings.
Subcategories:
- Clothing Stores: 6
- Department Stores: 2
- Food Stores: 5
- Hospitality: 0
- Specialty Stores: 7
- Wholesale Distributors: 11
The subcategories allow users to make more meaningful comparisons. The
types of merchandising products represent different businesses with
different risks and rewards. Specific issues related to the types of products
sold would affect financial statement presentation and measurement: such
as product returns, write-downs of inventory and amounts and
measurement of accounts receivable. For example, the inventory turnover of
department stores and food stores would be substantially different.

b. A sample of companies was used for illustrative purposes.

Canadian Tire
Lululemon Corporation, Leon's Furniture
Athletica Inc. Bri-Chem Corp. Limited Ltd. Goodfellow Inc. Metro Inc.
Year ended Jan 31,2021 Dec 31,2020 Dec 31,2020 Dec 31,2020 Nov 30,2020 Sept 26,2020
Food retailer and
distributor
Supllier of drilling Retail sales of Remanufacturing and (supermarkets,
Retail sales of fluids for the oil and goods and Retail sales of distribution of lumber discount stores
goods. gas industry. services. furniture. and wood products. and drugstores)
in thousands CDN CDN CDN CDN CDN CDN
Sales $ 4,401,879.00 $ 45,155.72 $ 14,871,000.00 $ 2,220,180.00 $ 454,103.00 $ 17,997,500.00
COGS $ 1,937,888.00 $ 37,820.98 $ 9,794,400.00 $ 1,236,258.00 $ 362,354.00 $ 16,306,400.00
Gross Margin $ 2,463,991.00 $ 7,334.74 $ 5,076,600.00 $ 983,922.00 $ 91,749.00 $ 1,691,100.00
Gross Profit% 56% 16% 34% 44% 20% 9%

Solutions Manual 4.137 Chapter 4

RA 4.6 FINANCIAL REPORTING (CONTINUED)

We can see that the gross profit percentage is not comparable between
companies with significant variations. The companies represent the
wholesale distribution of a variety of products in different industries. These
products represent different risk profiles and pricing strategies. Metro Inc.,
which is primarily a grocery retailer would be more suitably compared to
other grocery retailers such as Loblaw Companies Limited and Sobeys Inc.
Loblaw and Sobeys are classified as Merchandising Companies in the Food
Stores sub-category.

c. Industry information is available for Canadian companies from Industry

Canada.
A comparison could also be prepared using the EDGAR website. EDGAR is
the U.S. Securities and Exchange website. It collects financial reporting
information for companies that file on US stock exchanges. The industry
classifications could be different from those used in Canada. Most
companies in the US will not be reporting under IFRS, so comparability will
be affected. Private companies also prepare industry information that is
available on a subscriber basis. Libraries such as university or municipal
libraries may subscribe to these services.

The Business Development Bank of Canada lists the following information

on its website (https://www.bdc.ca/en/articles-tools/money-finance/manage-
finances/pages/financial-ratios-industry-standards-entrepreneurs.aspx).

Statistics Canada maintains a very thorough library of financial statistics

relevant to the Canadian economy, including current ratio values for most
industry sectors.
Information on specific financial ratios is available through Statistics
Canada’s annual Financial and Taxation Statistics for Enterprises program,
the Quarterly Financial Statistics for Enterprises publication, and the Small
Business Profiles dataset, which presents financial data for small
businesses in Canada on Industry Canada's Financial Performance Data
website.

U.S. data can be useful

Other sources to consider are published by American research companies
and widely used by Canadian lending institutions.
Most of these are available at university and larger municipal libraries. They
can also increasingly be found online. You can also purchase industry
standards reports for your business sector by contacting their publishers.
Annual Statement Studies is published by the Risk Management
Association (RMA). Banks use this data as a standard to evaluate
businesses applying for financing. RMA provides balance sheet and income
statement data, and financial ratios compiled from financial statements of

Solutions Manual 4.138 Chapter 4

nearly 300,000 commercial borrowers, classified into three income brackets

in over 700 different industry categories.
RA 4.6 FINANCIAL REPORTING (CONTINUED)

Dun & Bradstreet’s Key Business Ratios on the Web provides online access
to benchmarking data. It provides a number of key business ratios including
solvency ratios, efficiency ratios and profitability ratios for over 800 types of
businesses arranged by industry categories.

d. Accumulating financial ratios can be very time-consuming. The use of data

aggregators is a more efficient and timely way to obtain industry
comparative information. Caution is necessary to ensure that comparability
is achieved. Factors to consider include the source of information (U.S.
companies reporting under FASB as opposed to IFRS), industry
classifications (are they defined in the same way, or precisely enough to
allow comparison), definitions of ratios and level of comparison. Larger
companies usually operate in more than one industry and this limits
comparison. The comparison should allow the user to specify the size of
comparable companies so that a better matching of industry specific activity
is captured.

Solutions Manual 4.139 Chapter 4

LEGAL NOTICE

The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.

The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.

MMXXII vii F2

Solutions Manual 4.140 Chapter 4

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