‘Final Exam_ accounting F2021 Exam’

Question 1 (10 Marks)

Crystal Ltd. has prepared the following comparative balance sheets at December 31, 2020 and 2021. Crystal prepares its financial statements under IFRS.20212020Cash$148,500$76,500Accounts receivable79,50058,500Inventory75,00090,000Prepaid expenses9,00013,500Property, plant & equipment630,000525,000Accumulated depreciation-225,000-187,500Goodwill76,50087,000$793,500$663,000Accounts payable$76,500$84,000Accrued liabilities30,00021,000Mortgage payable0225,000Preferred shares322,5000Common shares300,000300,000Retained earnings64,50033,000$793,500$663,000 The condensed income statement for 2021 is as follows:Sales$990,000 Cost of sales544,500Gross profit445,500Operating expenses345,000Net income$100,500 Depreciation expense and a charge for impairment of goodwill have both been included in operating expenses. Required:From the information above, prepare a statement of cash flows (indirect method) for the fiscal year 2021. (10 Marks)Question 2 (20 Marks)On January 1, 2020, Hobbes Corp. enters into a ten-year non-cancellable lease with Calvin Ltd. for equipment having an estimated useful life of 11 years and a fair value of $ 6,000,000. Hobbes’s incremental borrowing rate is 8%, but they do not know Calvin’s implicit rate of 7%. Hobbes uses the straight-line method to depreciate assets. The lease contains the following provisions:1. Semi-annual lease payments of $438,000 (including $38,000 for maintenance), payable on January 1 and July 1 of each year.2. Calvin estimates they will realize $ 200,000 from selling the asset at the expiration of the lease. Hobbes does not provide any guarantees related to this.Both companies report under IFRS. Both companies have year end of December 31.Required:Discuss how Hobbes should record this lease. (1 Marks)Calculate the present value of the minimum lease payments. Round to the nearest dollar. (2 Marks)Present the journal entries that Hobbes would record on January 1, 2020 and December 31, 2020. Include an amortization schedule through January 1, 2021 and round values to the nearest dollar. (8 Marks)What kind of lease is this to Calvin Corp.? Why? (3 Marks)Present the journal entries that Calvin would record on January 1, 2020 and December 31, 2020. (3 Marks)Assume that at the end of lease term on January 1, 2030, the fair value of the equipment was $183,000. Record the required journal entries on the books of Hobbes and Calvin. (3 Marks)Question 3 (15 Marks)The following information relates to Sheeren Corporation’s transactions during 2020, its first year of operations.Income before income tax on the income statement for 2020 was $60,000.Income before income tax ($60,000 above) is net of a loss due to the writedown of land of $46,000.The tax rate enacted for 2020 and future years is 25%. Because this was Sheeren Corporation’s first taxation year, no instalments on account of income taxes were required or paid by Sheeren. Differences between the 2020 GAAP amounts and their treatment for tax purposes were as follows:Warranty expense accrued for financial reporting purposes amounted to $12,000. Warranty payments deducted for taxes amounted to $15,000. Warranty liabilities were classified as current on the SFP.Of the loss on writedown of land of $46,000, 25% will never be tax-deductible. The remaining 75% will be deductible for tax purposes evenly over the years from 2021 to 2023. The loss relates to the loss in value of company land due to contamination.Depreciation of property, plant, and equipment for financial reporting purposes amounted to $80,000. CCA charged on the tax return amounted to $60,000. The related property, plant, and equipment cost $300,000 when it was acquired early in 2020.A $3,500 fine paid for a violation of pollution laws was deducted in calculating accounting income.Dividend revenue earned on an investment was tax exempt and amounted to $1,400.Taxable income is expected for the next few years.Sheeren Corporation follows IFRS.Required:Calculate Sheeren Corporation’s deferred tax asset or liability at December 31, 2020. (4 Marks)Calculate the taxable income for 2020. Show all details of the adjustments to accounting income to arrive at taxable income. (7 Marks)Prepare the journal entry(ies) to record deferred income taxes for 2020. (2 Marks)Prepare a partial 2020 income statement, beginning with “Income before income tax.” (2 Marks)