Professional Documents
Culture Documents
BUS320
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Assignment #2
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QUESTION ONE
Part (A)
Alpha Foods Limited
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(i) $ A: Income from Continuing Operations (20X1)
= {(165,000+160,000) – [(-92,000)+(-121,000)]} x (1-30%) = 538,000 x 70% = $376,600
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(ii) $ C: Loss from Operations of Oven Meals Division (20X1) applying IFRS5,
= [(-92,000)+(-121,000)] x (1-30%) = -213,000 x 70% = -$149,100 para.15, 20; see p.56
of Lecture 02 slides
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(iii) $ E: Loss on Impairment of Net Assets of Oven Meals Division (20X1)
= [(1,060,000 – 140,000) – 1,122,000] x (1-30%) = -202,000 x 70% = -$141,400
(v)
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$ K: Gain on Disposal of Net Assets of Oven Meals Division (20X2)
= [(1,100,000 – 85,000) – (1,060,000 – 140,000)] x (1-30%) = 95,000 x 70% = $66,500
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Part (B)
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(ix) $ V: Income from Operations of Oven Meals Division (20X2) Lecture 02 slides
= 34,000 x (1-30%) = 34,000 x 70% = $23,800
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QUESTION TWO
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Part (A)
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Digital Control Limited
(i) The chief accountant of DC had made a serious mistake continuing to charge depreciation for the
heavy truck division after October 31, 20X1. In accordance with the requirements under IFRS, no
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further depreciation should be recognized on an asset once the asset is classified as held for sale
(IFRS5, para.25). In DC’s case, the heavy truck division must have met all the requirements to be
classified as held for sale on October 31, 20X1 and therefore no depreciation should be charged
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after that date. We know that the division was an asset held for sale because otherwise the planned
disposal of the heavy truck division would not have met the requirements to be accounted for as a
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discontinued operation for financial reporting purposes under IFRS.
To correct for this mistake, two adjustments are needed: operating loss of the division for the 12
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months ended December 31, 20X1 has to be adjusted (by adding back 2 months of depreciation) as
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shown in footnotes 2 & 3 in part (ii) below; and net book value of the equipment at December 31,
20X1 has to be adjusted (by adding back 2 months of depreciation) as shown in footnotes 4 & 5 in
part (ii) below.
(ii)
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Digital Control Limited
Partial Income Statement
For the year ended December 31, 20X1
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Income from continuing operations $1,320,0001
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Discontinued Operations:
Loss from operations of heavy truck division, a subtotal has
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the $ amount tax net of applicable tax recovery of $352,0002 $ (528,000)3 to be reported
effect has to be Loss on impairment of net assets of heavy truck division, for the two
separately net of applicable tax recovery of $140,0004 (210,000)5 (738,000) items, IAS1
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2
($1,000,000 - $60,000 x 2) x 40% = $880,000 x 40% = $352,000, for the tax effect of the net-
of-tax item
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3
($1,000,000 - $60,000 x 2) x 60% = $880,000 x 60% = $528,000
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4
[($1,300,000 - $250,000) - ($2,000,000 - $60,000 x 10)] x 40% = ($1,050,000 - $1,400,000) x
40% = -$350,000 x 40% = -$140,000, or
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60% = -$350,000 x 60% = -$210,000, with carrying amount of net assets of heavy truck
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division written down by $350,000 from $1,400,000 to $1,050,000
(iii)
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Digital Control Limited
Partial Income Statement
for the year ended December 31, 20X2
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Discontinued Operations:
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Loss from operations of heavy truck division,
net of applicable tax recovery of $280,0001 $(420,000)2
Gain on disposal of net assets of heavy truck
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division, net of applicable tax of $120,0003 180,0004 (240,000)
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1
$700,000 x 40% = $280,000, to show tax effect of the net-of-tax item
2
$700,000 x 60% = $420,000
3
[($1,500,000 - $150,000) - $1,050,000] x 40% = ($1,350,000 - $1,050,000) x 40% =
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$300,000 x 40% = $120,000, to show tax effect of the net-of-tax item
4
[($1,500,000 - $150,000) - $1,050,000] x 60% = ($1,350,000 - $1,050,000) x 60% =
$300,000 x 60% = $180,000
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see p.56 of Lecture 02 slides
Mount Royal Limited
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Supporting calculations for the carrying amount of Aircraft Division’s net assets:
Carrying Carrying
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amount before Write-down amount after
write-down or FV less cost to or recovery write-down or
Date
recovery write- sell write-up (if recovery write-
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up (if appropriate) up (if
appropriate) appropriate)
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Dec 31, 20X1 $1,320,000 $1,850,000 None $1,320,000
Dec 31, 20X2 $1,320,000 $1,300,000 $20,000 $1,300,000
write-down
Dec 31, 20X3 $1,300,000 $1,050,000 $250,000 $1,050,000
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write-down
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Dec 31, 20X4 $1,050,000 $1,400,000 $270,000 $1,320,000
recovery
write-up
Dec 31, 20X5 $1,320,000 $1,450,000 None $1,320,000
$1,850,000
$1,450,000
$1,400,000
Carrying amount
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$1,320,000
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$1,300,000
$1,050,000
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T-account of Aircraft Division’s net assets showing carrying amounts over time:
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Aircraft Division’s net assets
1,320,000
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No write-down/write-up at end of 20X1
Final balance, Dec.31, 20X1 1,320,000
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Write-down at end of 20X2 20,000
Final balance, Dec.31, 20X2 1,300,000
Write-down at end of 20X3 250,000
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Final balance, Dec.31, 20X3 1,050,000
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Write-up at end of 20X4 270,000
Final balance, Dec.31, 20X4 1,320,000
No write-down/write-up at end of 20X5
Final balance, Dec.31, 20X5 1,320,000
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Aircraft Division sold in April 20X6 1,320,000
Balance after sale 0
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Dec.31, 20X2 DR Loss on impairment of asset held for sale (I/S) 20,000
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Dec.31, 20X3 DR Loss on impairment of asset held for sale (I/S) 250,000
CR Net assets of aircraft division (B/S) 250,000
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(i) Mount Royal Limited
Partial Income Statement
For the year ended December 31, 20X4
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Discontinued Operations:
Recovery of losses previously recognized on the net assets
of Aircraft Division, net of applicable tax of $81,000* $189,000**
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* $270,000 x 30% = $81,000
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** $270,000 x 70% = $189,000
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para.21; see p.57 of Lecture 02 slides
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(ii) No operating income or loss related to the discontinued operations and no gain or loss
related to the net assets of the Aircraft Division is reported for the year ended December 31,
20X5.
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Discontinued Operations:
Gain on disposal of net assets of Aircraft Division, net
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Unlike the gain in part (i) above, there is no limit on this gain in
part (iii) here. Do you know why? Make sure you understand
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QUESTION THREE
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Part (A)
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XYZ Limited
Changes in accounting estimates and corrections of materials errors
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There are several important concepts related to a change in accounting estimate that we need to
understand. Estimates are inherent in the accounting process. They are necessary because we have
to deal with uncertain future events. When we make an estimate, we are supposed to use the best
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information available at the time when the estimate is made. As time passes, as circumstances
change, or as additional information is obtained, even estimates that were originally made in good
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faith must be revised. For example, an estimate on the useful life of a long-term asset, the
percentage of credit sales deemed to be uncollectible, amount determined necessary to cover for
warranty provision can change over time as new information becomes available. Such changes
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reflect the new information available and they should not be interpreted as evidence that the previous
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estimates were wrong. There were no errors in the previous estimates; the new estimates are
different now because of the new information that has come to light. Such changes in estimates are
accounted for in the period of change if they affect only that period or in the period of change and
future periods if the change affect both current and future periods. In other words, these changes are
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applied prospectively. There is no catch-up adjustment for the past as accounting records and
financial statements in the all prior periods are considered to have been properly prepared (i.e., no
errors in prior periods).
A correction of a material error is very different from a change in accounting estimate. An error
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made during a prior period that in a significant manner affected the financial statements (of that prior
period and in many cases also all subsequent periods because of carried-forward effects) is a genuine
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and serious error. Such an error involves an omission or misstatement of a material amount and can
be the result of mathematical mistakes, mistakes in applying policies, oversight or misinterpretation
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of facts. Such errors undermine the reliability of the information presented in the financial
statements in a material way (e.g., leading to different decisions of users, etc.) and must be corrected
when the error is discovered so that reliability of financial statements can be restored. The financial
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statements for all prior periods that are presented to users for comparative purposes will have to be
restated (except when the effect cannot be determined reasonably). If prior years’ financial
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statements are not presented for comparative purposes, then a cumulative amount is calculated and
adjusted through the opening balance of the retained earnings amount for the earliest prior year that
is presented (with corresponding adjustments to other balance sheet accounts if appropriate). Prior
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years’ amounts affected by the error will be corrected. In other words, the correction of a material
error is accounted for retrospectively.
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1. The change in the estimated residual value from $426,000 to $246,000 could have been
made by management because of new technological changes in relation to the machinery
equipment or recent changes in market conditions for resale of similar assets reducing the
estimated value of such equipment. Such a change reflects new information available and
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2. The change in the estimated residual value from $426,000 to $246,000 could have been
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made because management discovered this year that a transposition error was made many
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years ago in the recording of the estimated residual value of the machinery equipment. For
example, all research carried out by the engineering department at that time when the
estimate was made as documented in the company records showed an estimated residual
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value of $246,000 for the equipment; the dollar amount, however, was incorrectly recorded
as $426,000 when it was communicated to the accounting department. If the amount of the
error (i.e., difference of $180,000 in this case) is considered material, then the company has
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no choice but to make the necessary correction. The effects of the $180,000 reduction in
the estimated residual value have to be corrected and accounted for retrospectively as a
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correction of error.
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Part (B)
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Reasonable responses to the 3 questions:
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(i) YES
Possible, because all conditions in (Y) below could be satisfied but if any one of the
conditions in (X) was not satisfied, then we would have an “asset held for sale” but no
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“Discontinued Operations”.
For example, consider a truck that a company has used for many years and is no longer
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needed. The company plans to sell the truck and all the requirements in (Y) are met. The
truck would be reported as an “asset held for sale” on the balance sheet. This truck, however,
is not likely going to meet the requirement as a major line of business, geographical area of
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operations, or subsidiary acquired exclusively with intention for resale. It is also likely that
the operations including cash flows and the financial records (i.e., revenue, expense, asset,
and liability accounts) related to this truck are not clearly distinguishable from the rest of the
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business. In other words, the truck is not going to meet the requirements of a “component”
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and because of that, it is not a “discontinued operation”. Because this truck is not a
“discontinued operations”, any income/loss from operations of the truck and any gain/loss
related to the truck will not be reported in the “Discontinued Operations” section of the
income statement.
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Another example can be a component that meets all the conditions in (X) and (Y), i.e., we do
have an “asset held for sale” and the component also meets all the requirements of a
“discontinued operations”. In such a case, the answer to the question can still be a YES if (1)
all operations of the components have ceased and there is no more revenue and expense
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recorded for this component in the year that we are looking at right now, and (2) there was no
need to write-down the carrying amount of the “asset held for sale” at the end of this year
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because there was no change in the estimated “fair value less cost to sell” for this asset.
A further example is possible if we modify the last scenario above slightly to allow for the
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possibility that there was an increase in the estimated “fair value less cost to sell” of the “asset
held for sale” at the end of the year. But if this the case, a further condition would have to be
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imposed requiring that there was never an impairment loss recognized in the past on this
“asset held for sale”. Because there is no cumulative impairment loss, the unrealized gain
this year cannot be recognized in accordance with IFRS. This will result in nothing being
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reported in the “Discontinued Operations” section of the income statement for the year even
though there is an “asset held for sale” on the balance sheet at the end of the year.
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(ii) YES
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Possible, because all conditions in (X) below could be satisfied and the component had been
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disposed of before the end of the year (i.e., the component is no longer on hand at the end of
the year). Any income/loss from operations and any gain/loss related to the sale of the net
assets of component are reported in the “Discontinued Operations” section of the income
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statement. However, because the component has already been sold, there is no “asset held for
sale” at the end of the year as far as this component is concerned.
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(iii) NO
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Not Possible, because if the component had not been disposed of by the end of the year, the
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component had to meet the requirements of an “asset held for sale” in order to meet all the
requirements of a “Discontinued Operation”. If the component is not as “asset held for sale”
because it does not meet all the requirements in (Y), then the last condition in (X) is also not
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met. Therefore, there cannot be a “Discontinued Operation” in this case.
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(X) Conditions that need to be satisfied under IFRS to meet the requirements of “Discontinued
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Operations”:
- Component representing a major line of business, or geographical area of operations, or
subsidiary acquired exclusively with intention for resale,
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- Component has operations, cash flows, and financial elements that are clearly
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distinguishable from the rest of the business, and
- Component has been disposed of, or if it has not been disposed of, it meets the
requirements of “Asset held for sale”.
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(Y) Conditions that need to be satisfied under IFRS to meet the requirements of “Asset Held for
Sale”:
- An authorized plan to sell exists,
- Asset available for immediate sale,
- Active search for a buyer,
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- Sale is probable within a year,
- Asset is reasonably priced and marketed, and
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NOTE: The above responses assume that all dollar amounts involved are material. It is possible
that one can make alternative assumptions about the materiality of the “Discontinued
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Operations” and the “Asset Held for Sale” involved. If this is the case, the responses to the the
questions can be different and still be valid.
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Can you think of more examples, for each of the three questions, where immaterial items can
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