Question

GreenSpruce Inc. reported income from continuing operations before tax of $2,774,500 during 2020. Additional transactions occurring in 2020but not included in the $2,774,500 are as follows:1.

The corporation experienced an insured flood loss of $124,000 during the year.

2.The sale of FV-NI investments resulted in a loss of $165,850.

3.When its president died, the corporation gained $155,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $71,300 (the gain is non-taxable).

4.The corporation disposed of its recreational division at aloss of $178,250 before tax. Assume that this transaction meets the criteria for accounting treatment as discontinued operations.Instructions:

(a)Prepare an income statement for the year 2020, starting with income from continuing operations before income tax. Calculate earnings per share as required under IFRS. There were 60,000 common shares outstanding during the year. (Assume a tax rate of 20% on all items unlessthey are noted as being non-taxable.)

(b)Assume that beginning retained earnings for 2020is $3,967,000 and that dividends of $271,250 were declared during the year. Prepare the retained earnings portion of the statement of changes in equity for 2020

Answer 1

Ans)

Flood loss

This $124,000 loss was not considered in the calculation of income from continuing operations before tax. Since the loss should be in the nonoperating section (other revenues/gains and other expenses/losses), the $124,000 needs to be subtracted from the $2,774,500 income from continuing operations.

recreational division loss

Since the $178,250 loss meets the criteria for discontinued operations, it will need to be reported in the discontinued operations section of the income statement on a net of tax (after tax) basis.

cash surrender value of insurance policy when president died

This $83,700 gain ($155,000 realized - $71,300 cash surrender value of the policy) was also not reported in the nonoperating section of the income statement like it should have been. Therefore, the $83,700 needs to be added to the $2,774,500 income from continuing operations before tax. However, the gain is nontaxable, so when calculating the income tax expense, do not include the $83,700 in the income from continuing operations base.

B)

Retained earnings

Opening balance 3,967,000

Add: Net income 1,928,820

Less: Divident (271,250)

Retained earnings 5,624,570