P16.9 (LO 4) (EPS with Stock Dividend and Discontinued Operations) Christina Corporation is preparing the comparative financial statements to be included in the annual report to stockholders. Christina employs a fiscal year ending May 31.

Income from operations before income taxes for Christina was $1,400,000 and $660,000, respectively, for fiscal years ended May 31, 2021 and 2020. Christina experienced a loss from discontinued operations of $400,000 on March 3, 2021. A 20% combined income tax rate pertains to any and all of Christina Corporation's profits, gains, and losses.

Christina's capital structure consists of preferred stock and common stock. The company has not issued any convertible securities or warrants and there are no outstanding stock options.

Christina issued 40,000 shares of $100 par value, 6% cumulative preferred stock in 2017. All of this stock is outstanding, and no preferred dividends are in arrears.

There were 1,000,000 shares of $1 par common stock outstanding on June 1, 2019. On September 1, 2019, Christina sold an additional 400,000 shares of the common stock at $17 per share. Christina distributed a 20% stock dividend on the common shares outstanding on December 1, 2020. These were the only common stock transactions during the past 2 fiscal years.

Instructions
Determine the weighted-average number of common shares that would be used in computing earnings per share on the current comparative income statement for:
The year ended May 31, 2020.
The year ended May 31, 2021.
Starting with income from operations before income taxes, prepare a comparative income statement for the years ended May 31, 2021 and 2020. The statement will be part of Christina Corporation's annual report to stockholders and should include appropriate earnings per share presentation.
The capital structure of a corporation is the result of its past financing decisions. Furthermore, the earnings per share data presented on a corporation's financial statements is dependent upon the capital structure.
Explain why Christina Corporation is considered to have a simple capital structure.
Describe how earnings per share data would be presented for a corporation that has a complex capital structure.

Golden Wedding Dress Company designs custom wedding dresses for brides to be. The person preparing the adjusting entries at year-end was unable to complete the adjustments due to illness. You have been given the following unadjusted trial balance along with some additional information for the December 31, 2020, year-end.

Other information:

1. Assume all accounts have a normal balance.
2. 70% of the balance in the Advance Sales account is for wedding dresses to be made and delivered by Golden during 2021; the remaining 30% is from sales earned during 2020.
3. Golden warranties its wedding dresses against defects and estimates its warranty liability to be 2% of adjusted net sales.
4. The 3%, 5-year note payable was issued on October 1, 2020; interest is payable annually each September 30.
5. The mortgage is paid annually on the first day of the next year. The next mortgage payment will be paid consisting of $8,752 interest and $23,727 principal for a total of $32,479.
6. Uncollectible accounts are estimated to be 1.5% of outstanding receivables.
7. A physical count of the inventory showed a balance actually on hand of $61,700.
8. Sarah promised her operations manager a year-end performance bonus of $3,715, which would be paid with her salary in January for high sales achieved this year.

Required:
1. Based on the information provided, journalize the adjusting entries at December 31, 2020.

2. Prepare a classified balance sheet. (Be sure to list the assets and liabilities in order of their liquidity. Round the final answers to the nearest whole dollar amount.)

On October 1, 2020, Mr. Elon Musky starts a business. Mr. Musky chooses December 31 as the fiscal year end for his business. With the cash given to him by his rich uncle, he purchases the following assets:

Class 1 (10%):

                        A $980,000 brick building that will accommodate his manufacturing operations.

Class 8 (20%):

Three billboards costing $1,300 each

                        A cash register worth $2,800

                        A barcode scanner $1,900

                        Furniture and fixtures for a total of $16,000

Class 10.1 (30%):

A BMW sedan that he purchased new for $85,000. The vehicle is used exclusively for business purposes.

Class 12 (100%):

                          Mr. Musky purchased a variety of tools, dies, jigs, patterns and moulds. Although the total spent on these items was $18,000, no individual item costed more than $500.

Class 13 (SL):

                          Elon will need space to store his raw materials and finish goods. On October 1, he signs a 10-year lease with 3 renewal options. Each renewal option allows him to rent the warehouse for an additional 2 years. To meet his storage needs, Mr. Musky immediately spends $45,000 making improvements to the warehouse.

Class 14 (SL):

                          On November 1, Elon purchases a copyright from one of his competitors for $85,000. At the time of the purchase, the copyright had a remaining life of 25 years.

Class 14.1 (5%):

                          Elon spent a total of $5,000 on incorporation fees for his business. He plans to expense as much of these fees as he possibly can. He also acquires two smaller business that he thought would have been his major competitors. With the acquisition of the first business, a payment of $258,000 was made for goodwill. For the acquisition of the second business, a payment of $228,000 was reported for goodwill. Both business are fully absorbed into Elon’s operations.

Class 50 (55%):

                          Mr. Musky acquired four computers, each costing $3,000, and 2 cell phones costing $1,200 each.

Class 53 (50%):

                          Manufacturing equipment of all sorts was acquired at a total cost of $850,000.

During the year 2021, the following transactions took place:

Purchases made during the year.

Class 10.1 (30%):

Feeling that one car was not enough to meet his needs, Elon purchases a high-end Tesla for $130,000. This vehicle is also used exclusively for business purposes.

Class 12 (100%):

More small jigs and dies are purchased for a total of $5,500.

Class 50 (55%):

                        Two iPad tablets at a price of $1,300 each.

Class 53 (50%):

                        A casting machine was purchased for $10,000.

Dispositions of assets that occurred during the year.

Class 14 (SL):

            The copyright is no longer needed and was sold for $65,000.

Class 50 (55%):

            One of the computers was sold for $1,000

Class 53 (50%):

            Manufacturing equipment that had originally been purchased for $3,950 was sold for $4,500.

During the year 2022, the following transactions took place:

Purchases made during the year.

Class 13 (SL):

On November 1, 2022, more improvements were made to the leased warehouse costing a total of $66,000.

Class 53 (50%):

A new manufacturing machine was purchase for $105,000.

Dispositions of assets that occurred during the year.

Class 10.1 (30%):

While speeding on the highway, Mr. Musky lost control of his Tesla and totally destroyed his car. Elon received $85,000 from his insurance company as compensation for his destroyed Tesla.

Class 12 (100%):

Ten dies were sold for total proceeds of $3,300. These dies had been purchased for $450 each.

Class 14.1 (5%):

During the year, Elon sells a portion of his business and as a consequence, receives a payment for goodwill of $272,000.

Required:

Calculate the maximum CCA that can be claimed during the year as well as the closing UCC balances for the years ending December 31, 2020, 2021, and 2022.

Calculate any taxable capital gains, allowable capital losses, recapture or terminal losses resulting from the above transactions.

On October 1, 2020, Mr. Elon Musky starts a business. Mr. Musky chooses December 31 as the fiscal year end for his business. With the cash given to him by his rich uncle, he purchases the following assets:

Class 1 (10%):

                        A $980,000 brick building that will accommodate his manufacturing operations.

Class 8 (20%):

Three billboards costing $1,300 each

                        A cash register worth $2,800

                        A barcode scanner $1,900

                        Furniture and fixtures for a total of $16,000

Class 10.1 (30%):

A BMW sedan that he purchased new for $85,000. The vehicle is used exclusively for business purposes.

Class 12 (100%):

                          Mr. Musky purchased a variety of tools, dies, jigs, patterns and moulds. Although the total spent on these items was $18,000, no individual item costed more than $500.

Class 13 (SL):

                          Elon will need space to store his raw materials and finish goods. On October 1, he signs a 10-year lease with 3 renewal options. Each renewal option allows him to rent the warehouse for an additional 2 years. To meet his storage needs, Mr. Musky immediately spends $45,000 making improvements to the warehouse.

Class 14 (SL):

                          On November 1, Elon purchases a copyright from one of his competitors for $85,000. At the time of the purchase, the copyright had a remaining life of 25 years.

Class 14.1 (5%):

                          Elon spent a total of $5,000 on incorporation fees for his business. He plans to expense as much of these fees as he possibly can. He also acquires two smaller business that he thought would have been his major competitors. With the acquisition of the first business, a payment of $258,000 was made for goodwill. For the acquisition of the second business, a payment of $228,000 was reported for goodwill. Both business are fully absorbed into Elon’s operations.

Class 50 (55%):

                          Mr. Musky acquired four computers, each costing $3,000, and 2 cell phones costing $1,200 each.

Class 53 (50%):

                          Manufacturing equipment of all sorts was acquired at a total cost of $850,000.

During the year 2021, the following transactions took place:

Purchases made during the year.

Class 10.1 (30%):

Feeling that one car was not enough to meet his needs, Elon purchases a high-end Tesla for $130,000. This vehicle is also used exclusively for business purposes.

Class 12 (100%):

More small jigs and dies are purchased for a total of $5,500.

Class 50 (55%):

                        Two iPad tablets at a price of $1,300 each.

Class 53 (50%):

                        A casting machine was purchased for $10,000.

Dispositions of assets that occurred during the year.

Class 14 (SL):

            The copyright is no longer needed and was sold for $65,000.

Class 50 (55%):

            One of the computers was sold for $1,000

Class 53 (50%):

            Manufacturing equipment that had originally been purchased for $3,950 was sold for $4,500.

During the year 2022, the following transactions took place:

Purchases made during the year.

Class 13 (SL):

On November 1, 2022, more improvements were made to the leased warehouse costing a total of $66,000.

Class 53 (50%):

A new manufacturing machine was purchase for $105,000.

Dispositions of assets that occurred during the year.

Class 10.1 (30%):

While speeding on the highway, Mr. Musky lost control of his Tesla and totally destroyed his car. Elon received $85,000 from his insurance company as compensation for his destroyed Tesla.

Class 12 (100%):

Ten dies were sold for total proceeds of $3,300. These dies had been purchased for $450 each.

Class 14.1 (5%):

During the year, Elon sells a portion of his business and as a consequence, receives a payment for goodwill of $272,000.

Required:

Calculate the maximum CCA that can be claimed during the year as well as the closing UCC balances for the years ending December 31, 2020, 2021, and 2022.

Calculate any taxable capital gains, allowable capital losses, recapture or terminal losses resulting from the above transactions.

The following condensed income statements of the Jackson Holdings company are presented for the two years ended December 31, 2021 and 2020.

2021 2020

Sales Revenue $15,900,00 $10,500,000

Cost of goods sold 9,650,000 6,450,000

Gross profit 6,250,000 4,050,000

Operating expenses 3,560,000 2,960,000

operating income 2,690,000 1,090,000

gains on sale of divison 690,000 -

3,380,000 1,090,000

Income tax expenses 845,000 272,500

Net income 2,535,000 817,500

On October 15, 2021 Jackson entered into a tentative agreement to seel all the assets of one of its divisons. the divison qualifies as a component of an entity as defined by GAAP. the division was sold on december 31, 2021 for $5,270,000. Book value of the divisions assets was $4,580,000. The division's contribution to Jackson's operating income before-tax for each year was as follows:

2021 $445,000

2020 $345,000

Assume an income tax rate of 25%

Required

1. Prepare revised income statements according to GAAP, beginning with income from continuing operations before income taxes, Ignore EPS disclosures.

2. Asume that by december 31,2021 the divions had not yet been sold but was considered held for sale. The fair value of the divisons assets on december 31 was $5,270,000. prepare revised income statements accoring to GAAP, beginning with income from continuing operations before income taxes. ignore EPS disclosures.

3. Assume that by december 3, 2021, the division had not yet been sold but was considered held for sale. The fair value of the divisions asets on December 31 was $3,990,000. Prepare revised income statements according to GAAP, beginning with income from continuing operations before income taxes, ignore EPS disclosures.

The following condensed income statements of the Jackson Holdings company are presented for the two years ended December 31, 2021 and 2020.

2021 2020

Sales Revenue $15,900,00 $10,500,000

Cost of goods sold 9,650,000 6,450,000

Gross profit 6,250,000 4,050,000

Operating expenses 3,560,000 2,960,000

operating income 2,690,000 1,090,000

gains on sale of divison 690,000 -

3,380,000 1,090,000

Income tax expenses 845,000 272,500

Net income 2,535,000 817,500

On October 15, 2021 Jackson entered into a tentative agreement to seel all the assets of one of its divisons. the divison qualifies as a component of an entity as defined by GAAP. the division was sold on december 31, 2021 for $5,270,000. Book value of the divisions assets was $4,580,000. The division's contribution to Jackson's operating income before-tax for each year was as follows:

2021 $445,000

2020 $345,000

Assume an income tax rate of 25%

Required

1. Prepare revised income statements according to GAAP, beginning with income from continuing operations before income taxes, Ignore EPS disclosures.

2. Asume that by december 31,2021 the divions had not yet been sold but was considered held for sale. The fair value of the divisons assets on december 31 was $5,270,000. prepare revised income statements accoring to GAAP, beginning with income from continuing operations before income taxes. ignore EPS disclosures.

3. Assume that by december 3, 2021, the division had not yet been sold but was considered held for sale. The fair value of the divisions asets on December 31 was $3,990,000. Prepare revised income statements according to GAAP, beginning with income from continuing operations before income taxes, ignore EPS disclosures.

Gundagai Ltd was incorporated on June 30, 2019. On July 1, 2019, the company issued a prospectus offering 300,000 ordinary shares at an issue price of $10, payable on the following terms.

• $3 on application
• $3 on allotment
• $2 on the first call
• $2 on the second call

A summary of the applications and allotments register follows.

The application process was completed on August 31, 2019, and the shares were allotted to all applicants on September 1, 2019. All money received more than the amounts due on application where applied to amounts due on allotment and calls. Where appropriate, refunds of application money were made. All allotment money was received by September 30, 2019.

On November 1, 2020, Gundagai Ltd’s directors made a call of 42c per share, payable by November 30, 2020. By December 31, call money had not been received from holders of 25,000 shares.

Required:

Prepare journal entries to record the above events. No Post Ref required. Refer to the provided Chart of Accounts for the appropriate account names.

Gundagai Ltd was incorporated on June 30, 2019. On July 1, 2019, the company issued a prospectus offering 300,000 ordinary shares at an issue price of $10, payable on the following terms.

• $3 on application
• $3 on allotment
• $2 on the first call
• $2 on the second call

A summary of the applications and allotments register follows.

The application process was completed on August 31, 2019, and the shares were allotted to all applicants on September 1, 2019. All money received more than the amounts due on application where applied to amounts due on allotment and calls. Where appropriate, refunds of application money were made. All allotment money was received by September 30, 2019.

On November 1, 2020, Gundagai Ltd’s directors made a call of 42c per share, payable by November 30, 2020. By December 31, call money had not been received from holders of 25,000 shares.

Required:

Prepare journal entries to record the above events. No Post Ref required. Refer to the provided Chart of Accounts for the appropriate account names.

Question 6 Audit Report

Before the audit report was signed, the audit team encountered the following situation. Treat each situation independently and assume the remaining financial statements are fine.

1) A property owned by Cook’s Furniture Ltd was sold to Lidia Preston, the wife of Howard Cook in June 2020 (refer to case description in part A). The property has a market value of four million and was sold at 3.2 million. Management did not disclose this in the financial statement because they believed this was a private matter. The disposal of this asset has been appropriately accounted for on the financial statements (e.g. the asset was removed from PPE and the loss of disposal was correctly recognized as an expense).

2) The subsequent selling price of the ready-made furniture range suggests the inventory valuation as of 30 June 2020 should be written down by $48,000 but management only wrote $38,000 off as per the financial statements because they were confident that they can increase the selling price again in 2021 after people settling back to normality.

3) Carl Cook decided to retire in 2021 due to health reasons, Carl is willing to sell his shareholding to the remaining shareholders. However, the BoD decided to explore the potential of selling the business. By the time to sign the 2020 financial statements, the company has not commenced negotiations with any potential buyer. The BoD said to the auditor that they may not sell the business if they cannot get a good deal. Carl’s retirement decision is disclosed on the financial statements, but not the intention to sell the business.

REQUIRED: For each of the above situation:

a) Discuss the audit procedure that the auditor needs to perform in relation to each situation.

b) Explain which audit opinion is appropriate for each situation.

The comparative balance sheets for Pronghorn Corporation show the following information.

Additional data related to 2020 are as follows.

Prepare a statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Assume that IBM leased equipment that was carried at a cost of $120,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2020, with equal rental payments of $28,430 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $145,000. The equipment has a useful life of 6 years with no residual value. The lease has an implicit interest rate of 7%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM.

The present value of an annuity due, 6 years, 7% is 5.10020