The founder president and major shareholder of Hawthorne Corp recently
The founder, president, and major shareholder of Hawthorne Corp. recently sold his controlling interest in the company to a national distributor in the same line of business. The change in ownership was effective June 30, 2011, halfway through Hawthorne’s current fiscal year.
During the due diligence process of acquiring the company and over the last six months of 2011, the new senior management team had a chance to review the company’s accounting records and policies. Hawthorne follows accounting standards for private enterprises. Although EPS are not part of ASPE, management calculates EPS for its own purposes and applies the IFRS guidelines. By the end of 2011, the following decisions had been made:
1. Hawthorne’s policy of expensing all interest as incurred will be changed to correspond to the policy of the controlling shareholder whereby interest on self-constructed assets is capitalized. This policy will be applied retrospectively, and going forward it will simplify the consolidation process for the parent company. The major effect of this policy is to reduce interest expense in 2009 by $9,200 and to increase the cost of equipment by the same amount. The equipment was put into service early in 2010. Hawthorne uses straight-line depreciation for equipment and a five-year life.
Because the interest has already been deducted for tax purposes, the change in policy results in a taxable temporary difference.
2. Deferred charges of $12,000 remained in long-term assets at December 31, 2010. These were being written off on a straight-line basis with another three years remaining at that time. On reviewing the December 31, 2011 balances (after an additional year of depreciation), management decided that there were no further benefits to be received from these deferrals and there likely had not been any benefits for the past two years. The original costs were tax deductible when incurred.
3. A long-term contract with a preferred customer was completed in December 2011. When discussing payment with the customer, it came to light that a down payment of $30,000 made by the customer on the contract at the end of 2009 had been taken into revenue (and into taxable income) when received. The revenue should have been recognized in 2011 on completion of the contract.
Hawthorne’s financial statements (summarized) were as follows at December 31, 2010 and 2011, before any corrections related to the information above. The December 31, 2011 statements are in draft form only and the 2011 accounts have not yet been closed.
(a) Prepare any December 31, 2011 journal entries that are necessary to put into effect the decisions made by senior management.
(b) Prepare the comparative statement of financial position, income statement, and statement of retained earnings that will be issued to shareholders for the year ended December 31, 2011.
(c) Prepare the required note disclosures for the accounting changes.
(d) Assume now that Hawthorne follows IFRS instead of ASPE. Briefly comment on the changes, if any, to the accounting treatment for the three decisions in items 1 to 3 above.
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