INTERMEDIATE FINANCIAL REPORTING 1 UNIT 6 TASK-BASED SIMULATION #3 Simulation (20 minutes) Forest Bottles Inc. (FBI) is a public company whose primary business is the manufacturing of various sizes and shapes of plastic bottles. The company has three manufacturing plants across Canada and four distribution centres. Sean Chu reports directly to the companys CFO, Rebecca Wainwright. Sean and Rebecca are currently working on completing FBIs financial statements for the current year ended December 31, Year 1. Rebecca has asked Sean to review some documentation for any final adjustments that might need to be made. The following information is provided: Appendix I: Letter from Thompson & Whitaker Lawyers LLP Appendix II: Extracts from minutes of board of directors meeting Complete the tasks in the Excel Task file. Appendix I: Letter from Thompson & Whitaker Lawyers LLP February 20, Year 2 Dear Ms. Wainwright, Pursuant to your letter of February 1, Year 2, please find below an update on all work that our firm is currently completing for Forest Bottles Inc. (FBI). 1. On April 12, Year 1, George McMannis was terminated. Mr. McMannis then commenced a lawsuit on May 21, Year 1, against FBI, stating that he had been wrongfully dismissed, and is suing for $500,000. This case was settled for $250,000 on January 15, Year 2. 2. We have commenced the insurance claim for a fire that occurred at the companys distribution centre in Winnipeg on January 23, Year 2. Based on discussions with the insurance adjusters and our review of the insurance policy, we believe that FBI should receive an insurance claim of $720,000. 3. The regulatory body in British Columbia has started a review of its environmental legislation related to chemical disposals and cleanup. Currently, the legislators are considering proposals that may increase clean-up requirements. If this occurs, FBI may have to increase its decommissioning obligations at its manufacturing plant in that province. The vote on this is planned for late summer Year 2. If you have any questions, please contact us. Regards, Cameron Whitaker Cameron Whitake No amounts reflected in Year 1 statements relating to these items. Appendix II: Extracts from minutes of board of directors meeting EXTRACTS OF MINUTES FOR BOARD OF DIRECTORS MEETING FEBRUARY 22, Year 2 Present: Kenneth Solomon (Chairman of the Board); Tim Chung (Chief Executive Officer); Martha Adams (Secretary); Rebecca Wainwright (Chief Financial Officer); Jonathan Grosjean (Director); Frances Ibrahim (Director) A dividend of $0.35 per share, for a total of $1,750,000, was declared today, payable on March 12, to shareholders on record on March 5. It was noted that a defect was found this week in the one-litre bottles, SKU #4590WL, that were manufactured between November 5 and December 17, Year 1, costing $2,850,000. All this production was sold between November 10, Year 1, and January 15, Year 2, for total sales of $3,800,000, of which 85% occurred in Year 1. It was agreed that all these bottles would be recalled and destroyed, giving customers a full refund. The costs to recall and destroy all the product sold in Year 1 will be $200,000. Rebecca reported that the fair market value of the companys investment in Karlson Plastics Ltd. had fallen from its December 31, Year 1, price due to changes in the industry and the economy in early Year 2. The investment is reported at fair value through profit or loss and on December 31, Year 1, its fair value was $5,100,000 as reported on the draft Year 1 statements. On February 22, Year 2, its fair value has fallen to $3,480,000 which is an abnormally large and material decline. INTERMEDIATE FINANCIAL REPORTING 1 UNIT 6 TASK-BASED SIMULATION #3 Task 1 It is February 26, Year 2, and the Year 1 statements have not yet been completed or authorized. Review the lawyers letter (Appendix I) and the extracts from the minutes of the board of directors meeting (Appendix II), and provide the accounting implications for each of the material items identified below. Instructions: In Column B, indicate the type of subsequent event for the item described in Column A by selecting Adjusting event, Non-adjusting event, or Not an adjusting or non-adjusting event from the drop-down list. In Column C, enter the amount of the impact on Year 1 net income. If there is no value for a cell, enter 0. Enter all increases to net income as positive numbers and decreases to net income as negative numbers (for example, -10). In Column D, select the most appropriate rationale for the impact on the statements from the drop-down list. A B C D 1 Item Type of subsequent event for Year 1 statements Impact on Year 1 net income Rationale for impact on statements 2 Wrongful dismissal lawsuit 3 Insurance claim related to the fire 4 Changes in environmental regulations 5 Declaration of the dividends 6 Product recall 7 Price of the shares of Karlson Plastics Ltd. Column B drop-down options Adjusting event Non-adjusting event Not an adjusting or a non-adjusting event Column D drop-down options Requires note disclosure only. Will reduce net income and impact the statement of financial position. Will increase net income and impact the statement of financial position. Will impact line items on the statement of financial position only. Does not require note disclosure or recognition in the statements. INTERMEDIATE FINANCIAL REPORTING 1 UNIT 6 TASK-BASED SIMULATION #3 Task 2 In drafting the notes for FBIs financial statements, identify the items that must be disclosed. Instructions: In Column B, select two items that must be disclosed in the notes for the year-end statements by placing an X next to the two MOST valid items. A B 1 Factors to consider Two most valid (X) 2 The date of completion of the financial statements and who provided approval 3 The date of authorization of the financial statements and who provided this authorization 4 The date of completion and the date of authorization of the financial statements 5 The identity of persons who have the power to amend the financial statements after they are issued 6 The date of issue of the statements and who approved this issuance