Longhorn Casuals Ltd. Is a retail operation, the shares of which have been publicly traded since it
Question:
Longhorn Casuals Ltd. Is a retail operation, the shares of which have been publicly traded since it was incorporated. The company has prepared the following draft income statement. You work for Benson and Associates, CPAs and will conduct the audit of the financial statements. Bill Benson, partner, provides you with the following information provided by the client and asks you to prepare an adjusted income statement including the tax provision. He would also like you to outline any necessary note disclosures and to include the journal entries required to adjust the draft income statement.
Longhorn Casuals Ltd. Draft Income Statement For the year ended December 31, 2019 | |||
Sales | 100,000 | ||
COGS | 50,000 | ||
Gross Profit | 50,000 | ||
Expenses: | |||
Depreciation | 6,000 | ||
Pension | 2,000 | ||
Operation | 28,000 | 36,000 | |
Net pretax income | 14,000 | ||
Income tax-estimate | 30% | 4,200 | |
Net Income | 9,800 | ||
Earnings per share | 9.8M/2M | 4.90 |
Additional Information
- The company introduced a pension plan at the beginning of 2019. Past service costs were paid in full in the amount of $2,000,000. Current service costs for 2019 were $500,000 and were not funded in the year. Amounts funded were the only amounts included in pension expense (operating expense). The actual return on plan assets was 9% and the discount rate used 7% for the pension plan obligation, which is equivalent to the expected return on plan assets. Only funding is recognized by CRA as tax deductible. No benefits were paid because there were no retirees as of December 31, 2019.
- At the date of incorporation, the company had issued 2,000,000 common shares for $10 per share. On February 1, 2019, 20,000 of the shares were repurchased and cancelled by the company. The controller included the $1 million cost of this repurchase in operating expenses. The company had issued a call option inf 2018, expiring in 2020 and allowing the holder to purchase 40,000 shares for $40 per share. The average share price in 2019 was $51.
- On January 1, 2019 the company leased its administrative building under a contract wherein the company will obtain ownership of the building at the end of the 20-year lease for a nominal amount. Management decided to expense the lease payment of $3,000,000 for 2019 (paid on January 1, 2019). The building would have been capitalized at $30 million if treated as a capital lease. The building has a remaining economic life of 25 years. The interest for 2019 would have amounted to $2.45 million. The company has adopted IFRS 16 for lease accounting.
- The depreciation expense was $2 million lower than CCA in 2019, not including any impact from transaction 3. The tax rate enacted for 2020 and beyond was increased to 32%.
Required
Prepare the report.
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones