Penny Store Ltd (PSL), a Canadian public company, engaged in a variety of transactions in 2020....

 

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Penny Store Ltd (PSL), a Canadian public company, engaged in a variety of transactions in 2020. For each of the below independent transactions, indicate whether PSL's total assets and earnings-per- share (EPS), in its year-ended December 31, 2020 financial statements are overstated (too high), understated (too low), or unaffected as a result of the accounting error, if any. Transaction January 1, 2020 - PSL purchased a forklift machine for $22,500. The machine has an estimated useful life of 10 years and an estimated residual value of $2,500. The company uses the double-declining-balance depreciation method and recorded annual depreciation expense of $2,250. January 12, 2020 - PSL purchased land for $120,000. As part of the purchase, PSL paid $5,000 to a lawyer for a legal title search on the property. PSL capitalized $120,000 and expensed $5,000 as a legal expense. February 14, 2020 - As part of an active trading strategy, PSL purchased 9% of the common shares of XYZ Corp, a company that is widely held and actively traded on the Toronto Stock Exchange, for $150,000. At year-end, each common share was trading for double the original purchase price. Consistent with the historical cost convention, the investment continues to be recorded at its purchase of $150,000. March 6, 2020 - PSL purchased all the common shares of Save Mart Ltd (SML), a complimentary business, for $330,000 cash. At the time of acquisition, SML's identifiable net assets had a fair market value of $300,000. As result, PSL capitalized $300,000 to various assets and expensed the overpayment of $30,000. April 1, 2020 - PSL purchased all 45% of the common share of Shipping Ltd (SL) for $1,000,000, giving PSL significant influence over the relevant decisions of SL. For the year, SL had net income of $100,000 and paid dividends to all shareholders of $40,000. At year-end, the investment is recorded at $1,018,000. Total Assets Earnings per-Share- September 1, 2020 - PSL purchased custom-made shelving for $900,000 made specifically for mall kiosks. On November 1, 2020, due to a change in marketing strategy, it was determined that the PSL would stop selling in malls. The useful life of the shelving is estimated to be 10 years with no residual value. Annual depreciation of $90,000 was recorded at year-end. November 3, 2020 - PSL purchased a patent that provides an indefinite right to sell certain products for $105,000. Although the patent was recorded on the balance sheet as an asset, no amortization was recorded at year-end. Penny Store Ltd (PSL), a Canadian public company, engaged in a variety of transactions in 2020. For each of the below independent transactions, indicate whether PSL's total assets and earnings-per- share (EPS), in its year-ended December 31, 2020 financial statements are overstated (too high), understated (too low), or unaffected as a result of the accounting error, if any. Transaction January 1, 2020 - PSL purchased a forklift machine for $22,500. The machine has an estimated useful life of 10 years and an estimated residual value of $2,500. The company uses the double-declining-balance depreciation method and recorded annual depreciation expense of $2,250. January 12, 2020 - PSL purchased land for $120,000. As part of the purchase, PSL paid $5,000 to a lawyer for a legal title search on the property. PSL capitalized $120,000 and expensed $5,000 as a legal expense. February 14, 2020 - As part of an active trading strategy, PSL purchased 9% of the common shares of XYZ Corp, a company that is widely held and actively traded on the Toronto Stock Exchange, for $150,000. At year-end, each common share was trading for double the original purchase price. Consistent with the historical cost convention, the investment continues to be recorded at its purchase of $150,000. March 6, 2020 - PSL purchased all the common shares of Save Mart Ltd (SML), a complimentary business, for $330,000 cash. At the time of acquisition, SML's identifiable net assets had a fair market value of $300,000. As result, PSL capitalized $300,000 to various assets and expensed the overpayment of $30,000. April 1, 2020 - PSL purchased all 45% of the common share of Shipping Ltd (SL) for $1,000,000, giving PSL significant influence over the relevant decisions of SL. For the year, SL had net income of $100,000 and paid dividends to all shareholders of $40,000. At year-end, the investment is recorded at $1,018,000. Total Assets Earnings per-Share- September 1, 2020 - PSL purchased custom-made shelving for $900,000 made specifically for mall kiosks. On November 1, 2020, due to a change in marketing strategy, it was determined that the PSL would stop selling in malls. The useful life of the shelving is estimated to be 10 years with no residual value. Annual depreciation of $90,000 was recorded at year-end. November 3, 2020 - PSL purchased a patent that provides an indefinite right to sell certain products for $105,000. Although the patent was recorded on the balance sheet as an asset, no amortization was recorded at year-end.

Answer rating: 100% (QA)

Total Assets The first transaction has no effect on total assets The second transa... View the full answer