INVENTORY MISSTATEMENTS

PROBLEM 1 – INVENTORY MISSTATEMENTS (11 MARKS)

The net income as per the financial records of Creative Gifts was determined without knowledge of the following ending inventory errors. The 2018 year was Creative Gift`s first year in business. No dividends were declared and paid in 2018 or 2019.

The following chart shows net income as per the company`s books for each year and the inventory errors for each year:

Year Net Income as stated per books Ending Inventory Error
2018 $50,000 Overstated $5,000
2019 $52,000 Overstated $9,000

Required:

a) Calculate the corrected net income and retained earnings ending balances for each of 2018 and 2019. (6 marks)

b) Prepare the journal entries to correct the books as follows:

i. For 2018, assuming the 2018 books are still open (2 marks)

ii. For 2019, assuming the books for 2018 are closed: (3 marks)
• To correct the 2018 error
• To correct the 2019 error

PROBLEM 2 – FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (FV-OCI)
(25 MARKS)

Frank Corporation invested its excess cash in investments accounted for using the fair value through other comprehensive income (FV-OCI) model during 2010. At December 31, 2010, the portfolio consisted of the following common shares:

Investment # shares Cost Fair Value
(and current carrying value)

Lara Inc. 1,000 shares $13,000 $19,000

Paula Inc. 2,000 shares 42,000 44,000

Aryn Inc. 2,000 shares 72,000 60,000

                        $127,000                 $123,000

Frank Corporation applies the FV-OCI model with unrealized gains and losses reclassified to retained earnings.

FOR 2010:

a) Make the journal entry at December 31, 2010 to adjust the share investments to their fair value? (1 marks)

b) What is the balance of accumulated other comprehensive income (AOCI) at December 31, 2010? (1 mark)

FOR 2011:

In 2011, Frank Corporation sold 2,000 shares of Paula Inc. for $36,400 less a $1,250 brokerage fee. In that same year, Frank Corporation purchased 500 more shares of Lara Inc. for $7,000. Frank Corporation pays no brokerage fees on share purchases. Aryn Inc. paid Frank Corporation a $1,500 cash dividend.

The December 31, 2011 portfolio of FV-OCI investments were as follows:

Investment # shares Fair Value

Lara Inc. 1,500 shares $ 49,000

Aryn Inc. 2,000 shares 22,000

c) Make all the required journal entries to record the transactions related to the Paula Inc. shares in 2011. (8 marks)

d) Record the purchase of the additional Lara Inc. shares in 2011. (2 marks).

e) Record the dividend payment received by Frank Corporation in 2011. (1 mark)

f) Make the journal entry at December 31, 2011 to adjust the share investments to their fair value? (2 marks)

g) Prepare the following financial statements (partial) for 2011 (use the proper 3-line heading):

i. Statement of Earnings (2 marks)
ii. Statement of Comprehensive Income (4 marks) (assume net income $100,000)
iii. Statement of Changes in Shareholders’ Equity for Accumulated Other Comprehensive Income (AOCI). (3 marks)
iv. Statement of Financial Position at Dec 31, 2011 (1 mark)

PROBLEM 3 – FAIR VALUE THROUGH NET INCOME (FV-NI) (12 MARKS)

Yellow Inc. holds the following portfolio of securities held for trading purposes and accounted for using the fair value through net income model at September 30, 2011, the end of Yellow’s third quarter. Yellow Inc. prepares adjusting entries and financial statements at the end of each quarter.

Investment Cost ($) Fair Value ($)

1,000 common shares of Blue Inc. 180,000 176,000
5,000 common shares of Red Inc. 225,000 196,000
3,500 common shares of Orange Inc. 133,000 140,000

On November 30, 2011, Yellow sold all Red Inc. shares for $57 per share and purchased 3,000 shares of Green Inc. for $59.50 per share. Yellow pays a 1% commission on all purchase and sale share transactions. On December 31, 2011, the fair values of the shares held were as follows: Blue Inc. $193,000; Orange Inc. $96,000; Green Inc. $132,000.

Required:
a) Prepare the journal entries to record the purchases, sales and quarter-end adjustments in Yellow’s investment portfolio for the fourth quarter of 2011. (10 marks)

b) Prepare the partial classified balance sheet for the FV-NI investments of Yellow Inc. at December 31, 2011. (partial) for 2011. Use a proper three-line title. (2 marks)

PROBLEM 4 - AMORTIZED COST BOND INVESTMENT (13 marks)
Smoke Corporation purchased a 9%, $100,000 bond investment in A Company on January 1, 2010. The following partial amortization table reflects the bond investment on January 1, 2010, with a 5 year term, (due Dec. 31, 2014) when the annual market rate of interest was 10%. Smoke follows IFRS.

Interest is paid to Smoke June 30 and Dec 31. Smoke has an April 30 year end.

Period Ended
Cash Interest Received
Interest Income
Amortized Bond Discount
Carrying Value

Jan. 1, 2010
(issue date) --- --- 96,139

Jan 1, 2010 -
June 30, 2010 4500 4807 307 96,446

July 1, 2010 -
Dec 31, 2010 4500 4823 323 96,769

Jan 1, 2011 -
June 30, 2011 4500 4839 339 97,108

July 1, 2011 -
Dec 31, 2011 4500 4856 356 97,464

Required:
a) Prepare the journal entry to record the purchase of the bond by Smoke at Jan 1, 2010. (1 mark)
b) Prepare the journal entry to accrue interest and adjust the bond investment at April 30, 2011. (round answers to the nearest dollar) (3 marks)
c) Prepare a classified partial balance sheet at April 30, 2011 to show the amortized cost bond investment and any associated interest. Use a proper three-line title. (2 marks)
d) Prepare the journal entry(ies) required at June 30, 2011. (4 marks)
e) How much total interest income would Smoke record over the entire term of the bond investment? (2 marks)
f) If Smoke followed ASPE and used the straight line method to amortize bond discount, how much interest income would Smoke book over the entire term of the bond investment? (1 mark)