COMM 321 Assignment #2

Question #1: Disposal Group:

Deep Down Mining Corp. operates a number of base metal mines in the area surrounding Timmons,
Ontario. The company decided on 1 April 2019 to dispose of one of its mining properties. The
property contains mineral rights (an intangible asset) and on-site mining equipment. The mineral
rights have a carrying value of $1,140,000 while the mining equipment has a net book value (after
depreciation) of $470,000. Due to the currently depressed value of base metals on the world market,
the value of the mineral rights is estimated to be $835,000. The recoverable amount of the mining
equipment is very low, no more than $114,000, because most of the equipment is fixed to the
property and cannot be moved at any reasonable cost. The board of directors for Deep Down Mining
is already actively searching for a buyer of the mine and they are confident that a buyer will be found
within the year. As a public company traded on the TSX, Deep Down Mining must provide quarterly
statements to the shareholders.

Required:

1. Prepare journal entries to recognize the mineral rights and equipment as a disposal group,
including any reclassification entries, if necessary.
2. Assume that at 30 June (the end of the second quarter), the value of base metals has
increased and the mineral rights are worth $1,220,000. Prepare any necessary journal entries
to reflect the increase in value.
3. On 28 July (in the third quarter), Deep Down Mining signs a contract which conveys all of the
rights to the mine and the equipment to GSB Inc., a Chilean-based mining company. The
contract price is $1,450,000. Prepare the journal entry (or entries) to record the sale.

Question #2: Financial Statement Disclosure:

Harvest Farm Manufacturing Ltd. is a global farm equipment producer. On February 20, one of the
company’s major customers declared bankruptcy. The customer accounted for 20% of Harvest
Farm’s year-end receivables and 35% of the company’s revenue in 2020. The company’s December
31, 2020 year end has not yet been finalized by the auditors.

Required:

Identify and explain the appropriate accounting treatment for this subsequent event.
Question #3 Discontinued Operations:

Nibbles Delight Ltd. is a food processing company that operates divisions in three major lines of
convenience products: soda pop, snack foods, and candy. On 26 July 2020, the board of directors
voted to put the candy division up for sale. The candy division’s operating results had been declining
for the past several years due to the latest health trends promoting healthier choice snacks.

The board hired the consulting firm Brown LLP to conduct a search for potential buyers. The
consulting fee was initiated at the time of the board’s decision to sell. The negotiated fee of 5% is to
be applied only to value of the asset, not the liabilities.

By 31 December 2020, Brown had found a highly interested buyer for the candy division, and serious
negotiations were underway. The buyer was a food conglomerate based in Taiwan; it offered $6.3
million cash.

On 12 February 2021, after further negotiations, the Nibbles Delight’s board accepted an enhanced
Taiwanese offer to buy the division for $6.5 million. The company’s shareholders approved the sale
on 5 March 2021. The transfer of ownership took place on 31 March 2021.

Nibbles Delight Ltd’s income tax rate is 20%. Other information is as follows (before tax, in thousands
of dollars):

26 July 2020 31 December

2020
Book Value Fair Value Fair Value
Candy division’s net assets:
Current assets $ 1,070 $1,000 $ 920
Property, plant, and equipment (net) 6,200 4,700 4,900
Current liabilities (1,250) (1,250) (1,250)
$ 6,020 $4,450 $4,570
Net earnings (loss) of the candy division, before tax:
1 January to 21 September 2020 870
22 September to 31 December 2020 630
1 January to 31 March 2021 (740)

Required:

1. Prepare whatever journal entries are appropriate at 21 August 2020, 31 December 2020,
12 February 2021, 5 March 2021 and 31 March 2021. Assume any recoverable amount
relates to assets only – i.e no impairment of liabilities.
2. Assume that the after-tax earnings from continuing operations amounted to $4 million in
2020. Prepare the lower section of the earnings section of the 2020 Statement of
Comprehensive Income (in thousands of dollars).
Question #4: Error Correction:

In October 2019, Green Apple Food Corp hired Susan Lau as their new CFO. Susan then launched a
thorough review of corporation’s past accounting, particularly of transactions that exceeded the
company’s normal level of materiality. As a result of her review, she instructed the company’s
accountant to correct two errors:

a. The company made extensive improvements to the granola bar production process in 2016,
and installed a substantial amount of new equipment. The entire cost of the equipment was
accidentally charged to income as restructuring expense in 2016. However, the equipment
should have been capitalized and added to the factory equipment account. The cost of the
equipment was $1,200,000. Green Apple depreciates its factory equipment on the straight-
line basis over ten years. A full year’s depreciation is charged in the year that equipment is
acquired.

b. A year-end cut-off error occurred in 2017. A large shipment of nonperishable supplies arrived
from South America on the last day of 2017 and had been left in the shipping containers
outside the main plant. As a result, the supplies were recorded as received in 2018 and had
not been included in the year-end 2017 inventory count. The account payable also had not
been recorded in 2017. The supplies cost $160,000.

The company’s tax rate is 20%

Required:

1. Prepare the necessary journal entry, if any, for part a to correct the accounts as of January 1,
2019.
2. Prepare the necessary journal entry, if any, for part b to correct the accounts as of January 1,
2019.
3. Prepare the journal entry for part b if the error was discovered at the end of 2018.
4. Prepare the retained earnings section of the SCE for the year ended December 31, 2019
assuming that retained earnings at 1 January 2019 was $1,400,000; net income for 2019
before tax was $710,000; and dividends of $350,000 were declared and paid during 2019.
(See Chapter 4 Powerpoint Slide for Format)
Question #5: Statement of Cash Flows:

Jackson Corp.’s 2020 financial statements showed the following:

Sales $631,575
Cost of goods sold $ 240,000
Depreciation 31,500
Other operating expenses 94,425
Income tax 54,300
Loss on sale of equipment 3,825
Gain on sale of investment (2,400) 421,650
Net earnings and comprehensive income $209,925

As at December 31 2020 2019

Cash $ 85,350 $ 67,950
Accounts receivable 110,250 126,900
Inventory 231,000 216,750
Equipment 684,750 587,250
Less: accumulated depreciation (284,250) (282,750)
Investment 67,500 97,500
Total $894,600 $813,600
Accounts payable $ 76,350 $128,400
Income tax payable 12,225 8,700
Bonds payable 56,250 0
Common shares 378,000 378,000
Retained earnings 371,775 298,500
Total $ 894,600 $813,600

Additional information:
During the year, equipment with an original cost of $123,000 was sold for cash.

Required:

1. Prepare the SCF, in good form using the indirect method. Make logical assumptions
regarding the nature of changes in asset, liability, and equity accounts.

End of Assignment