BUS 320 Lecture Notes - Lecture 20: Net Income, Income Statement, Book Value

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© Dennis Chung 2016 Do not distribute
BUS320
Assignment #2
QUESTION ONE
Part (a)
Alpha Foods Limited
(i) $ A: Income from Continuing Operations (20X1)
= [194,000+190,000-(-108,000)-(-143,000)] x (1-30%) = 635,000 x 70% = $444,500
(ii) $ C: Loss from Operations of Oven Meals Division (20X1)
= [(-108,000)+(-143,000)] x (1-30%) = -251,000 x 70% = -$175,700
(iii) $ E: Loss on Impairment of Net Assets of Oven Meals Division (20X1)
= [(1,250,000-170,000)-1,320,000] x (1-30%) = -240,000 x 70% = -$168,000
(iv) $ I: Loss from Operations of Oven Meals Division (20X2)
= -166,000 x (1-30%) = -166,000 x 70% = -$116,200
(v) $ K: Gain on Disposal of Net Assets of Oven Meals Division (20X2)
= [(1,300,000-100,000)-(1,250,000-170,000)] x (1-30%) = 120,000 x 70% = $84,000
Part (b)
Beta Foods Limited
(vi) $ N: Income from Continuing Operations (20X1)
= (194,000+190,000-92,000-57,000) x (1-30%) = 235,000 x 70% = $164,500
(vii) $ P: Income from Operations of Oven Meals Division (20X1)
= (92,000+57,000) x (1-30%) = 149,000 x 70% = $104,300
(viii) $ R: No Recognition of Gain on Net Assets of Oven Meals Division (20X1)
= 0
(ix) $ V: Income from Operations of Oven Meals Division (20X2)
= 34,000 x (1-30%) = 34,000 x 70% = $23,800
(x) $ X: Gain on Disposal of Net Assets of Oven Meals Division (20X2)
= [(1,750,000-100,000)-1,320,000] x (1-30%) = 330,000 x 70% = $231,000
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© Dennis Chung 2016 Do not distribute
QUESTION TWO
Part (a)
(i) The chief accountant of DC had made a serious mistake continuing to charge depreciation for the
heavy truck division after October 31, 20X1. In accordance with the requirements under IFRS, no
further depreciation should be recognized on an asset once the asset is classified as held for sale. In
DC’s case, the heavy truck division must have met all the requirements to be classified as held for
sale on October 31, 20X1 and therefore no depreciation should be charged after that date. We
know that the division was an asset held for sale because otherwise the planned disposal of the
heavy truck division would not have met the requirements to be accounted for as a discontinued
operation for financial reporting purposes under IFRS.
To correct for this mistake, two adjustments are needed: operating loss of the division for the 12
months ended December 31, 20X1 has to be adjusted (by adding back 2 months of depreciation) as
shown in footnotes 2 & 3 in part (ii) below; and net book value of the equipment at December 31,
20X1 has to be adjusted (by adding back 2 months of depreciation) as shown in footnotes 4 & 5 in
part (ii) below.
(ii)
Digital Control Limited
Partial Income Statement
for the year ended December 31, 20X1
: :
Income from continuing operations $1,320,000
1
Discontinued Operations:
Loss from operations of heavy truck division,
net of applicable tax recovery of $352,0002 $ (528,000)3
Loss on impairment of net assets of heavy truck
division, net of applicable tax recovery of $140,0004 (210,000)5 (738,000)
Net income $ 582,000
1 $2,200,000 x 60% = $1,320,000
2 ($1,000,000 - $60,000 x 2) x 40% = $880,000 x 40% = $352,000, to show tax effect of the net-
of-tax item
3 ($1,000,000 - $60,000 x 2) x 60% = $880,000 x 60% = $528,000
4 [($1,300,000 - $250,000) - ($2,000,000 - $60,000 x 10)] x 40% = ($1,050,000 - $1,400,000) x
40% = -$350,000 x 40% = -$140,000, or
[($1,300,000 - $250,000) - ($1,280,000 + $60,000 x 2)] x 40% = ($1,050,000 - $1,400,000) x
40% = -$350,000 x 40% = -$140,000, to show tax effect of the net-of-tax item
5 [($1,300,000 - $250,000) - ($2,000,000 - $60,000 x 10)] x 60% = ($1,050,000 - $1,400,000) x
60% = -$350,000 x 60% = -$210,000, or
[($1,300,000 - $250,000) - ($1,280,000 + $60,000 x 2)] x 60% = ($1,050,000 - $1,400,000) x
60% = -$350,000 x 60% = -$210,000, with carrying amount of net assets of heavy truck
division written down by $350,000 from $1,400,000 to $1,050,000
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© Dennis Chung 2016 Do not distribute
(iii)
Digital Control Limited
Partial Income Statement
for the year ended December 31, 20X2
Discontinued Operations:
Loss from operations of heavy truck division,
net of applicable tax recovery of $136,0001 $(204,000)2
Gain on disposal of net assets of heavy truck
division, net of applicable tax of $120,0003 180,0004 (24,000)
1 ($700,000 - $60,000 x 6) x 40% = $340,000 x 40% = $136,000, to show tax effect of the
net-of-tax item
2 ($700,000 - $60,000 x 6) x 60% = $340,000 x 60% = $204,000
3 [($1,500,000 - $150,000) - $1,050,000] x 40% = ($1,350,000 - $1,050,000) x 40% =
$300,000 x 40% = $120,000, to show tax effect
4 [($1,500,000 - $150,000) - $1,050,000] x 60% = ($1,350,000 - $1,050,000) x 60% =
$300,000 x 60% = $180,000
Note: Operating loss of the division for the 12 months ended December 31, 20X2 has to be
adjusted (by adding back 6 months of depreciation) as shown in footnotes 1 & 2 above.
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Document Summary

= [(1,250,000-170,000)-1,320,000] x (1-30%) = -240,000 x 70% = -,000. = [(1,300,000-100,000)-(1,250,000-170,000)] x (1-30%) = 120,000 x 70% = ,000 (v) $ k: gain on disposal of net assets of oven meals division (20x2) (iv) $ i: loss from operations of oven meals division (20x2) = -166,000 x (1-30%) = -166,000 x 70% = -,200 (ii) $ c: loss from operations of oven meals division (20x1) (iii) $ e: loss on impairment of net assets of oven meals division (20x1) = [(-108,000)+(-143,000)] x (1-30%) = -251,000 x 70% = -,700. = [194,000+190,000-(-108,000)-(-143,000)] x (1-30%) = 635,000 x 70% = ,500. = [(1,750,000-100,000)-1,320,000] x (1-30%) = 330,000 x 70% = ,000 (ix) $ v: income from operations of oven meals division (20x2) = 34,000 x (1-30%) = 34,000 x 70% = ,800 (vi) $ n: income from continuing operations (20x1) 2 (ii) for the year ended december 31, 20x1.

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