(13) Accounting for Leases

(13) Accounting for Leases 258 Accounting for a Lease that Transfers Ownership finance lease: a lease that transfers the rights, rewards, and risks of ownership is considered an acquisition lessee has the use of the property and should record an asset, as it is a purchase of property the lessee has a liability for future payments equal to the present value of the lease payments and records interest expense the lessor no longer has the use of the property and removes the asset from its books lessor is financing a purchase for the lessee and records a receivable and recognized interest income operating lease: a lease that does not transfer ownership rights lessor: rent revenue; equipment remains on books lessee: rent expense; equipment is not on books 259 1 of 39 CMA Ontario, 2011

Finance Lease Criteria If one of the following two criteria are met, then the lease is a finance lease: lease transfers ownership to the lessee by the end of the lease term the lease contains a bargain purchase option that gives the lessee the option to purchase the property at a price that is expected to be substantially below fair market value 260 Finance Lease Criteria for a lease that does not transfer ownership, the following criteria need to be analyzed: economic life of asset is the lease term a major part of the economic life of the leased asset? present value of minimum lease payments is the present value of the minimum lease payments substantially all of the fair value of the leased asset? specialized nature - the leased assets are of such a specialized nature that only the lessee can use them without major modification 261 2 of 39 CMA Ontario, 2011

Depreciation and Executory Costs depreciation of assets under finance lease: if the lease entails a transfer of ownership - depreciate over the life of the asset if the asset reverts back to the lessor at the end of the lease term, then depreciate over the lease term executory costs represent a reimbursement of costs incurred by the lessor: these are usually included in the lease payments and should be expensed 262 Guaranteed vs. Unguaranteed Residual Value issue: if title does not pass to the lessee and there is no BPO, the lessee returns physical custody of the asset to the lessor at the end of the lease term guaranteed residual values: occurs if the lessee agrees to make up any deficiency below the stated amount at the end of the lease term include in the calculation of minimum lease payments unguaranteed residual values are not included in the minimum lease payments from the lessee s perspective they are included as part of the determination of the lease payments by the lessor 263 3 of 39 CMA Ontario, 2011

ASPE - Leases finance leases are called capital leases same criteria (except for the specialized nature of equipment) with quantitative thresholds: if the lease term is greater than or equal to 75% of the asset's economic life, then the economic life criteria is deemed to be met, or if the present value of lease payments is greater than or equal to 90% of the fair value of the asset, then the fair value criterion is deemed to be met 264 ASPE - Leases (cont d) the discount rate used to calculate the present value of the minimum lease payments is the lesser of the lessee's incremental borrowing rate or the rate implicit in the lease (if known) the standard differentiates between sales-type leases and direct financing leases (from the lessor's perspective) 265 4 of 39 CMA Ontario, 2011

Lease Example On Jan 1, 20x2 you lease an asset with a fair value of $1,000,000 useful life = 10 years, RV at end of useful life = $100,000 lease term = 6 years, RV at end of lease term = $300,000 purchase option of $50,000 at end of lease term 1. Lessor wants to earn a 8% return, what is the lease payment? 2. Prepare the journal entries for first two years for the lessee. 3. How does the lease break out on the statement of financial position at the end of 20x2? 4. Assume now that there is a guaranteed residual value (no purchase option), lease term = 8 years, residual value = $200,000. Redo # 1 and 2. 266 Sales-Leaseback Transactions sale-leaseback: the property owner sells the property to another party and then leases back the property finance lease: any profits or losses are deferred and amortized over the lease term or economic life in proportion to the amortization of the leased assets; 267 5 of 39 CMA Ontario, 2011

Sales-Leaseback Transactions - cont d operating lease: if the transaction is established at fair value, any gain or loss shall be recognized immediately if below fair value, any gain or loss are recognized immediately except that, if the loss is compensated for by future lease payments at below market price, it shall be deferred and amortized in proportion to the lease payments over the period for which the asset is expected to be used. if above fair value, the excess over fair value shall be deferred and amortized over the period for which the asset is expected to be used. 268 Sale-Leaseback Example On December 31, 20x2 you sell and lease back a building that has a NBV of $20M (cost of $40M, and accumulated depreciation of $20M) for its FMV of $30M. The useful life is 20 years, the lease term is 20 years, salvage value of building at the end of 20 years is zero and the title transfers automatically at the end of the lease term. 1. Calculate the lease payment assuming the lessor requires a return of 8%. 2. Prepare all journal entries for 20x2 and 20x3 for the lessee. 269 6 of 39 CMA Ontario, 2011

Problem 23 Accounting for Leases The Connors Company (the lessee) entered into a lease transaction for the acquisition of equipment on December 31, 20x3. The relevant details of the lease agreement are as follows: Fair market value of equipment $500,000 Residual value at end of lease term 100,000 Residual value at end of useful life 50,000 Lease term Useful life of asset 7 years 10 years Connor s incremental borrowing rate 12% Interest rate implicit in the lease (known to lessee) 10% The Connors Company uses straight-line amortization for all of its assets. Required For each of the scenarios listed below 1. Calculate the lease payment that will be required by the lessor. 2. Determine the classification of the lease from the point of view of Connors Company. 3. Prepare the journal entries to account for this lease on the books of the Connors Company for the years 20x3 to 20x5. Assume that the first lease payment is due on December 31, 20x3. Scenario A the equipment reverts back to the lessor at the end of the lease term and the residual value is guaranteed. Scenario B the equipment reverts back to the lessor at the end of the lease term and the residual value is unguaranteed. Scenario C the lessee has the option of purchasing the asset at the end of the lease term for $20,000. 7 of 39 CMA Ontario, 2011

(14) Accounting for Non-Profit Organizations 270 NPO Financial Statements Statement of Financial Position Statement of Operations Statement of Changes in Net Assets (Statement of Retained Earnings) Statement of Cash Flows 271 8 of 39 CMA Ontario, 2011

Objectives of Financial Reporting focus primarily on the information needs of members, contributors and creditors: information about the entity s cost of service and how that cost was funded and in predicting the ability of the entity to meet its obligations and achieve its service delivery objectives information about how the management of the entity has discharged its stewardship responsibilities to those that have provided resources to the entity 272 Objectives of Financial Reporting cont d the objective of financial statements is to communicate information that is useful to members, contributors, creditors and other users. Consequently, financial statements provide information about: an entity s economic resources, obligations and net assets; changes in an entity s economic resources, obligations and net assets; and the economic performance of the entity. qualitative characteristics and elements of financial statements are the same as for the ASPE model 273 9 of 39 CMA Ontario, 2011

Definitions NPO: entities, normally without transferable ownership interests, organized and operated exclusively for social, educational, professional, religious, health, charitable or any other not-for-profit purpose a NPO s members, contributors and other resource providers do not, in such capacity receive any financial return directly from the organization 274 Financial Statement Presentation - General a clear and concise description of a NPO s purpose, its intended community of service, its status under income tax legislation and its legal form should be included as an integral part of its financial statements if fund accounting is used, a brief description of the purpose of each fund reported should be provided revenues and expenses should be disclosed at their gross amounts 275 10 of 39 CMA Ontario, 2011

More Definitions restrictions: stipulations imposed that specify how resources must be used only external restrictions matter restricted fund method - specialized type of fund accounting where restricted funds are reported as separate funds; usually includes a general fund, restricted fund(s) and an endowment fund deferral method - accounting for contributions when the restricted fund method is not used 276 Restricted Contributions most externally imposed restrictions are made explicit by the contributor, however they can be implicit. Signs that a contribution may be implicitly restricted: if the organization is unable to spend a contribution received in a current period, it is clear from the purpose for which the contributed was solicited by the organization, or the contributor is aware of the purposes for which the contribution will be used and would have recourse if the contributed resources were not used in the way specified. 277 11 of 39 CMA Ontario, 2011

Restricted Contributions cont d contributions received with instructions that they can be used for general operations and without any indication of the period in which they should be used or the specific operating expenses they are intended to fund would not be considered restricted 278 Contributions - Revenue Recognition Contributed Materials and Services contributed materials and services can be recorded only if the materials/services would otherwise have been purchased contributions should be measured at fair value at the date of contribution if fair value can be reasonably estimated 279 12 of 39 CMA Ontario, 2011

Contributions - Revenue Recognition Deferral vs. Restricted Fund Method Fund Accounting currently used? Yes No Objective? Show Restrictions Show Activities Restricted Fund Method Deferral Method 280 Contributions Revenue Recognition Deferral Method endowment contributions: direct increases in net assets (equity) restricted contributions for expenses of future periods: defer and recognize when the related expenses are recognized (as you would in a regular business) restricted contributions for the purchase of capital assets: deferred and amortized as revenue on the same basis as the amortization expense if for assets that are not amortized, recognize as a direct increase in net assets restricted contributions for expenses in the current period and unrestricted contributions should be recognized in the current period 281 13 of 39 CMA Ontario, 2011

Contributions - Revenue Recognition Deferral Method - Disclosure deferred contributions balances should be presented in the statement of financial position outside net assets an organization should disclose the nature and amount of changes in deferred contributions balances for the period 282 Fund Accounting fund accounting consists of a self-balancing set of accounts for each fund operated by the organization generally consists of a general fund, one or more specific funds organized around a function or restriction and an endowment fund provides a segregation of assets and a recognition of separate operations which pertain to those assets and classification of revenues and expenses by fund 283 14 of 39 CMA Ontario, 2011

Contributions - Revenue Recognition Restricted Fund Method general fund and restricted fund(s) purpose of a restricted fund: record the receipts and use of resources that are subject to restrictions all revenue reported in a restricted fund is externally restricted all unrestricted funds are reported in the general fund endowment contributions should be recognized as revenue of the endowment fund in the current period 284 Contributions - Revenue Recognition Restricted Fund Method restricted contributions for which a corresponding restricted fund is presented should be recognized as revenue of that fund in the current period restricted contributions for which no corresponding restricted fund is presented should be recognized in the general fund in accordance with the deferral method 285 15 of 39 CMA Ontario, 2011

Contributions Receivable a contribution receivable should be recognized as an asset when it meets the following criteria: the amount to be received can be reasonably estimated, and ultimate collection is reasonably assured when an NPO has recognized outstanding pledges and bequests in its financial statements, the following should be disclosed: the amount recognized as assets at the reporting date the amount recognized as revenue in the period 286 Capital Assets record at cost or FMV for assets contributed - if FMV undeterminable, record at nominal value write-downs: when a capital asset no longer has any long-term service potential, the excess of the carrying cost over the asset s residual value should be written-off (never to be reversed) nature and amount of contributed capital assets received should be disclosed information about contributed capital assets recognized at nominal value should be disclosed tangible capital assets purchased substantially below fair market value are recognized at fair value the difference is reported as a contribution 287 16 of 39 CMA Ontario, 2011

Capital Asset Exemption Small NPO s a small NPO whose average gross revenues (between the current and the past year) are less than $500,000 can opt to not follow the recommendations (i.e. does not have amortize assets, these can be expensed as purchased). The following must be disclosed: the policy followed in accounting for capital assets information about major categories of capital assets not recorded, including a description of the assets, and if capital assets are expensed when acquired, the amount expensed in the current period. an organization following the capital asset recommendations whose average revenues subsequently fall below $500,000 would have to continue applying the recommendations 288 Collections held by NPO s collections are defined as works of art, historical treasures or similar assets that are: held for public exhibition, education or research; protected, cared for and preserved; and subject to an organizational policy that requires any proceeds from their sale to be used to acquire other items to be added to the collection or for the direct care of the existing collection if the above definition is met, collections are excluded from the definition of capital assets 289 17 of 39 CMA Ontario, 2011

Collections held by NPO s cont d organizations can choose to either capitalize or expense the cost of collections (they could even choose to capitalize and amortize) the following disclosures are required: a description of the collection, the accounting policies followed with respect to the collection, details of any significant changes to the collection for the period the amount of expenditures on collection items in the period, and proceeds of any sales of collection items in the period and how the proceeds were used. 290 Reporting Controlled and Related Entities by NPO s the first step is to establish whether or not the reporting organization has control, significant influence or has an economic interest in another organization control is the continuing power to determine the strategic, operating, investing and financing policies without the co-operation of others significant influence is the ability to affect the strategic, operating, investing and financing policies of the entity (disclosure requirements only) 291 18 of 39 CMA Ontario, 2011

Reporting Controlled and Related Entities by NPO s cont d economic interest exists if: the other organization hold resources that must be used to produce revenue or provide services for the reporting organization, or the reporting organization is responsible for the liabilities of the other organization economic interest can be an indicator of either control or significant influence economic interest may exist without control or significant influence disclosure requirements only 292 Control control is presumed to exist if the reporting entity has the right to appoint the majority of the other entity s board of directors if not, the following characteristics taken together or individually can establish control: a significant economic interest, provisions in the other organization s bylaws or charter that cannot be changed without the reporting organization s consent and that limit the other organization to activities that provide future economic benefits to the reporting organization, or the other organization s purpose is integrated with that of the reporting organization so that the two organizations have common or complementary objectives 293 19 of 39 CMA Ontario, 2011

Reporting Controlled NPO s two options: consolidated financial statement or disclosure disclosure: total assets, liabilities and net assets revenues, expenses and cash flows in the three categories details of any restrictions on the resources of the controlled organization, and significant differences in accounting policies 294 Reporting Controlled NPO s cont d if the organization has control over a large number of individually immaterial organizations (i.e. local branches of the Canadian Red Cross), these may be excluded from consolidation/ disclosure provided that the reporting organization discloses the reasons why the controlled organizations have neither been consolidated nor included in the disclosure requirements 295 20 of 39 CMA Ontario, 2011

Reporting Controlled Profit Oriented Enterprises two options: consolidation or equity method if equity method, need to disclose: total assets, liabilities and shareholders; equity revenues, expenses, net income and cash flows in each of the three categories 296 Disclosure of allocated expenses by NPO s when allocations of fundraising and general support expenses have been made to other functions, the accounting policy disclosure should explain: the policies adopted for the allocation of expenses among functions, the nature of the expenses being allocated, and the basis on which such allocations have been made the amounts allocated from each of the two functions (fundraising and general support) and the amounts and the functions to which have been allocated, should be disclosed 297 21 of 39 CMA Ontario, 2011

Budgetary Control and Encumbrances some NPO s and most government organizations set up the approved budget in the accounts this allows actual expenditures to be tracked against budget approved expenditures (encumbrances) are recorded in the accounts also, the difference between the current + approved future expenditures and the budget is the free balance 298 NPO Example 1 A local club has provided us with a donation of $25,000 to purchase a minivan. How do we account for this? Would your answer be different if the local club had donated a minivan instead of the cash. 299 22 of 39 CMA Ontario, 2011

NPO Example 2 A volunteer currently provides an NPO with free bookkeeping services. This provides us with a savings of $3,000 per year. Do we have to do anything about this? 300 NPO Example 3 One of an NPO s benefactors has recently died and has donated $150,000 to the organization. The will stipulates that the interest income may be used at the organization s discretion, but the principal must be left intact. How do you account for this? 301 23 of 39 CMA Ontario, 2011

NPO Example 4 A NPO conduct a weekly bingo in one of the local community halls. The organizer is a volunteer and has been doing this for us for over 8 years now. He deposits the net bingo receipts in our bank account the day following the bingo. The total of these deposits are reported as bingo revenues the Statement of Operations. Is this correct accounting? 302 24 of 39 CMA Ontario, 2011

(15) Financial Statement Analysis 303 Financial Statement Analysis analysis of financial strength - liquidity solvency analysis of management performance profitability asset management 304 25 of 39 CMA Ontario, 2011

Analyzing the Statement of Financial Position - Liquidity liquidity analysis: likelihood of a company to satisfy its short-term obligations current ratio = current assets current liabilities quick ratio = (cash + marketable securities + accounts receivable) " current liabilities 305 Analyzing the Statement of Financial Position - Solvency (Financing) solvency - ability of a company to meet its long-term obligations debt-equity ratio = debt equity times interest earned = earnings before interest and taxes interest 306 26 of 39 CMA Ontario, 2011

Analyzing the Income Statement - Profitability (Performance) return on equity = net income average equity return on assets = operating income average assets sales return = operating income sales gross margin% = gross margin sales note: when dividing an income statement number into a statement of financial position number, the latter must be taken as an average 307 Analyzing the Income Statement - Asset Management total asset turnover = sales average assets days sales in accounts receivable = " "Average A/R (Average daily credit sales) accounts receivable turnover = 365 / days sales in accounts receivable or Average daily credit sales / Average A/R inventory turnover = COGS average inventory or Sales average inventory (if COGS is not disclosed) 308 27 of 39 CMA Ontario, 2011

Limitations of Ratio Analysis changes in ratios can only be interpreted by understanding the underlying economic events i.e. current ratio increases but you find out that a large accounts payable was settled by issuing a long-term note payable ratios may change as a result of non-economic events that affect the financial statements i.e. change in accounting method or estimate 309 Limitations of Ratio Analysis - cont d comparisons of a company s ratios with another company s or with industry averages involves certain restrictive assumptions that all companies being compared are: structurally similar use the same (or similar) accounting principles experience a common set of external influences 310 28 of 39 CMA Ontario, 2011

Problem 24 Financial Statement Analysis Comparative statements of financial position and income covering the last two fiscal years for Silver Corporation are reproduced below and on the next page. The market price of Silver's common shares was $20 per share on May 31, 20x2. Silver Corporation Statement of Financial Position May 31, 20x2 (in thousands of dollars) 20x2 20x1 20x0 Assets Current assets Cash $ 3,000 $ 2,000 $1,800 Short-term marketable securities 1,000 1,000 600 Accounts receivable (net) 14,000 11,000 10,600 Merchandise inventory 24,000 16,000 14,500 42,000 30,000 27,500 Property, plant and equipment - net 68,000 60,000 58,000 Long-term investments 10,000 10,000 4,000 $120,000 $100,000 $89,500 Liabilities and Shareholders' equity Current liabilities Accounts payable $ 5,000 $ 4,000 $3,400 Wages payable 1,000 1,000 800 6,000 5,000 4,200 Bonds payable, 10%, due 20x9 20,000 20,000 20,000 26,000 25,000 24,200 Shareholders' equity Common shares 25,000 25,000 25,000 Retained earnings 69,000 50,000 40,300 94,000 75,000 65,300 $120,000 $100,000 $89,500 29 of 39 CMA Ontario, 2011

Silver Corporation Statements of Income for the years ended May 31,20x2 (in thousands of dollars) 20x2 20x1 Sales (all made on credit) $200,000 $140,000 Cost of goods sold (120,000) (80,000) Gross profit 80,000 60,000 Selling and administrative expenses (30,000) (24,000) Depreciation expense (8,000) (6,000) Income before interest and income taxes 42,000 30,000 Interest expense (2,000) (2,000) Income before income taxes 40,000 28,000 Income tax expense (15,000) (11,000) Net income $ 25,000 $ 17,000 Required - Perform a financial analysis of Silver Corporation. 30 of 39 CMA Ontario, 2011

Problem 6 Statement of Cash Flow The comparative balance sheets for 2005 and 2004 and the income statement for 2005 are given below for Arduous Company. Additional information from Arduous's accounting records is also provided. Assets ARDUOUS COMPANY Comparative Balance Sheets December 31, 2005 and 2004 ($ in millions) 2005 2004 Cash $125 $81 Accounts receivable 200 202 Less: Allowance for doubtful accounts (10) (8) Investment revenue receivable 6 4 Inventory 205 200 Prepaid insurance 4 8 Long-term investment 156 125 Land 196 150 Buildings and equipment 412 400 Less: Accumulated depreciation (97) (120) Patent 30 32 Liabilities $1,227 $1,074 Accounts payable $50 $65 Salaries payable 6 11 Bond interest payable 8 4 Income tax payable 23 22 Notes payable 23 0 Bonds payable 297 275 Less: Discount on bonds (22) (25) Shareholders' Equity Common shares 525 495 Preferred shares 75 0 Retained earnings 242 227 $1,227 $1,074 31 of 39 CMA Ontario, 2011

ARDUOUS COMPANY Income Statement for the year ended December 31, 2005 ($ in millions) Revenues Sales revenue $410 Investment revenue 13 $423 Expenses Cost of goods sold 180 Salaries expense 65 Depreciation expense 12 Patent amortization expense 2 Bad debt expense 8 Insurance expense 7 Bond interest expense 28 Loss on disposal of equipment due to flood 18 Income tax expense 36 356 Net income $ 67 Additional information from the accounting records: a. During 2005, $6 million of customer accounts were written off as uncollectible. b. A machine originally costing $70 million that was one-half depreciated was rendered unusable by a rare flood. Most major components of the machine were unharmed and were sold for $17 million. c. The preferred shares of Tory Corporation was purchased for $25 million as a long-term investment. d. Land costing $46 million was acquired by issuing $23 million cash and a 15-percent, fouryear, $23 million note payable to the seller. e. A building was acquired by an issue of $82 million bonds payable. f. $60 million of bonds were retired at maturity. Required: Prepare the cash flow statement of Arduous Company for the year ended December 31, 2005. Present cash flows from operating activities by the direct method. 32 of 39 CMA Ontario, 2011

Problem 15 Liabilities Pride Music Emporium is a publicly accountable entity and carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Pride uses two sales promotion techniques - warranties and an incentive program - to attract customers. Musical instruments and sound equipment are sold with a one-year warranty for replacement of parts and labour. The estimated warranty cost, based on past experience, is 2% of sales. The incentive program is offered on the recorded and sheet music. Customers receive a coupon for each dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and $20 for an MP3 player. Pride pays $34 for each MP3 player and estimates that 60% of the coupons given to customers will be redeemed. The fair value of each MP3 player is $50. Pride s total sales for 20x2 are $7,200,000. Sales are $5,400,000 from musical instruments and sound reproduction equipment and $1,800,000 from recorded music and sheet music. Replacement parts and labour for warranty work total $164,000 during 20x2. A total of 6,500 MP3 players used in the incentive program are purchased during the year and there are 1,200,000 coupons redeemed in 20x2. The balances in the accounts related to the warranty and incentive program on January 1, 20x2 are as shown below. Required Inventory of MP3 Players $39,950 Deferred Revenues Inventive Program 99,200 Warranty Provision 136,000 Pride s Music Emporium is preparing its financial statements for the year ended December 31, 20x2. Determine the amounts that will be shown on the 20x2 financial statements for the following: 1. Warranty Expense 2. Warranty Provision 3. Reduction of revenues related to the incentive program 4. Inventory of MP3 Players. 5. Deferred Revenues Incentive Program 6. Net Sales as it would be presented on the statement of income. 33 of 39 CMA Ontario, 2011

Problem 16 Liabilities On March 1, 20x5 the Klimova Company issued bonds dated January 2, 20x5 with the following characteristics: Required Face value $20,000,000 Coupon rate 7.6% Yield to maturity 8% Maturity 20 years Coupon payment dates June 30, Dec 31 Company year end Dec 31 a) Prepare all journal entries for this bond issue for the year 20x5. Assume the effective interest method is used. b) Assume that on July 2, 20x14, the company repurchases 40% of the bond issue on the open market at 98. Write all journal entries for the year 20x14. c) Redo parts (a) and (b) on the assumption that Klimova is a private company subject to ASPE and opts to account for premiums and discounts on bonds payable using the straight line method. 34 of 39 CMA Ontario, 2011

Problem 17 Shareholders Equity Excerpts of the shareholders' equity section of P Ltd.'s December 31, 20x5, balance sheet follow: Capital Stock Authorized 500,000 common shares without par value 100,000 10% non-cumulative, non-voting preferred shares Issued and fully paid 300,000 common shares $ 300,000 50,000 preferred shares 200,000 Retained earnings 1,100,000 Total shareholders' equity $1,600,000 During 20x6, P Ltd. engaged in the following transactions: 1) June 30 - Common share dividend of $1 per share was declared. 2) July 31-100,000 common shares were issued for cash consideration totaling $150,000. 3) Aug. 31-10% stock dividend declared on common stock. The per share market value of common stock on August 31, 20x6, was $1.50. (assume that this market price is after the announcement of the stock dividend i.e. it has been adjusted for the dilutive effects of the stock dividend) 4) Sep. 30 - Acquired and cancelled 50,000 P Ltd. common shares for $75,000. 5) Oct. 31 - Annual preferred share dividends were declared and paid. 6) Dec. 30 - Common share dividend of $1 per share was declared. 7) Dec. 31 - The common stock was split 2 for 1. P Ltd. reported 20x6 net income in the amount of $800,000. Based solely on the transactions and information above, what is P Ltd.'s closing retained earnings balance on December 31,20x6? 35 of 39 CMA Ontario, 2011

Problem 20 Accounting for Pensions The Empey Company has a defined benefit pension plan for its employees. The pension plan information for the year 20x4 is as follows: January 1, 20x4 amounts - Defined benefit obligation $3,500,000 Plan assets at market value 2,700,000 Pension account balance 300,000 cr. Estimated average remaining service life 10 years Current service cost $300,000 Contributions made to pension plan 450,000 Benefits paid to retirees 250,000 Actual return on pension plan assets 190,000 Discount rate and expected rate of return on plan assets 6% The actuary audited the pension plan on December 31, 20x4 and calculated the defined benefit obligation at $4,100,000. What is the amortization of actuarial gains and losses for the year ended December 31, 20x5? Assume that the estimated average remaining service life at January 1, 20x5 is 10 years. Assume that the Empey company uses the defer and amortize approach. 36 of 39 CMA Ontario, 2011

Problem 21 Earnings Per Share Barnes Inc. has the following capital structure as at December 31, 20x8: Number of outstanding common shares 336,000 Number of cumulative convertible preferred shares, $3 10,000 9% convertible bonds $1,000,000 Additional information: 1. On September 1, 20x8, Barnes issued 36,000 additional common shares of common stock for $40 each. 2. Net income for the year ended December 31, 20x8 was $750,000. 3. Preferred share dividends have not been declared since December 31, 20x6. 4. The preferred shares are convertible at the rate of 2 common for each preferred share. 5. The 9% convertible bonds are convertible into 40 shares of common for each $1,000 bond. 6. The following were also convertible on December 31, 20x8: - warrants to purchase 20,000 shares of common stock at $62 per share, and - unexercised stock options to purchase 30,000 shares of common at $20 7. No actual conversions occurred during 20x8. 8. The company is subject to a tax rate of 40%. 9. The market price of the stock averaged $60 during the year. Required - Compute all earnings per share figures that should be disclosed by Barnes in its December 31, 20x8 financial statements. 37 of 39 CMA Ontario, 2011

Problem 22 - EPS Rivera Ltd. reported net income of $13,500,000 for the year ended December 31, 20x5. The following information is available: there were 3,000,000 common shares outstanding at December 31, 20x5 the company has a convertible bond issue outstanding with the following characteristics: Face Value $10,000,000 Coupon Rate 5.6% Yield to maturity on date of issue 4.8% Interest payment dates June 30 and Dec 31 Bonds mature on June 30, 20x12 Bond conversion ratio each $1,000 bond is convertible into 40 common shares. the company has a convertible, cumulative preferred share issue of $25,000,000 paying a dividend of 5%. There are 100,000 shares outstanding. The conversion ratio is 2 common shares for each preferred share. As at December 31, 20x5, the preferred dividends are in arrears 3 years. also outstanding are 200,000 noncumulative preferred shares in the amount of $10,000,000. The stated dividend on these preferred shares is 7%. The dividends on these shares were declared in 20x5. the following common share transactions took place during the year: April 1 Issue 200,000 shares June 1 2:1 split October 1 Shares retired and cancelled 50,000 shares the company has two series of stock options outstanding: - Series G: 200,000 options, exercise price $12 - Series H: 150,000 options, exercise price $22 the average market price of the company s stock in 20x5 was $18 the tax rate is 40% all convertible share conversion ratios are adjusted in the case of a stock split or stock dividend. Required Calculate all relevant EPS numbers for the year ended December 31, 20x5. 38 of 39 CMA Ontario, 2011

Week 6 Homework File Suggested study plan for this week: Primary List Secondary List 1. Review what we did in class on Saturday. 2. Leases MCQ, Problems 1, 2, 3, 4 Problems 5, 6, 7, 8 3. Accounting for NonProfit Organizations MCQ, Problems 1 Problem 2 4. Financial Statement Analysis Problems 1, 2, 5, Problems 3, 4, 6 Note that there is no quiz due this week. 39 of 39 CMA Ontario, 2011