Background

Castle Home Builders Co$.($CHB$)$ is a public company that was incorporated on January $2,2023.$ The company began operations on January $2,2023.$ CHB specializes in designing and building high end homes. The company was founded by Casey Castle, President and CEO. Its business motto is $$Our house, your castle.$.$ In Casey$$s words, $$we use the best designers, materials and trades people to create to create dream homes for our customers$.$

Building costs can vary enormously depending on the options and features chosen by the customer. A typical cost for CHB$$s homes is about $$1$ million.

$$We$$re doing great$$ says Casey, $$and I expect business to double in size in $5$ years. But something is bothering me$.$ While business is booming, I suspect that our accounting is not as good as it should be$.$ We have a dedicated and enthusiastic accounting staff, but they are somewhat inexperienced.$$

As a public company CHB is required to provide audited financial statements to stakeholders. As a CPA, you have been hired to prepare the financial statements for the year ended December $31,2023.$

Casey would like you to tell him what accounting items were not treated properly. He wants you to tell him what the proper accounting treatment should be$.$ Of course, you will have to provide the necessary correcting journal entries to the accounting department.

$$Yes$,$ I can do all that$,$ you respond. $$Is there anything else that I need to do$?$

$$Yes$,$ says Casey. $$First$,$ we need to make sure the Earning Per Share $($EPS$)$ amounts are properly calculated and presented in the income statement. Our accountant has never had to compute EPS before and so it$$s likely that the amount is incorrect. You know how important this number is to our investors. Second, our business is growing rapidly, and we will need additional capital to expand. We$$re not sure whether it would be wiser to take out an additional loan from the bank or whether we should issue more common shares. It would be helpful if you would indicate what the advantages and disadvantages are for each option.$$

$$Yes$,$ of course$$ you respond.

With this mandate you spend the week talking to accounting department personnel. Your findings are summarized in Exhibit $1.$

Required:

Casey Castle, President and CEO of Castle Home Builders Co$.,$ has asked you to provide him with a report addressing numerous items. Prepare the requested report to Casey making to sure to include the following:

$1.$ Discuss the accounting issues of concern. Specifically, identify each significant issue where the accounting treatment was incorrect $,$ why was the accounting treatment was wrong according to IFRS, and discuss what the proper treatment is$.$ Use Exhibit $3$ on pages $10-12.$

$2.$ Based on $(1)$ above, prepare the appropriate correcting entries for the errors. Use Exhibit $4$ on pages $13-14.$

$3.$ Prepare the corrected financial statements once you have the entries in $(2)$ above completed. Use the formatted Excel spreadsheet posted to your Moodle site.

$4.$ Compute the required earnings per share amounts to be included on the income statement. Use Exhibit $5$ on page $15.$

$5.$ Finally, provide a summary of the advantages and disadvantages of taking out a bank lEXHIBIT $1$

NOTES FROM DISCUSSIONS WITH ACCOUNTING PERSONNEL

$1.$ Capital Structure of CHB

i$.$ The company issued $100,000$ common shares on January $1,2023.$ Another $60,000$ common shares were issued on July $1,2023.$ On September $1,2023$ the company repurchased $30,000$ of its own shares.

ii$.50,000$ warrants were issued on May $1,2023.$ Each warrant permits the holder to purchase one common share of CHB for $$20$ any time before December $31,2027.$

iii. Stock options were granted to management on October $1,2023$ for the purchase of $10,000$ common shares for a price of $$50$ per share any time before December $31,2028.$

iv$.$ On June $30,2023$ the company issued $$5,000,000,6\%,$ convertible bonds at par value. Each $$1,000$ bond is convertible into $20$ common shares.

v$.$ In $2023$ the average market value of the common shares was $$40$ per share.

The accounting has been done properly for the above items and no dilutive securities were converted into common shares during $2023.$

$2.$ The company$$s tax rate for $2023$ is $20\%.$

$3.$ Customers pay a deposit before construction begins on their homes that is applied to the home price as construction proceeds. At December $31,2023$ deposits made on houses that will start construction in $2024$ amounted to $$2,000,000.$ The deposits were recorded as:oan and issuing more common shares. Use Exhibit $6$ on page $16.$

DEBIT CREDIT

Cash $2,000,000$

Sales revenue $2,000,000$

$($to record deposits on homes not yet built$)$

All other deposits received in $2023$ were correctly recorded as part of $2023$ sales.

$4.$ CHB provides a one$-$year warranty against defects on its homes. Customers can purchase an extended warranty costing $2\mathrm{.}5\%$ of the home price for an additional two years. Based on his experience in the home construction industry, Casey estimates that req