Case Study Need

3. Every watch sold has a complete two-year warranty. Customers have the option to buy, for an amount equal to 10% of the watch's sales price, an extended warranty for an additional four years of coverage. The total amount received from customers in 2023 for extended warranty protection was $1,000,000. Costs incurred in 2023 for repairs made under the two-year basic warranty amounted to $300,000. Based on industry standards, the company estimates that repairs on the original two-year warranty will be 2% of sales revenue. During 2023 , the following entries for warranties were recorded: NOTE FOR TAX PURPOSES: Warranties can only be deducted as an expense for income tax purposes when the actual repair costs are incurred and not for the estimated future repair expense amount. 4. Details about shareholders' equity and dilutive securities: i. The company issued 120,000 common shares on January 2, 2023, the date of its incorporation. Another 420,000 common shares were issued on April 30, 2023 and 180,000 shares were issued on September 1, 2023. ii. 50,000 warrants were issued on June 30,2023 for $20 per warrant. Each warrant permits the owner to purchase two common shares of BWCC for $40 per share any time before December 31, 2025. iii. Options were issued at no cost to employees on August 31, 2023, permitted the holders to purchase 40,000 common shares for $60 per share any time before December 31, 2026. iv. On March 31, 2023 the company issued $10,000,000,6%, convertible bonds at par value. Each $1,000 bond is convertible into 20 common shares. v. The average market value of the common shares in 2023 was $100 per share. vi. No dilutive securities were converted into common shares during 2023. vii. The journal entries for items (4i,iv.) has been done correctly. 5. The company's income tax rate for 2023 is 15%. The income tax expense on the preliminary income statement was calculated by multiplying the income before tax amount by 15% 6. The Ball Watch Company of Canada signed a 10-year lease on January 2, 2023 for its state-of-the-art watch manufacturing equipment. Annual rental payments are $1,000,000 each January 2, starting January 2, 2023. The interest rate implicit in the lease is 6%, while BWCC has an incremental borrowing rate of 7%. An appraisal showed the equipment was worth $7,802,000 at the time the lease was signed. The equipment's economic life is estimated to be 10 years, with a zero-residual value. BWCC uses the straight-line method of depreciation. The only entry made in 2023 for the lease was for the payment made on January 2, 2023. 7. Three former employees of BWCC, all brothers, - Nick Jonas, Joe Jonas and Kevin Jonas commenced legal action against the company for various reasons: - Nick is seeking $60,000 claiming the company broke its obligation to hire him as a spokesperson for the company. - Joe is suing for $10,000 for an unpaid bonus he claims he should have received. - Kevin is seeking $80,000 for a workplace injury caused by the company's negligence. The company's legal counsel believes that Nick and Joe will probably not win their cases. Further, legal counsel believes Kevin will probably get anywhere from $40,000 to $80,000 on his claim. The three cases are expected to go to trial sometime in 2024. The following entry was made to record the loss for the lawsuits: NOTE FOR TAX PURPOSES: Lawsuit losses can only be claimed as an expense on the tax return when the actual payment is made and not for estimates made. 8. The following capital assets (not including the leased equipment noted in item 6 ) have been correctly recorded and depreciated in 2023: NOTE FOR TAX PURPOSES: CCA allowed to be deducted on the 2023 taX return for these capital assets is $2,500,000. DO NOT CALCULATE CCA ON THE LEASED EQUIPMENT NOTED IN ITEM 6 AS THE LESSEE CANNOT CLAIM CCA ON THE TAX RETURN FOR LEASED ASSETS. Other items for tax purposes: a. A$250,000 in certain expenses are not deductible for tax purposes. b. $100,000 dividends were received in 2023 and are non-taxable. c. Included in other expenses is a $100,000 capital loss, only one-half of which is deductible for tax purposes. d. Recreational fees for the president at the Edmonton Petroleum club for $25,000 are not deductible for tax purposes. Required: Taro Tanaka, President and CEO of The Ball Watch Company of Canada, has asked you to do the following: 1. Based on your findings, prepare the necessary correcting entries for the errors made and the adjusting journal entries that should have been prepared at year end from your findings. Use the general journal sheets provided to you in Appendix 2, on pages 17 and 18 for these entries. To compute the tax expense, prepare a reconciliation between accounting income and taxable income on page 19. 2. Compute the required earnings per share amounts to be included on the income statement for the year ended December 31, 2023. Use Appendix 3 on page 20 for your answer. 3. Prepare a memo to Taro discussing the areas where the accounting treatment done improperly according to IFRS and what the proper accounting treatment should be. He also wants you to indicate why the treatment is not acceptable and what the general impact was on the financial statements once the corrections and adjustments were made in item 1 above. Your report should be about three double spaced pages, should avoid using accounting jargon such as "journal entries", "debit, credit", "matching principle", "revenue recognition principle" and so forth as these terms are generally meaningless to a nonaccountant. Use Exhibit 3 on pages 2123 for your memo. 4. Prepare the corrected financial statements once you have done the entries in 1 above. Use the formatted excel spreadsheet on your Moodle site, as this will reduce your work considerably. The excel spreadsheet is formatted to compute the correct financial statement amounts once the adjustments are entered. APPENDIX 1 - PRELIMINARY FINANCIAL STATEMENTS INCOME STATEMENT For the year ended December 31, 2023 2023 Sales $60,000,000 Cost of goods manufactured and sold Gross margin 30,000,00030,000,000 Expenses Wage expense 8,000,000 Research and development expenses Depreciation expense (see note 8 on page 12) Interest expense Rent expense on leased equipment (see note 6 on page 11) Expense due to lawsuits (see note 7 on pages 11) Warranty expense (see note 3 on page 10) Office expenses Total expenses 5,000,00022,650,0007,350,000 Other revenue - extended warranty revenue (see note 3 on page 10) - dividend revenue (see note 8 page 12) Income before income tax expense Income tax expense (15%$8,450,000) (see note 5 on page 12) Net income Earnings per share $7,182,500720,000 shares \begin{tabular}{ll} \hline \hline$9.98 \\ \hline \hline \end{tabular} APPENDIX 1 - PRELIMINARY FINANCIAL STATEMENTS - CONTINUED STATEMENT OF RETAINED EARNINGS - For the year ended December 31, 2023 THE STATEMENT OF FINANCIAL POSITION - December 31, 2023 2023 ASSETS CURRENT ASSETS Cash* Accounts receivable * Inventory * Total current assets CAPITAL ASSETS (net) (see note 8 on page 12) 3,100,000,000 Total assets LABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable * $4,200,000 Accrued liabilities 3,700,000 Liability due to lawsuits (see note 7 on page 11) Current tax liability Total current liabilities NON-CURRENT LIABIUITIES Long-term bank loan* - The accounting for these items was done correctly