1. Discuss the areas where the accounting was not done properly and make sure to indicate what should have been done instead.
2. Based on 1. above, prepare the appropriate correcting journal entries to correct the errors.
3. Prepare the corrected financial statements once you have done the entries in 2. above.
4. Compute the required earnings per share amounts to be included in the income statement.

Based on that information below:

1. Wally Watchmaker requires financial statements to be prepared for the year ended December 31, 2020, using IFRS standards. The auditors will want to see these in conjunction with their audit work early in 2021. The accounting department has prepared draft financial statements that can be found on EXHIBIT-1 (attached pictures below). But you recall that numerous accounting issues may have not been handled properly by the accounting staff. Wally would like you to tell him what accounting areas were not treated properly in accordance with IFRS. You will need to identify what areas the accounting was deficient, and you will need to make corrections before final, accurate financial statements can be provided to the auditors.

2. Wally is particularly keen to make sure that the Earning Per Share (EPS) amounts are properly calculated and presented in the income statement. "Our accountant is quite inexperienced and has never calculated EPS before and so it's likely that the amount has been incorrectly calculated. As you know, this number is hugely important and so we need to get it absolutely right", states Wally.

1. Capital Structure of CCC

i. The company issued 500,000 common shares for $10 a share on January 2, 2020, the date of its incorporation. Another 340,000 common shares were issued for $30 each on March 1, 2020. On November 1, 2020, the company repurchased 60,000 of its own shares.

ii. 100,000 warrants were issued for $20 each on April 1, 2020. One warrant permits the owner to purchase one common share of CCC for $30 any time before December 31, 2024.

iii. On September 1, 2020 the company issued $2,400,000, 5%, convertible bonds at par value. Each $1,000 bond is convertible into 20 common shares.

iv. The average market value of the common shares in 2020 was $40 per share based on private sales of the shares during the year.

v. No dilutive securities were converted into common shares during 2020.

vi. Note that accounting for all of the above items has been done properly.

4. The company's tax rate for 2020 is 20%. New tax laws were enacted at the end of 2020 that will result in a tax rate of 30% for 2021 and later years.

5. CCC intends to have the best warranty terms in the watch industry. Every watch sold has a complete three warranty. Customers have the option to buy an extended warranty for an additional three years. The cost to the customer for the extended warranty is 5% of the watch sales price. The total amount received in 2020 for the extended warranties was $300,000. Actual repairs made to watches in 2020 amounted to $50,000.

Based on past sales, Wally estimates that required repairs on the original three-year warranty will be 2% of sales revenue.

Actual correct warranty expense is 2% x 10,000,000 = 200,000

During 2020, the accountant made the following entries for warranties:

Warranty expense 50,000

Cash 50,000

(to record actual warranty repairs made on defective watches)

Cash 300,000

Extended warranty revenue 300,000

(to record amount received for extended warranties)

You remind yourself that estimated warranty expenses are not permitted to be deducted on the tax return. Only actual amounts paid under warranty coverage can be deducted as an expense on the tax return.

6. CanLux Connected Corporation entered into a 15-year lease agreement on January 1, 2020, for a head office. The company is required to make annual payments of $500,000 starting on January 1, 2020. The remaining economic life of the building is 35 years, at which time there will be a $3,000,000 expected residual value. CCC has the option to purchase the building at the end of the lease for $5,000,000, considerably less than the expected fair value at that time. A real estate appraiser determined that the fair value of the building was $7,233,800 on January 1, 2020. The implicit interest rate in the lease is 6% and CCC has an incremental borrowing rate of 7.5%. The only lease accounting entry made by Christina Credit in 2020 was:

Rental expense 500,000

Cash 500,000

(to record first payment)

7. Two former employees of CCC, Benny Bruiser, and Doogie Daze, started legal action against the company for wrongful termination. Benny is seeking $300,000 and Doogie wants $200,000. Legal counsel for CCC believes that Benny is likely to get around $30,000 but is unable to determine the outcome for Doogie's lawsuit. The lawsuits will be heard in court sometime during 2021. Christina Credit recorded the following entry for the loss:

Expense due to lawsuit ($300,000+$200,000) 500,000

Liability due to wrongful termination 500,000

(to record the maximum possible loss)

Note that for tax purposes, amounts for lawsuit losses can only be claimed as an expense on the tax return when the actual payment is made and not before.

8. The following capital assets have been correctly recorded and depreciated in 2020:

Capital asset Cost Accumulated Depreciation Book value at Dec. 31, 2020

Manufacturing facilities $ 9,000,000 $ 750,000 $ 8,250,000

Office equipment 1,200,000 50,000 1,150,000

Vehicles 400,000 75,000 325,000

Total $ 10,600,000 $ 875,000 $ 9,725,000

Note for 2020: CCA on the above assets was $1,675,000.

9. In calculating income tax expense, Daniel Debit simply multiplied the 2020 tax rate (20%) by the income before tax amount on the original income statement.

STATEMENT OF RETAINED EARNINGS For the year ended December 31, 2020 2020 Retained earnings, January 1, 2020 $ 0 Net income 860,000 Retained earnings, December 31, 2020 $ 860,000 BALANCE SHEET As at December 31, 2020 2020 Assets Current assets Cash* $ 1,850.000 Accounts receivable * 1,600,000 Inventory * 8,000,000 11,450,000 Capital assets (net) (see note 9)* 9,725,000 Total assets $ 21,175,000 Liabilities and shareholder's equity Current liabilities Accounts payable $ 250,000 Accrued liabilities* 450,000 700,000 Long-term liabilities Liability due to lawsuits (see note 8) 500,000 Long-term bank loan* 600,000 Convertible bonds payable (see Exhibit 1) * 2,400,000 3,500,000 Total liabilities 4,200,000 Shareholders' equity Common shares, 780,000 shares issued and outstanding * 14,115,000 Contributed surplus - 200,000 warrants (see Exhibit 1) 2,000,000 Retained earnings 860,000 Total shareholder's equity 16,975,000 $ 21,175,000 * The accounting for these items on the balance was done correctly. STATEMENT OF RETAINED EARNINGS For the year ended December 31, 2020 2020 Retained earnings, January 1, 2020 $ 0 Net income 860,000 Retained earnings, December 31, 2020 $ 860,000 BALANCE SHEET As at December 31, 2020 2020 Assets Current assets Cash* $ 1,850.000 Accounts receivable * 1,600,000 Inventory * 8,000,000 11,450,000 Capital assets (net) (see note 9)* 9,725,000 Total assets $ 21,175,000 Liabilities and shareholder's equity Current liabilities Accounts payable $ 250,000 Accrued liabilities* 450,000 700,000 Long-term liabilities Liability due to lawsuits (see note 8) 500,000 Long-term bank loan* 600,000 Convertible bonds payable (see Exhibit 1) * 2,400,000 3,500,000 Total liabilities 4,200,000 Shareholders' equity Common shares, 780,000 shares issued and outstanding * 14,115,000 Contributed surplus - 200,000 warrants (see Exhibit 1) 2,000,000 Retained earnings 860,000 Total shareholder's equity 16,975,000 $ 21,175,000 * The accounting for these items on the balance was done correctly