E. Analysis of Core Earnings (15 points) M Co. designs, manufactures and markets various toy products worldwide through sales to retailers and directly to consumers. Below is an income statement for M for years 2022, 2021 and 2020. The company has reported a strong turnaround in profitability. Notes to the financial statements reveal the following information. 1 Discontinued Operations - In 2009 M acquired LCo. In 2020 M's Board of Directors committed to dispose of the L Company and its consumer software operations. In 2020 the L Company was reported as a discontinued operation and the company was sold to G Co. in October, 2022. 2.Changes in Depreciation of Fixed Assets - There were no purchases or sales of fixed assets from 2020- 2022. In 2022, the company changed its estimates of the expected life of depreciable fixed assets from an average of 15 years to an average of 20 years. Total depreciation expensed in 2022, 2021 and 2020, was $ 200, $300 and $ 300, respectively. 3. Pension costs- M Co. has a defined benefit pension plan. In its footnotes concerning its pension plan, M Co. reported pension expense in the amount of $ (4), 40, and 40 in 2022, 2021, and 2020, respectively. All components of pension expense in 2020 and 2021 were the same as for 2022, except for expected return on pension investments. In 2022, the estimated rate of return on plan assets was substantially increased. Service cost $30 Contributions to pension plan 142 Benefits paid to retirees 150 Plan assets (fair value), January 1 700 Plan assets (fair value), December 31 800 Actual return on plan assets 20 Pension Benefit Obligation (PBO), January 1 450 PBO, December 31 550 Discount rate 10% 12% Long-term expected return on plan assets *Assume there was no net expense reported for unamortized prior service cost or actuarial costs. 6) Inventory- The company uses LIFO to cost its products. If it had used FIFO, inventories would have been 750 million and 300 million, at year-end, 2021 and 2022, respectively. During 2022, the company discontinued several older lines of toys. Most of the reduction in this LIFO reserve resulted from a liquidation of these old toy lines. E. Analysis of Core Earnings (15 points) M Co. designs, manufactures and markets various toy products worldwide through sales to retailers and directly to consumers. Below is an income statement for M for years 2022, 2021 and 2020. The company has reported a strong turnaround in profitability. Notes to the financial statements reveal the following information. 1 Discontinued Operations - In 2009 M acquired LCo. In 2020 M's Board of Directors committed to dispose of the L Company and its consumer software operations. In 2020 the L Company was reported as a discontinued operation and the company was sold to G Co. in October, 2022. 2.Changes in Depreciation of Fixed Assets - There were no purchases or sales of fixed assets from 2020- 2022. In 2022, the company changed its estimates of the expected life of depreciable fixed assets from an average of 15 years to an average of 20 years. Total depreciation expensed in 2022, 2021 and 2020, was $ 200, $300 and $ 300, respectively. 3. Pension costs- M Co. has a defined benefit pension plan. In its footnotes concerning its pension plan, M Co. reported pension expense in the amount of $ (4), 40, and 40 in 2022, 2021, and 2020, respectively. All components of pension expense in 2020 and 2021 were the same as for 2022, except for expected return on pension investments. In 2022, the estimated rate of return on plan assets was substantially increased. Service cost $30 Contributions to pension plan 142 Benefits paid to retirees 150 Plan assets (fair value), January 1 700 Plan assets (fair value), December 31 800 Actual return on plan assets 20 Pension Benefit Obligation (PBO), January 1 450 PBO, December 31 550 Discount rate 10% 12% Long-term expected return on plan assets *Assume there was no net expense reported for unamortized prior service cost or actuarial costs. 6) Inventory- The company uses LIFO to cost its products. If it had used FIFO, inventories would have been 750 million and 300 million, at year-end, 2021 and 2022, respectively. During 2022, the company discontinued several older lines of toys. Most of the reduction in this LIFO reserve resulted from a liquidation of these old toy lines
