EXHIBIT 1 NOTES FROM DISCUSSION WITH NANCY NUMBERS ON SIGNFICANT ISSUES 1. Capital Structure of DTI The company issued 200,000 common shares for $10 a share on December 20, 2018. Another 50,000 common shares were issued for $20 each on April 1, 2019. On October 1, 2019 the company repurchased 10,000 of its own shares. 25,000 warrants were issued for $10 each on May 1, 2019. One warrant permits the owner to purchase one common share of DTI for $50 any time before December 31, 2022. iii. On June 30, 2019 the company issued $5,000,000,6%, convertible bonds at par value. Each $1,000 bond is convertible into 20 common shares. The accounting has been done properly for the above items and no convertible securities were converted into common shares during 2019. 2. The company's tax rate for 2019 is 30%. New tax laws were enacted at the end of 2019 that will result in a tax rate of 25% for 2020 and later years Also, in 2019 the average market value of the common shares was $25 per share. 3. DTT management maintains the highest standards in the renovation industry. Every project completed by the company has a one-year warranty that covers parts and labor for defects that need to be corrected. The customers have the option to purchase an extended warranty for an additional two years. The cost to the customer for the extended warranty is 3% of the project's contract revenue. Based on his extensive experience in the renovation industry, Carl estimates that required repairs on the basic one-year warranty will amount to 2% of the actual contract revenue for 2019. In reviewing the accounting records provided by Nancy, CPA noted the followed items: 1. Contract revenue earned on renovation projects for 2019 is $15,000,000. 2. Actual repair work done under the basic one-year warranty was $75,000 3. Customers on which DTI earned $6,000,000 in contract revenue decided to purchase the extended two-year warranty. The amount paid in total for the extended warranties was 3% X $6,000,0000 - $180,000. The accountant Daniel Debit made the following journal entries for the warranty related items: 6 | Page NOTES FROM DISCUSSION WITH NANCY NUMBERS ON SIGNFICANT ISSUES - coat'd DEBIT CREDIT Warranty expense 75.000 Cash (to record warranty repairs done) Cash 180.000 Contract revenue (to record the amount received for extended warranties) A former employee of DTI, Herschel Hurt, initiated legal action against the company for injuries incurred while doing renovation work. The lawsuit seeks $250,000 in damages. DTI's lawyer believes that the former employee will probably win the case at an estimated amount of $50,000. Daniel Debit remembered something about the conservatism principle when he took his accounting course several years ago and so he recorded the following journal entry: DEBIT CREDIT 250,000 250,000 Expense due to lawsuit Liability due to injury claims (to record the expense on the amount claimed in lawsuit) 5. Designed to Impress Corporation entered into a 15-year lease agreement on January 1, 2019 for a building where its offices are located. The company is required to make annual payments of $400,000 starting on January 1, 2019. The remaining economic life of the building is 25 years, at which time there will no expected residual value. DIT has the option to purchase the building at the end of the lease for $500,000, considerably less that the expected fair value at that time. A real estate appraiser determined that the fair value of the building was $3,855,315 on the date the lease was signed. The implicit interest rate in the lease is 8% and DIT has an incremental borrowing rate of 10%. The accounting entry made by Daniel Debit was: DEBIT CREDIT Rental expense 400,000 Cash 400,000 (to treat the lease as an operating lease and record payment) 7] Page NOTES FROM DISCUSSION WITH NANCY NUMBERS ON SIGNFICANT ISSUES - Conta 0. Capital assets were purchased on January 2 2019 and the correct depreciation expense amounts the book value amounts for all assets have been recorded in the financial statements. Cost Carrying value at December 31, 2019 Accumulated Depreciation Capital Assets purchased $ 500,000 $ 25,000 $ 475,000 Office furniture 315,000 35,000 350,000 Computer equipment 20,000 130,000 150,000 Vehicles S 920,000 S 1,000,000 $ 80,000 7. In calculating income tax expense, Daniel Debit simply multiplied the 2019 tax rate (30%) by the income before tax amount on the draft income statement. Additional information obtained from Nancy to assist in calculating the tax expense amount follows: i. ii. The company paid a hefty fine for $5,000 in 2019 which is not deductible for tax purposes. The company paid $15,000 in 2019 for Carl Carpenter's membership at a private golf club. This amount is not deductible for tax purposes Capital Cost Allowance (CCA) for 2019 is $280,000. iii. You remind yourself that there may be other items mentioned previously that will affect the income tax expense and income tax payable amounts. incorrectly by your accoun for things like calculating the earnings per share and for pointing outu . issuing more shares versus borrowing more money? "I knew you would likely ask for this information responds Nancy. "Here, I have it all for you" said Nancy as she points to the papers on her desk. You spend some time going over the paperwork with Nancy who courteously answered all your questions as you write away. Late in the afternoon you complete your work. You thank Nancy for her assistance and head out the door with several folders full of schedules and notes from your time with Nancy (for details refer to the exhibits on pages 5 - 18). Required: Carl Carpenter, President and CEO of Designed to Impress Corporation, has asked you to provide him with a report addressing numerous items. Prepare the requested report to Carl making to sure to include the following: 1. Discuss the accounting issues of concern. Specifically, identify each significant issue where the accounting was done wrong, why was the accounting treatment wrong according to IFRS, and discuss what should have been done correctly instead. You can start your report in Exhibit 3 on page 11. 2. Based on (1) above, prepare the appropriate correcting a entries to adjust for the errors. There are also adjusting entries to prepare as well at year end. You can use Exhibit 4 on pages 12 and 13 to prepare these entries. 3. Prepare the corrected financial statements once you have the entries in (2) above completed. Use the templates given in Exhibit 5 on pages 14 - 16 to efficiently do your work. 4. Compute the required earnings per share amounts to be included on the income statement. Use Exhibit 6 on page 17. 5. Finally, provide a summary of the advantages and disadvantages of taking out a bank loan, issuing. preferred shares or issuing more common shares. Use Exhibit 7 on page 18. 4 Page EXHIBIT 2 DRAFT FINANCIAL STATEMENTS PREPARED BY DANIEL DERIT INCOME STATEMENT For the year ended December 31, 2019 (naudited) Contract revenue (includes extended warranty item noted in Exhibiti, note 3) $ 15,180.000 Contract expenses 10,180.000 Gross margin 5.000.000 Expenses Advertising, promotion, and insurance expense 140,000 Depreciation expense (see Exhibit I, note 6) 80,000 Interest expense 195,000 400,000 Rental expense on lease see Exhibit I, note 5) Expense due to lawsuit (see Exhibit 1, note 4) 250.000 Warranty expense 75.000 Wage and salary expense 2,000,000 Total expenses 3,140,000 1,860,000 Income before taxes Income tax expense (30% x $1,860,000) (see Exhibit 1, note 7) 558,000 Net income $ 1,302,000 Earnings per share $1,302,000+ 240,000 shares 5.43 STATEMENT OF RETAINED EARNINGS For the year ended December 31, 2019 (unaudited) 2019 Retained earnings, January 1, 2019 Net income 1,302,000 Retained earnings, December 31, 2019 $ 1,302,000 9 Page 2019 EXHIBIT 2 DRAFT FINANCIAL STATEMENTS - cont'd BALANCE SHEET As at December 31, 2019 (unaudited) Assets Current Cash Accounts receivable from clients Inventory of incomplete renovation projects Prepaid insurance 438,000 1,400,000 7.954,000 80,000 14,672,000 920,000 $ 10,792,000 Capital Assets (net) (see Exhibit 1, note 6) Total assets Liabilities and shareholder's equity Current liabilities Accounts payable to subcontractors Accrued liabilities and liability due to injury claim (see Exhibit 1, item 3) 185,000 850,000 1,035,000 325,000 Long-term liabilities Long-term bank loan Convertible bonds payable (see Exhibit 1, note 1) 5,000,000 5,325,000 6,360,000 Total liabilities Shareholders' equity Common shares, 240,000 shares issued and outstanding * Contributed surplus - 25,000 warrants (see Exhibit 1, note 1) 2,880,000 250,000 Retained earnings 1,302,000 Total shareholder's equity 4,432,000 $ 10,792,000 * The accounting for convertible bonds payable, common shares and contributed surplus is correct. 10 Page EXHIBIT 1 NOTES FROM DISCUSSION WITH NANCY NUMBERS ON SIGNFICANT ISSUES 1. Capital Structure of DTI The company issued 200,000 common shares for $10 a share on December 20, 2018. Another 50,000 common shares were issued for $20 each on April 1, 2019. On October 1, 2019 the company repurchased 10,000 of its own shares. 25,000 warrants were issued for $10 each on May 1, 2019. One warrant permits the owner to purchase one common share of DTI for $50 any time before December 31, 2022. iii. On June 30, 2019 the company issued $5,000,000,6%, convertible bonds at par value. Each $1,000 bond is convertible into 20 common shares. The accounting has been done properly for the above items and no convertible securities were converted into common shares during 2019. 2. The company's tax rate for 2019 is 30%. New tax laws were enacted at the end of 2019 that will result in a tax rate of 25% for 2020 and later years Also, in 2019 the average market value of the common shares was $25 per share. 3. DTT management maintains the highest standards in the renovation industry. Every project completed by the company has a one-year warranty that covers parts and labor for defects that need to be corrected. The customers have the option to purchase an extended warranty for an additional two years. The cost to the customer for the extended warranty is 3% of the project's contract revenue. Based on his extensive experience in the renovation industry, Carl estimates that required repairs on the basic one-year warranty will amount to 2% of the actual contract revenue for 2019. In reviewing the accounting records provided by Nancy, CPA noted the followed items: 1. Contract revenue earned on renovation projects for 2019 is $15,000,000. 2. Actual repair work done under the basic one-year warranty was $75,000 3. Customers on which DTI earned $6,000,000 in contract revenue decided to purchase the extended two-year warranty. The amount paid in total for the extended warranties was 3% X $6,000,0000 - $180,000. The accountant Daniel Debit made the following journal entries for the warranty related items: 6 | Page NOTES FROM DISCUSSION WITH NANCY NUMBERS ON SIGNFICANT ISSUES - coat'd DEBIT CREDIT Warranty expense 75.000 Cash (to record warranty repairs done) Cash 180.000 Contract revenue (to record the amount received for extended warranties) A former employee of DTI, Herschel Hurt, initiated legal action against the company for injuries incurred while doing renovation work. The lawsuit seeks $250,000 in damages. DTI's lawyer believes that the former employee will probably win the case at an estimated amount of $50,000. Daniel Debit remembered something about the conservatism principle when he took his accounting course several years ago and so he recorded the following journal entry: DEBIT CREDIT 250,000 250,000 Expense due to lawsuit Liability due to injury claims (to record the expense on the amount claimed in lawsuit) 5. Designed to Impress Corporation entered into a 15-year lease agreement on January 1, 2019 for a building where its offices are located. The company is required to make annual payments of $400,000 starting on January 1, 2019. The remaining economic life of the building is 25 years, at which time there will no expected residual value. DIT has the option to purchase the building at the end of the lease for $500,000, considerably less that the expected fair value at that time. A real estate appraiser determined that the fair value of the building was $3,855,315 on the date the lease was signed. The implicit interest rate in the lease is 8% and DIT has an incremental borrowing rate of 10%. The accounting entry made by Daniel Debit was: DEBIT CREDIT Rental expense 400,000 Cash 400,000 (to treat the lease as an operating lease and record payment) 7] Page NOTES FROM DISCUSSION WITH NANCY NUMBERS ON SIGNFICANT ISSUES - Conta 0. Capital assets were purchased on January 2 2019 and the correct depreciation expense amounts the book value amounts for all assets have been recorded in the financial statements. Cost Carrying value at December 31, 2019 Accumulated Depreciation Capital Assets purchased $ 500,000 $ 25,000 $ 475,000 Office furniture 315,000 35,000 350,000 Computer equipment 20,000 130,000 150,000 Vehicles S 920,000 S 1,000,000 $ 80,000 7. In calculating income tax expense, Daniel Debit simply multiplied the 2019 tax rate (30%) by the income before tax amount on the draft income statement. Additional information obtained from Nancy to assist in calculating the tax expense amount follows: i. ii. The company paid a hefty fine for $5,000 in 2019 which is not deductible for tax purposes. The company paid $15,000 in 2019 for Carl Carpenter's membership at a private golf club. This amount is not deductible for tax purposes Capital Cost Allowance (CCA) for 2019 is $280,000. iii. You remind yourself that there may be other items mentioned previously that will affect the income tax expense and income tax payable amounts. incorrectly by your accoun for things like calculating the earnings per share and for pointing outu . issuing more shares versus borrowing more money? "I knew you would likely ask for this information responds Nancy. "Here, I have it all for you" said Nancy as she points to the papers on her desk. You spend some time going over the paperwork with Nancy who courteously answered all your questions as you write away. Late in the afternoon you complete your work. You thank Nancy for her assistance and head out the door with several folders full of schedules and notes from your time with Nancy (for details refer to the exhibits on pages 5 - 18). Required: Carl Carpenter, President and CEO of Designed to Impress Corporation, has asked you to provide him with a report addressing numerous items. Prepare the requested report to Carl making to sure to include the following: 1. Discuss the accounting issues of concern. Specifically, identify each significant issue where the accounting was done wrong, why was the accounting treatment wrong according to IFRS, and discuss what should have been done correctly instead. You can start your report in Exhibit 3 on page 11. 2. Based on (1) above, prepare the appropriate correcting a entries to adjust for the errors. There are also adjusting entries to prepare as well at year end. You can use Exhibit 4 on pages 12 and 13 to prepare these entries. 3. Prepare the corrected financial statements once you have the entries in (2) above completed. Use the templates given in Exhibit 5 on pages 14 - 16 to efficiently do your work. 4. Compute the required earnings per share amounts to be included on the income statement. Use Exhibit 6 on page 17. 5. Finally, provide a summary of the advantages and disadvantages of taking out a bank loan, issuing. preferred shares or issuing more common shares. Use Exhibit 7 on page 18. 4 Page EXHIBIT 2 DRAFT FINANCIAL STATEMENTS PREPARED BY DANIEL DERIT INCOME STATEMENT For the year ended December 31, 2019 (naudited) Contract revenue (includes extended warranty item noted in Exhibiti, note 3) $ 15,180.000 Contract expenses 10,180.000 Gross margin 5.000.000 Expenses Advertising, promotion, and insurance expense 140,000 Depreciation expense (see Exhibit I, note 6) 80,000 Interest expense 195,000 400,000 Rental expense on lease see Exhibit I, note 5) Expense due to lawsuit (see Exhibit 1, note 4) 250.000 Warranty expense 75.000 Wage and salary expense 2,000,000 Total expenses 3,140,000 1,860,000 Income before taxes Income tax expense (30% x $1,860,000) (see Exhibit 1, note 7) 558,000 Net income $ 1,302,000 Earnings per share $1,302,000+ 240,000 shares 5.43 STATEMENT OF RETAINED EARNINGS For the year ended December 31, 2019 (unaudited) 2019 Retained earnings, January 1, 2019 Net income 1,302,000 Retained earnings, December 31, 2019 $ 1,302,000 9 Page 2019 EXHIBIT 2 DRAFT FINANCIAL STATEMENTS - cont'd BALANCE SHEET As at December 31, 2019 (unaudited) Assets Current Cash Accounts receivable from clients Inventory of incomplete renovation projects Prepaid insurance 438,000 1,400,000 7.954,000 80,000 14,672,000 920,000 $ 10,792,000 Capital Assets (net) (see Exhibit 1, note 6) Total assets Liabilities and shareholder's equity Current liabilities Accounts payable to subcontractors Accrued liabilities and liability due to injury claim (see Exhibit 1, item 3) 185,000 850,000 1,035,000 325,000 Long-term liabilities Long-term bank loan Convertible bonds payable (see Exhibit 1, note 1) 5,000,000 5,325,000 6,360,000 Total liabilities Shareholders' equity Common shares, 240,000 shares issued and outstanding * Contributed surplus - 25,000 warrants (see Exhibit 1, note 1) 2,880,000 250,000 Retained earnings 1,302,000 Total shareholder's equity 4,432,000 $ 10,792,000 * The accounting for convertible bonds payable, common shares and contributed surplus is correct. 10 Page