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Module 5.1 Intermediate Financial Reporting 1 Project 2 Chartered Professional Accountants of Canada, CPA Canada, CPA are trademarks and/or certification marks of the Chartered Professional Accountants of Canada. 2016, Chartered Professional Accountants of Canada. All Rights Reserved. Module 5.1 Intermediate Financial Reporting 1 PROJECT 2 (32 MARKS) Yum-Yum Inc. owns eight restaurants in British Columbia. Yum-Yum has approached your accounting firm to prepare its financial statements for the year ended December 31, 20X5, in accordance with IFRSs. Yum-Yum has provided the trial balance (Exhibit 1) and the following information: 1. In January 20X5, Yum-Yum purchased land in Nanaimo for $160,000 with the intention of building a new restaurant. Yum-Yum paid $1,300 in legal fees for a title search and the drawing up of the contract. Payment to an engineering firm included $21,000 for the architectural design and $2,000 for a land survey for building preparation. Both the legal fees and the engineering fees have been recorded as professional fees. Yum-Yum also paid $7,000 for land clearing and landfill deposits, which was added to the land account along with the land purchase. 2. Construction of the new restaurant started on March 1, 20X5, and was completed on November 1, 20X5, with the following payments to the contractor: Date March 1 May 1 July 1 September 1 November 1 Payment $200,000 450,000 360,000 180,000 100,000 Yum-Yum took out a $500,000 bank loan at 10% interest on March 1, 20X5, to finance the construction. The loan was repaid on November 1, 20X5, when construction was complete. The company has $600,000, 5%, 15-year bonds issued January 1, 20X2, with interest payable annually on December 31. It also had a $400,000, 12%, three-year note outstanding during the year. The payments to the contractor have been recorded in the building account, while the interest payments on the bank loan, bonds and note were recorded as interest expense. An insurance premium of $8,000 for the construction was recorded as insurance expense. 3. On June 1, 20X5, Yum-Yum signed a 15-year lease agreement and opened a new restaurant in downtown Victoria. The company has the obligation to remove certain equipment from the restaurant at the end of the lease term. Yum-Yum has estimated the removal costs would be $12,000 at the end of 15 years. The company uses a discount rate 2/5 Module 5.1 Intermediate Financial Reporting 1 Project 2 of 10% for this type of obligation. The restaurant equipment was purchased for a total price of $114,000 including shipping and installation. The equipment account was debited $114,000 in total for the year. 4. On August 31, 20X5, Yum-Yum paid $9,000 in overhaul costs for its delivery truck in Vancouver. It is estimated that the cost of the old, replaced components was $12,000 with $9,900 accumulated depreciation. The annual maintenance costs for the truck totalled $3,600. All costs were expensed as vehicle expense. 5. Yum-Yum applies the revaluation model to land. Other than the land recently purchased in Nanaimo, Yum-Yum owns land in two other locations. Their value was assessed as follows: Kelowna Coquitlam Dec. 31, 20X4 $250,000 128,000 Dec. 31, 20X5 $275,000 106,000 The land in Kelowna has a revaluation surplus of $50,000 and no balance in revaluation gain/loss. The land in Coquitlam was acquired in 20X3 at a cost of $120,000 and has been revalued to its December 31, 20X4, value. No adjustments have been recorded for the land in 20X5. 6. Yum-Yum uses the following depreciation method for its property, plant and equipment: Asset Building Equipment and furniture Leasehold improvement Vehicle Basis Declining balance Declining balance Straight-line Declining balance Rate 4% 20% Lesser of lease term and useful life 30% Depreciation expense has been recorded for 20X5. Yum-Yum pro-rates the depreciation expense in the year of acquisition and the year of disposal. 7. One restaurant has experienced losses over the last two years. On December 31, 20X5, the carrying amount of the restaurant's assets were as follows: Equipment and furniture Leasehold improvement Vehicle $30,000 37,000 14,000 $81,000 The restaurant has been assessed for impairment as a cash-generating unit, and it was determined that the value in use was $62,000, and fair value less costs to sell was $68,000. The equipment and furniture can be sold today for $35,000, and the vehicle for $10,000. No adjustment has been made for impairment. 8. On July 1, 20X5, Yum-Yum bought 20-year, $200,000, 4% bonds for $229,916. Interest on the bonds is to be paid semi-annually on December 31 and June 30 every year. The first interest payment was received on December 31, 20X5, and recorded as interest revenue. 3/5 Module 5.1 Intermediate Financial Reporting 1 Project 2 Yum-Yum intends to hold the bonds until they mature. The market value of the bonds was $232,000 on December 31, 20X5. 9. The investment in shares account on December 31, 20X5, comprised the following investments: Investments B&B Ltd. MCT Co. LEM Ltd. Carrying amount $17,800 13,500 20,900 $52,200 Fair value $20,000 21,300 16,400 $57,800 Yum-Yum would like to classify the investment in B&B as FVOCI. The shares of MCT and LEM were acquired for trading purposes. 10. Yum-Yum also completed the following securities transactions in 20X5: Feb. 1: Yum-Yum sold 500 common shares of Orlando Ltd. at $25 per share. The shares were acquired for $20 each in 20X4 for trading purposes. Market value was $22 per share on December 31, 20X4. Yum-Yum has recorded $2,500 as investment income in 20X5. Oct. 15: Yum-Yum received a dividend of $3,000 from B&B, and recorded it as investment income. Required (32 marks): a) Prepare all necessary adjusting journal entries for the year ended December 31, 20X5. Adjusting journal entries should be properly formatted with explanations of why each adjustment is required and how any calculations were completed (if details are not already covered in the supporting schedules). Number the journal entries according to the numbered situations above. If a situation requires more than one adjusting journal entry, label each entry (for example, 1a and 1b). Do not include the original journal entries in the adjusting journal entries. b) Prepare the supporting schedules for borrowing costs, depreciation, impairment, and investment in bonds amortization for your adjusting journal entries. Each schedule should be separate. c) Prepare the adjusted trial balance based on the adjusting journal entries made, using the following worksheet format: Account Unadjusted Trial Balance DR CR Ref Adjustments DR CR Ref Adjusted Trial Balance DR CR Statement of Financial Position DR CR Statement of Comprehensive Income DR CR d) Prepare financial statements in proper form for Yum-Yum Inc. This should include a statement of financial position, statement of comprehensive income and statement of changes in shareholders' equity. 4/5 Module 5.1 Intermediate Financial Reporting 1 Exhibit 1 Yum-Yum Inc. Trial balance As at December 31, 20X5 Cash Accounts receivable Inventories Prepaid expenses Investment in shares Investment in bonds Land Building Accumulated depreciation building Equipment Accumulated depreciation equipment Vehicle Accumulated depreciation vehicle Leasehold improvement Accumulated depreciation leasehold improvement Trademark Accounts payable Accrued liabilities Income tax payable Bonds payable Note payable Common shares Accumulated OCI Retained earnings Sales revenue Interest revenue Investment income or loss Cost of goods sold Depreciation and amortization Interest expense Insurance expense Marketing and distribution Maintenance expense Rent and utilities Salaries and benefits Professional fees Vehicle expense Income tax expense 5/5 Project 2 Debit $121,800 8,200 32,280 5,000 52,200 229,916 545,000 1,290,000 Credit $8,600 930,000 545,000 96,000 78,000 220,900 72,300 250,000 60,716 36,580 22,630 600,000 400,000 400,000 58,000 889,500 6,357,700 4,000 5,500 1,747,500 97,660 111,500 24,500 12,800 64,500 366,560 3,016,780 41,200 30,600 243,630 $9,538,526 $9,538,526