II\" CMHK LTE 19:21 (a) s? 8893C} moodle.cpcepolyu.edu.hk Page 3 of 6 Question 2 (28 marks} As at 31 December 2018. Conrad Company has 350i000 ordinary shares outstanding with par value of$5 each that originally issued at $15 per share. On 1 April 2019. Conrad issued 100,000 shares of 3%. $10 par value cumulative convertible preference shares (convertible into 200.000 common shares) and purchased 60.000 ordinary shares on the open market as treasury stock by paying $30 per share. 0n 1 June 2019, Conrad declared and issued a 2for1 share split. The company also issued 120.000 ordinary shares tor cash at $22 per share on 1 November 2019. One month later. the company paid $500,000 cash dividends on the ordinary shares because of the signicant increase of sales revenue. There were incentive share options granted to key executives of the company as at 31 December 2019. The options are exercisable as of 15 September 2013i for 60,000 shares at an exercise price of $20 per share. During 2019. the average and ending market price of ordinary shares were $25 and $30 per share respectively During the year 2018.. 6% convertible bonds were issued at par for 31.000.000. Each $1.000 bond is convertible into 250 ordinary shares. Conrad's net income for the year ended 31 December 2019 was $2.5 million and the income tax rate is 30%. There was neither conversion of the convertible bonds nor exercise of the incentive share options during the year of2019. Required: (Answers should be rounded to the nearest 2 decimal places) [3] Compute the weighted average number ofshares outstanding during the year. [6 marks) (b) Calculate the basic earnings per share {EPS) for 2019. (4 marks) [c] Calculate the diluted earnings per share for 2019. {l l rmrks) (d) Assume the options exercisable for 60,000 shares is at an exercise price of$23 per share granted in 2019. explain how does it affect your answer in part (c) above. [within 80 words] (3 marks) (e) Explain the rationale, with appropriate accounting principlesa'concepts, of presenting the diluted EPS. apart 'om the basic EPS, for companies with complex capital stnicture. [within 100 words] [4 marks) Page 4 of 6 all CMHK LTE 19:21 @ 1 88% a moodle.cpce-polyu.edu.hk Question 1 (27 marks) Superstar Limited purchased several investments during 2018. At 31 December 2018, the company had the following investments in ordinary share listed below. All investments are considered as available-for-sale: Cost per share Fair value per share 100,000 Sunshine Company shares $12 $10 120,000 Orlando Company shares $18 $25 On 1 May 2019, the company sold out half of Orlando shares at $28 each and paid $5,000 brokerage fee. The company acquired 6% bonds from Fantastic Company on 1 October 2019 at $1,207,321. The face value of the bonds is $1,500,000. Semiannual interest is payable 31 March and 30 September. The market interest rate was 9% for bonds of similar risk and maturity. Management has the positive intent and ability to hold the bonds until maturity in 2029. During 2019, the net income for Sunshine and Orlando were $200,000 and $500,000 respectively. Sunshine and Orlando declared and paid cash dividends of $1.2 and $0.8 each share on 31 December 2019. The fair value of the investments on 31 December 2019 are shown as below: Fair Value Sunshine Company $15 per hare Orlando Company $20 per share 6% bonds of Fantastic $1,226,000 Company Required: (a) Prepare the journal entries (on investment companies' basis as the suggested solution of IA Assignment 1 Q.2) to record the investments mentioned above for the year 2019. (23 marks) (b) Assume Superstar has significant influence over the management of Sunshine Company (the investment represents 25% interest in the net assets of Sunshine), what is the reported amount of the investment shown on Superstar's 2019 statement of financial position? (4 marks) Page 3 of 6all CMHK LTE 19:21 @ 1 88% moodle.cpce-polyu.edu.hk C Question 3 (cont.) Required: (a) With reference to each of the five classification criteria, discuss why the leased equipment should be classified as the "finance lease", instead of the "operating lease", in the books of Freddy. [within 200 words] (6 marks) (b) Prepare a Statement of Cash Flows for the year ended 31 December 2019 for Freddy Corporation using the indirect method (assuming dividends and interest paid are classified as financing activities). (24 marks) (c) Goods, which costs $1,500, were not included in the physical count of inventory by Freddy. They were shipped from a supplier FOB shipping point on 29 December 2019, and did not arrive until 3 January 2020. Assuming that the purchase was properly recorded while the omission of the inventory could only be discovered after the 2019 financial statements were issued, i. analyze the effect (over/understate) of this omission on 2019 costs of goods sold, net income and retained earnings, and ii. prepare the adjusting entries accordingly. (5 marks) Question 4 (10 marks) Ocean Pacific Limited sells split-type air conditioners through an internet ordering system. The company has undertaken the responsibility for installing air conditioners in customers' premises. Customers pay in advance for the air conditioners when placing their orders. The average length of time between the delivery and final installation is 5 days. 80% of the sales invoice amount relates to the air conditioner and 20% to the installation service. Ocean Pacific's existing accounting policy is to recognize sales revenue only when the air conditioners had been successfully installed. The new Financial Controller of Ocean Pacific is proposing to change the accounting policy to recognize sales revenue when customers order and pay for the air conditioners. Required: Evaluate the impact of BOTH the existing and the proposed new accounting policy for recognizing the sales revenue as mentioned above, and advise if they are CORRECT or not to comply with the relevant accounting principles and concepts for revenue recognition. [ within 300 words] (10 marks) - End of Assignment - Page 6 of 6 >all CMHK LTE 19:21 @ 1 88% a moodle.cpce-polyu.edu.hk Leased equipment - Accumulated depreciation (9,531) 729.063 611,700 Accounts payable 90,000 84,000 Accrued liabilities 54,000 63,000 Lease payable 18,594 Interest payable 930 Bonds payable 125,000 60,000 Share capital-ordinary 100,000 92,000 Retained earnings 340,539 312,700 729.063 611,700 For the year 2019 Net income $47,839 Depreciation expense - Buildings 19,000 Depreciation expense - Machinery 5,000 Depreciation expense - Leased equipment 9.531 Cash dividends declared and paid 20,000 Gain or loss on sale of Machinery None Additional information: * On 1 January 2019, Freddy leased an equipment, with an economic useful life of ten years, from Flower Company for three years. The present value of the minimum lease payment and the fair value of the leased equipment were $28,594 and $95,313 respectively. Annual lease payment of $10,000 has to be made at the beginning of each period. The lease agreement offers Freddy an option of purchasing the leased equipment at $1 at the end of the lease period. Page 5 of 6 Question 3 (cont.) Required: (a) With reference to each of the five classification criteria, discuss why the leased equipment should be classified as the "finance lease", instead of the "operating lease", in the books of Freddy. [within 200 words] (6 marks) (b) Prepare a Statement of Cash Flows for the year ended 31 December 2019 for Freddy Corporation using the indirect method (assuming dividends and interest paid are classified as financing activities). (24 marks) (c) Goods, which costs $1,500, were not included in the physical count of inventory by Freddy. They were shipped from a supplier FOB shipping point on 29 December 2019, and did not arrive until 3 January 2020. Assuming that the purchase was properly recorded while the omission of the inventory could only be discovered after the 2019 financial statements were issued, i. analyze the effect (over/understate) of this omission on 2019 costs of goods sold, net income and retained earnings, and ii. prepare the adjusting entries accordingly