Question 1: Special Item Accounting (20 marks) Cambridge Corp. is a construction machinery manufacturer. The following is the consolidated income statement of Cambridge Corp. and subsidiaries. Cambridge Corporation and Subsidiaries Consolidated income statement ($ million) 2016 1,000 (550) 450 2017 1,000 (520) 480 2018 1,000 (500) 500 2019 1,000 (480) 520 2020 1,000 (450) 550 (150) (180) (120) (150) Revenue Cost of goods sold Gross profit Expenses Selling and administration expenses Restructuring charge PPE impairment charge Interest expenses income before tax income tax expense Income before continuing operations Gain from extinguishment of debt Loss from operating discontinued segment Gain from sale of discontinued segment Net income (100) 200 (70) 130 (100) 200 (70) 130 (200) (400) (300) (100) (500) 175 (325) 500 (100) 300 (105) 195 (100) 300 (105) 195 65 (10) 30 150 130 175 195 260 Notes from the annual report provided the following additional information: (1) The PPE impairment charge in 2018 came from the fact that a construction equipment was estimated to have useful life of 6 years with no salvage value, but actually became useless at the end of year 3. (2) The objective of restructuring is to reduce future labor costs and improved efficiency, and it was expected that this restructuring would benefit future TWO (2) years. (3) The marginal tax rate is 35%. 1. With the worksheet below, determine the core income and permanent income of the company for all 5 years. (10 marks) Items 2016 2017 2018 2019 2020 Adjustments: Core income Adjustments: Permanent income 2. Compare the level and growth rate of net income, core income and permanent income for the 5 years and comment on the likelihood that the company use non-recurring items to manage earnings. (10 marks) Question 1: Special Item Accounting (20 marks) Cambridge Corp. is a construction machinery manufacturer. The following is the consolidated income statement of Cambridge Corp. and subsidiaries. Cambridge Corporation and Subsidiaries Consolidated income statement ($ million) 2016 1,000 (550) 450 2017 1,000 (520) 480 2018 1,000 (500) 500 2019 1,000 (480) 520 2020 1,000 (450) 550 (150) (180) (120) (150) Revenue Cost of goods sold Gross profit Expenses Selling and administration expenses Restructuring charge PPE impairment charge Interest expenses income before tax income tax expense Income before continuing operations Gain from extinguishment of debt Loss from operating discontinued segment Gain from sale of discontinued segment Net income (100) 200 (70) 130 (100) 200 (70) 130 (200) (400) (300) (100) (500) 175 (325) 500 (100) 300 (105) 195 (100) 300 (105) 195 65 (10) 30 150 130 175 195 260 Notes from the annual report provided the following additional information: (1) The PPE impairment charge in 2018 came from the fact that a construction equipment was estimated to have useful life of 6 years with no salvage value, but actually became useless at the end of year 3. (2) The objective of restructuring is to reduce future labor costs and improved efficiency, and it was expected that this restructuring would benefit future TWO (2) years. (3) The marginal tax rate is 35%. 1. With the worksheet below, determine the core income and permanent income of the company for all 5 years. (10 marks) Items 2016 2017 2018 2019 2020 Adjustments: Core income Adjustments: Permanent income 2. Compare the level and growth rate of net income, core income and permanent income for the 5 years and comment on the likelihood that the company use non-recurring items to manage earnings. (10 marks)