The founder, president, and major shareholder of Dewitt Corp. recently sold his controlling interest in the company to a national distributor in the same line of business. The change in ownership was effective June 30, 2020, halfway through Dewitt’s current fiscal year.

During the due diligence process of acquiring the company and over the last six months of 2020, the new senior management team had a chance to review the company’s accounting records and policies. Dewitt follows ASPE. Although EPS is not part of ASPE, management calculates EPS for its own purposes and applies the IFRS guidelines. By the end of 2020, the following decisions had been made.

1.		Dewitt’s policy of expensing all interest as incurred will be changed to correspond to the policy of the controlling shareholder whereby interest on self-constructed assets is capitalized. This policy will be applied retrospectively, and going forward it will simplify the consolidation process for the parent company. The major effect of this policy is to reduce interest expense in 2018 by $10,400 and to increase the cost of equipment by the same amount. The equipment was put into service early in 2019. Dewitt uses straight-line depreciation for equipment and a five-year life. Because the interest has already been deducted for tax purposes, the change in policy results in a taxable temporary difference.
2.		Deferred development costs of $12,900 remained in long-term assets at December 31, 2019. These were being written off on a straight-line basis with another three years remaining at that time. On reviewing the December 31, 2020 balances (after an additional year of depreciation), management decided that there were no further benefits to be received from these deferrals and there likely had not been any benefits for the past two years. The original costs were tax deductible when incurred.
3.		A long-term contract with a preferred customer was completed in December 2020. When discussing payment with the customer, it came to light that a down payment of $37,500 the customer made on the contract at the end of 2018 had been taken into revenue when received. The revenue should have been recognized in 2020 on completion of the contract.

Dewitt’s financial statements (summarized) were as follows at December 31, 2019 and 2020, before any corrections related to the information above. The December 31, 2020 statements are in draft form only and the 2020 accounts have not yet been closed.

 

DEWITT CORP. Statement of Financial Position December 31 Liabilities and Shareholders' Equity Assets 2020 2019 2020 2019 $192,300 $168,400 Current liabilities 322,000 311,000 Long-term liabilities $514,300 $479,400 Share capital (10,000 shares) $117,000 $103,000 166,000 50,000 181,300 $514,300 $479,400 Current assets Long-term assets 153,000 50,000 173,400 Retained earnings DEWITT CORP. Income Statement Year Ended December 31 2020 2019 $491,000 $471,000 385,000 106,000 31,800 $74,200 Revenues Expenses 379,000 92,000 27,600 $64,400 Income tax (30% effective rate) Net income Earnings per share Dividends declared, per share $7.42 $6.44 $6.63 $2.85