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Question

The following statements were prepared for DRB Limited, a company using IFRS, by the company's new

bookkeeper:

 

DRB Limited Comprehensive Income Page

For the Year Ended December 31, Year 4 (in thousands of dollars)

 

Income:

Sales revenue

$2,000

Loss from bonds retirement

          200

       1,800

Expenses: Depreciation

80

Cost of goods sold (B)

800

Income tax (C)

67

Other (D)

          580

       1,527

Regular Income

       $ 273


DRB Limited Statement of Retained Earnings

For the Year Ended December 31, Year 4 (in thousands of dollars)

 

Balance, beginning of year

$ 610

Profit

273

Severance pay (E)

(80)

Dividends (F)

(55)

Other comprehensive income related to an investments

18

Balance, end of year                                                                                           $ 766


(A) During Year 4, the company retired an issue of bonds early. These bonds had a carrying value of $1 million and were retired at a cost of $1.2 million.

 

(B) Goods costing $75 was purchased from Supplier Company, FOB Destination Point. It was shipped on December 28, Year 4 and arrived at DRB's warehouse on January 4, Year 5. The invoice arrived December 28, Year 4 and the bookkeeper recorded the purchase. DRB uses a periodic inventory system and hence determined ending inventory based on a physical count at the end of the business day on December 31.


(C) DRB pays income tax at a rate of 40% on all income. Assume that all revenues, expenses, gains, and losses are taxable or deductible for income tax purposes. The reported income tax expense of $67 reflects cash taxes paid this year but which were accrued in prior year.

 

(D) Details of the amounts recorded in "other expenses" were as follows:

 

All expenses associated with transportation division

$600

Miscellaneous

10

Outstanding cheques

               (30)

 

              $580


The transportation division had been losing money for the last three years. Management decided to shut down the division to avoid future losses. Sales revenue includes $390 pertaining to the transportation division. The bank reconciliation at the end of December showed outstanding cheques of $30. The new bookkeeper thought that these amounts should not be reported as expenses since these cheques had not yet cleared the bank. Therefore, he processed an entry to debit cash and credit other expenses. On 1 January Year 5, he recorded another entry to debit other expenses and credit cash.

 

(E)  In Year 4, DRB laid off two employees who no longer had the skills required to work for the company. In order to avoid a wrongful dismissal lawsuit, the company paid the employees $40 each as a severance pay. In turn, the employees agreed not to take any legal action against the company.

 

(F)   The company paid $55 to a major shareholder for management services rendered. Since the payment was made to a shareholder, the bookkeeper recorded it as dividends paid.

 

Required:


(a) Refer to the information given in item (B), what accounting theory, principle, concept, and/or criteria underlying GAAP was/were violated in this situation? Briefly explain.

 

(b) Assume that the transportation division meets the definition of "discontinued operations" for the purposes of discontinued operations. Prepare, in good form, a multiple step comprehensive income statement for DRB for Year 4. Correct any deficiencies and/or errors contained in the draft statements prepared by the new bookkeeper.

 

(c) Assume that, in addition to the information given in the original question above, you identify that DRB had made a mistake in the Year 3 financial statements. Depreciation expense of

$30,000 was not recorded in Year 3. Prepare in good form only the Retained Earnings portion of the Statement of Changes in Equity for Year 4.

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