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Part A The following represents the liabilities and shareholders' equity portions of the balance sheet for Spectator Inc. as at December 31, 2011 and...

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Part A The following represents the liabilities and shareholders’ equity portions of the balance sheet for Spectator Inc. as at December 31, 2011 and 2012. Spectator Inc. Partial Balance Sheet As at December 31 $ thousands 2012 2011 Current liabilities ($000) ($000) Demand loan payable 10,000 12,000 Accounts payable 5,700 6,000 Income taxes payable 300 200 16,000 18,200 Deferred tax liability 800 600 Accrued pension liability 18,000 16,000 4% convertible bonds payable, issued prior to 2011 25,000 23,000 6% convertible bonds payable, issued prior to 2011 - 17,000 59,800 74,800 Shareholders’ equity 5% cumulative dividend, $2,000 par value convertible preferred shares, 20,000 authorized, 5,000 shares issued and outstanding 10,000 10,000 Common shares, 1,000,000 shares authorized, 327,000 shares outstanding (2011 – 250,000 shares outstanding) 18,000 15,000 Contributed surplus 2,000 1,000 Retained earnings 124,000 122,000 154,000 148,000 213,800 222,800 Additional notes: 1. On July 31, 2011, options were granted giving the executive team the option to purchase 5,000 common shares at $50/share. The average market price of Spectator’s share during 2011 was $53/share. 2. On February 1, 2012, Spectator issued 45,000 common shares for cash at $50/share. 3. On July 31, 2012, options were granted giving the executive team the option to purchase 6,000 common shares at $53/share. The average market price or Spectator’s share during 2012 was $52/share. 4. On August 1, 2012, Spectator declared a stock dividend of 10%. Assume that this stock dividend did not change the conversion ratios of any of the convertible securities. 5. On September 1, 2012, half of the options granted during 2011 were exercised. The average market price during the first eight months of the year was $51. 6. On October 1, 2012, Spectator issued put options to certain shareholders giving them the option to sell 10,000 shares back to Spectator at $53. The put options are still outstanding. 7. The effective yield of the 4% bonds is 5.5%. Each bond has a face value of $5,000 ($30,000,000 in total) and is convertible into 10 common shares. 8. The effective yield of the 6% bonds is 5%. Each bond has a face value of $1,000 ($15,000,000 in total) and is convertible into 15 common shares. The bonds were redeemed on October 1, 2012. 9. Each preferred share is convertible into two common shares. 10. Cash dividends were not declared during 2012. 11. Net income for the year was $25,000,000. Spectator’s net income included a gain, before taxes, on discontinued operations of $2,000,000. 12. Spectator’s effective tax rate for 2012 is 40%. Instructions: Calculate and present basic and diluted earnings per share for 2012 as required for reporting in the financial statements.
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Part B Sigma Ltd. uses leases as a method of selling small aircraft. The company has just completed production of an airplane at a cost of $3,000,000 and will lease it to Epsilon Corp., a small charter airline, on July 2, 2013. Sigma marks up its airplanes by 30% of cost to arrive at a selling price. The terms of the lease are as follows: Lease term 20 years Useful life 25 years Estimated value, end of lease term (unguaranteed) $500,000 Purchase option, end of lease term $ 50,000 Estimated salvage value, end of useful life $ 40,000 Interest rate implicit in the lease 10% Lessee’s incremental borrowing rate 12% Date of first annual lease payment July 2, 2013 Instructions—for lessee (Epsilon Corp.): 1. Calculate the amount of each annual lease payment that Sigma Ltd. would require if it wanted to earn a 10% return on the lease transaction. 2. Prepare the entries for Epsilon Corp. for (i) 2013 and (ii) 2014 assuming Epsilon has a December 31 year end. Assume that Epsilon is aware of the lessor’s implicit interest rate. 3. Prepare the entry(ies) made by Epsilon at the end of the lease term assuming Epsilon acquires the airplane by making a payment equal to the purchase option. 4. For its year ended December 31, 2014, indicate what accounts and amounts related to this lease would be reported by Epsilon on the following financial statements: Classified Balance Sheet Income Statement Cash Flow Statement 5. Answer parts 1. and 2. (i) again, but this time, under the assumption that Epsilon guaranteed a residual value of $500,000 and there was no purchase option at the end of the lease. Instructions—for lessor (Sigma Ltd.): 6. Based on your answer to 1. above, prepare the entries Sigma would make during its fiscal years ended September 30, 2013 and 2014. Show all calculations. Part C (a) Identify the differences between ASPE and IFRS in determining whether a lease is a capital/financing lease or an operating lease. (b) Explain to a friend of yours, a marketing major, why the current lease standards are likely to be replaced with new standards in the very near future.
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