Reference no: EM132465047

PART ONE:

• KC Plastics Inc. (KC) has decided to discontinue the operations on September 1st, of its mold making division. The low prices from foreign corporations makes them not competitive. The mold making is not a separate division but is a significant operating segment both financially and operationally. The company sold the operations on October 15, 2019 to SF 49 Inc. (SF), and the liabilities will be assumed by purchaser. The sale details are:

Purchase Price paid by SF                             $10,000,000

Liabilities assumed by SF (fair value)               $1,350,000

Division assets, book value at September          $800,000

Division assets, estimated fair value, September $750,000

Division Revenue to October 15, 2019               5,000,000

Division Profit before taxes to October 15, 2019 $100,000

Income Tax Rate 27%

On December 31, 2019, the after-tax income, including the mold division, was $1,000,000.

Question 1. Complete the entries to record the sale of the mold making division.

Question 2. Complete the entries for the reclassification.

Question 3. With the information provided, complete 2019 income statement, starting with the income from continuing operations, after tax.

Question 4. Explain if required any and all reclassifications and disclosures in the 2018 comparative financial statements and notes.

PART TWO:

• KC Plastics Inc.,(KC) had the following three independent events occurred in 2018. The year-end is December 31st.

Event 1

• On December 31, 2018, KC sold a machine for $125,000 and collected $25,000 as a down payment. The remainder was financed at 10% interest and is payable on December 31, 2019. KC will deliver to SF Loses Inc. on January 19th 2019 which title will be transferred.

Event  2

• On June 15, 2018, the company received $30,000 from a client. The payment was deposit for services to be provided from July 1, 2018 to June 30, 2019. During 2018, additionally work was completed and invoiced by KC Plastics Inc.

Event 3

• On October 15, 2018, KC sold concentrated colourant for $7,500. The colourant was delivered on that date. KC agreed that SB54 the purchaser to pay for the product with 3 totes of resin that sell for $2,000 a tote. SB54 promised to deliver the resin by February 28, 2019.

Question 1. When should revenue be recognized?

Question 2. The entry that should be made on the transaction date, if required.

Question 3. Explain the reasoning for your decisions.

PART THREE:

On December 1st. 2017, when preparing for the 2017-year end statements, Billy Reid, the CFO of KC Plastics discovered three errors after an initial review it was agreed that there were only two (2) errors in the 2015 statements. The tax rate is 30%.

Error 1

• Inventory purchases of 1.8 million had inadvertently been charged to equipment, a capital asset account, and had been amortized by 8% for 2015 and 2016. The accounting amortization rate is the same rate for CCA for tax purposes. The ending and beginning inventories were stated correctly. The mistake caused cost of sales to be understated by 1.8 million and pretax earnings to be overstated by the same amount.

Error 2

• A customer had paid 3.8 million for a partial payment due for an ongoing contract with SF49's Inc. The contract revenue had already been recognized. However, the payment was accidentally credited to Sales instead of accounts receivable and was included in taxable income.

Question 1. Show the calculations for the earnings correction that KC Plastics Inc. must show in the 2017 financial statements.

Question 2. Where will the above corrections be disclosed?