MGAC02 – 2024 Winter
Case Assignment 2 – Due Date : March 24, 2024
Marinebay Ltd. is a retail operation, the shares of which have been publicly traded since it was incorporated. The company has prepared the following draft income statement. You are the auditor for Marinebay. You collected the the following information provided by the client. You are asked to prepare an adjusted income statement including the tax provision. Marinebay would also like you to outline any necessary note disclosures and discuss any accounting implication required for the adjusted draft income statement.
Marinebay Ltd.
Draft IncomeStatement
For the year ended December 31, 2024 (000s)
Sales $100,000
Cost of goods sold 50,000
Gross profit 50,000
Expenses:
Depreciation $6,000
Pension 2,000
Operating 28,000 36,000
Net pretax income 14,000
Income tax-estimate 30% 4,200
Net income $ 9,800
Earnings per share ($9,800,000/2,000,000) = $4.90
Additional information:
• The company introduced a pension plan at the beginning of 2024. Past service costs were paid in full in the amount of $2 million. Current service costs for 2024 were $500,000 and were not funded in the year. Amounts funded were the only amounts included in pension expense (operating expense). The actual return on plan assets was 9% and the discount rate used 7% for the pension plan obligation, which is equivalent to the expected return on plan assets. Only funding is recognized by CRA as tax deductible. No benefits were paid because there were no retirees as of December 31, 2024.
• At the date of incorporation, the company had issued 2,000,000 common shares for $10 per share. On February 1, 2024, 20,000 of the shares were repurchased and cancelled by the company. The controller included the $1 million cost of this repurchase in operating expenses. The company had issued a call option in 2023, expiring in 2025 and allowing the holder to purchase 40,000 shares for $40 per share. The average share price in 2024 was $51.
• On January 1, 2024, the company leased its administrative building under a contract wherein the company will obtain ownership of the building at the end of the 20-year lease for a nominal amount. Management decided to expense the lease payment of $3,000,000 for 2024 (paid on January 1, 2024). The building would have been capitalized at $30 million if treated as a capital lease. The building has a remaining economic life of25 years. The interest for 2024 would have amounted to $2.45 million. The company has adopted IFRS 16 for lease accounting.
• The depreciation expense was $2 million lower than CCA in 2024, not including any impact from transaction 3. The tax rate enacted for 2025 and beyond was increased to 32%.
Required:
Prepare the report.