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Overview Overview of Eastern Township Sales Ltd. Eastern Township Sales Ltd. (Eastern) was established in 1995. Its shares were listed on the Toronto Stock Exchange starting in 2016. The corporation’s headquarters are located in Trois-Rivières, Quebec. It has regional distribution warehouses in Trois-Rivières and four other eastern Canadian locations. The corporation buys Canadian-made appliances and distributes these to regional retail stores that specialize in providing high-quality appliances to customers with higher-than-average disposable incomes. Eastern has a reputation for purchasing appliances that are innovative and reliable, and backing what it sells through a generous warranty and refund policy. Eastern is recovering from a regional economic downturn. Demand for its type of appliances has fluctuated over the past few years. The company has two main competitors, both headquartered in the United States. These both focus on lower-cost appliances. Though Eastern is still ranked as the number one appliance wholesaler in eastern Canada in terms of total sales dollars, its competitors are gaining ground. Eastern has maintained very good relations with manufacturers and retailers. Retailers actively promote Eastern products as good value for money, and provide valuable feedback to Eastern about retail customer purchasing trends and requests for new products. Unlike its competitors, the Eastern sales force is well-trained. They monitor changing customer preferences for appliances and communicate these back to Eastern management for consideration. The company recognizes that long-term success largely depends on continued promotion of Eastern products by its retail store customers, which means that the chains must be able to continue to earn high gross profit on sales of these same products. However, increased competition from lower-priced appliances by Eastern’s US competitors has begun to cut into sales and profit margins. Eastern’s warehouse distribution facilities and processes are state-of-the-art. Once products have been purchased, they are able to be transported from manufacturing plants and to retailers very quickly. Eastern’s distribution costs are usually lower than competitors because its warehouses are closer to customers, and its logistics are efficient. Company management believes costs can also be reduced by renting rather than owning delivery trucks. v.7667Pg. 1 Required: Prepare the following information in .docx or .xlsx format. Label all your work with the version (v.) shown in the bottom left corner of each page of this case. 1a. Refer to the Trial Balance ("TB") worksheet tab, page 3. Prepare an income statement and statement of changes in equity for the year ended December 31, 2020 using the format shown on the "Pt 1&5" worksheet tab, page 5. Assume all accounts have normal balances. b. Present 2020 EPS at the bottom of the income statement. Show your calculations. Assume there are 10,000 common shares outstanding at the end of 2019, and the following 2020 transactions: #Total Common shares issued on January 1500$5,000 2Using the format shown on the "Pt 2" worksheet on page 7, prepare a note to the financial statements listing 2020 expenses in 'nature of expense' format. Agree these amounts to the 2020 amounts shown on the income statement. Show how you have grouped the expenses. (Reasonable allocations are acceptable. 2020 groupings do not need to agree with 2018 and 2019 groupings shown on the income statement.) Assume the following 2020 amounts: (Increase) decrease in inventory of goods held for resale$(182,520) Merchandise purchases$1,165,320 3Refer to the Trial Balance ("TB") worksheet. Using the format shown on the "Pt 3" worksheet on page 9, prepare classified statements of financial position at December 31, 2019 and 2020. Assume the operating bank loan is due on demand and that 10% of the non-current bank loans are due within one year at each year end. 4Refer to the "Pt 4" worksheet on page 11. Calculate ratios shown for the year ended December 31, 2020. Assume all sales are on credit. Show your work. Analyze your results. 5Refer to the "Pt 1" and "Pt 3" worksheets on pages 5 and 9. Perform vertical and horizontal analysis on the statement of financial position and income statement for 2019 and 2020. Analyze your results. 6Refer to the "Pt 6" worksheet tab, page 13. On page 14, prepare statements of cash flows for the years ended December 31, 2019 and 2020 from the worksheet information. Analyze the results. Assume that the operating bank loan is part of cash and cash equivalents. 7667Pg. 2 TB Trial Balance Account202020192018 Accounts payable12,8006,40020203,200 Accounts receivable350,860500,480202,400 Accumulated amortization, patent2,8561,190700 Accumulated depreciation, PPE204,000102,00060,000 Advertising expense304160100 Allowance for doubtful accounts1,6641,280800 Amortization expense1,666490300 Bad debts expense2,0161,260900 Cash43,56013,2008,800 Common shares79,00074,00074,000 Cost of goods sold982,800702,000540,000 Current tax liabilities7,5606,3006,300 Depreciation expense230,400144,000144,000 Dividends, common shares700700500 Dividends, preferred shares200700600 Gain on disposal of PPE7,8409,8007,000 Income taxes expense (recovered)55,659127,77354,750 Insurance expense1,216760400 Interest expense9,07222,68025,200 Inventory393,120210,600156,600 Investment property rental income16,4089,7209,900 Investment property upkeep13,9087,3206,100 Operating bank loan213,000106,50071,000 Non-current bank loan453,600453,600504,000 Patent7,1283,9602,200 Post-retirement benefits5,1005,1003,400 Preferred shares, non-cumulative12,5406,6006,600 Prepaid insurance7,6505,1003,000 Property, plant, and equipment902,918687,987720,000 Rent expense13,9327,7404,300 Repairs expense14,6007,3007,300 Retained earnings, opening662,737366,000312,350 Salaries, wages, and commissions266,000133,00070,000 Sales1,670,7601,472,000920,000 Statutory deductions12,49611,3607,100 Telephone expense12,6369,7208,100 Utilities expense5,3763,3602,400 Warranty provision720720400 Warranty expense12,1689,3607,800 v.7667Pg. 3 THIS PAGE IS BLANK v.7667Pg. 4 CALCS PT 1 Type Account202020192018 SALSales1,670,7601,472,000920,000 LCAccounts payable12,8006,4003,200 ASAccounts receivable350,860500,480202,400 Accumulated amortization, patent2,8561,190700TAKE AWAY FROM ASSETS NON CURRENT Accumulated depreciation, PPE204,000102,00060,000TAKE AWAY FROM ASSETS NON CURRENT SMEXAdvertising expense304160100 EXAllowance for doubtful accounts1,6641,280800 ADMEXAmortization expense1,666490300 ADMEXBad debts expense2,0161,260900 ASCash43,56013,2008,800 EQCommon shares79,00074,00074,000 COGCost of goods sold982,800702,000540,000 LCCurrent tax liabilities7,5606,3006,300 ADMEXDepreciation expense230,400144,000144,000 EQDividends, common shares700700500 EQDividends, preferred shares200700600 ASNCGain on disposal of PPE7,8409,8007,000Other Income NetGain on PPE 7,840 IOIncome taxes expense (recovered)55,659127,77354,750Invest Rental Income 16,408 ADMEXInsurance expense1,216760400Rental Upkeep(13,908) ASTEXInterest expense9,07222,68025,200Other Income Net10,340 ASInventory393,120210,600156,600 IOInvestment property rental income16,4089,7209,900 ADMEXInvestment property upkeep13,9087,3206,100 LCOperating bank loan213,000106,50071,000 LNCNon-current bank loan453,600453,600504,000 ASNCPatent7,1283,9602,200 SMEXPost-retirement benefits5,1005,1003,400 EQPreferred shares, non-cumulative12,5406,6006,600 ASPrepaid insurance7,6505,1003,000 ASProperty, plant, and equipment902,918687,987720,000 ADMEXRent expense13,9327,7404,300 ADMEXRepairs expense14,6007,3007,300 EQRetained earnings, opening662,737366,000312,350 SMEXSalaries, wages, and commissions266,000133,00070,000 SMEXStatutory deductions12,49611,3607,100 ADMEXTelephone expense12,6369,7208,100 ADMEXUtilities expense5,3763,3602,400 LCWarranty provision720720400 SMEXWarranty expense12,1689,3607,800 Eastern Township Sales Ltd. Income Statement Year Ended December 31, 2020 EXPENSES CLASSIFED BY NATUREExpense IN THOUSAND OF DOLLARS Note 202020192018Sell & Mark202020192018 Advertising expenseS304160100Advertising expense304160100 Selling and marketing$296,068(158,980)(88,400) Post-retirement benefitsS5,1005,1003,400Post-retirement benefits5,1005,1003,400 Salaries, wages, and commissionsS266,000133,00070,000Salaries, wages, and commissions266,000133,00070,000 Administrative$0174,630167,700 Statutory deductionsS12,49611,3607,100Statutory deductions12,49611,3607,100 Warranty expenseS12,1689,3607,800Warranty expense12,1689,3607,800 Total Compensation Expense 296,068158,98088,400 $296,068158,98088,400 Changes in inventories, resale goods (increase)C(182,520)54,000156,60000 Merchandise Purchases C1,165,320 Amortization expenseA1,666490300Administrative Bad debts expenseA2,0161,260900Amortization expense1,666490300 Depreciation expenseA230,400144,000144,000Bad debts expense2,0161,260900 Insurance expenseA1,216760400Depreciation expense230,400144,000144,000 Rent expenseA13,9327,7404,300Insurance expense1,216760400 Repairs expenseA14,6007,3007,300Rent expense13,9327,7404,300 Telephone expenseA12,6369,7208,100Repairs expense14,6007,3007,300 Utilities expenseA5,3763,3602,400Telephone expense12,6369,7208,100 Total COGS & Administration Expense1,264,642Utilities expense5,3763,3602,400 $281,842174,630167,700 Represented by: TRUETRUE Cost of Good Sold 982,800 Selling & Marketing Expenses 296,068 Administrative 281,842 1,560,710 Earnings Per Share Calculation 202020192018 Net income (loss)5565929813754750 Preferred Dividends dividends paid -200-700-600 Common Shares issued Jan 1, 2020 (Jan 1, 2019)12 mth500010050 Outstanding Common Shares issued Dec 31, 2019 (2018)5000100500 EPS$3.57$29.74$5.51Can't match up EPS in 2018 29.74$5.42 EPS = (Net Income-Dividends Paid Preferred Shares) Weighted average (Common outstanding +Issued (12/12)) Part 1 (cont.) Eastern Township Sales Ltd. Statement of Changes in Equity Year Ended December 31, 2020 Ret. Total Share capitalearnings equity CommonPref. sharessharesTotal Balance (deficit), Jan. 1, 2018$74,000$6,600$80,600$312,350$392,950 Net income (loss)54,75054,750 Transactions with shareholders Dividends – common(500)(500) Dividends – preferred(600)(600) Balance (deficit), Jan. 1, 201974,0006,60080,600366,000446,600 Net income (loss)298,137298,137 Transactions with shareholders Dividends – common(700)(700) Dividends – preferred(700)(700) Balance, Dec. 31, 201974,0006,60080,600662,737743,337 Net income (loss)55,65955,659 Transactions with shareholders Shares issued: Common + Preferred 5,0005,94010,94010,940 Dividends -Common (700)(700) Dividends -Preferred(200)(200) Balance, Dec. 31, 2020$79,000$12,540$91,540$717,496$809,036 Pt 1&5 Trial Balance Part 1Part 5Account202020192018 Eastern Township Sales Ltd.LCAccounts payable12,8006,40020203,200 Income StatementASAccounts receivable350,860500,480202,400 Year Ended December 31, 20202018-20192019/20Accumulated amortization, patent2,8561,190700 Vertical AnalysisHorizontal AnalysisVertical $Horizontal $Accumulated depreciation, PPE204,000102,00060,000Selling & marketing 2020201920182020 (%)2019 (%)2020 (%)2019 (%)EXAdvertising expense304160100 Sales1,670,760$1,472,000$920,00013.5%60.0%$552,000$198,760EXAllowance for doubtful accounts1,6641,280800 Cost of goods sold(982,800)(702,000)(540,000)40.0%30.0%-$162,000-$280,800EXAmortization expense1,666490300 Gross profit$687,960770,000380,000-10.7%102.6%$390,000-$82,040EXBad debts expense2,0161,260900 Operating expensesASCash43,56013,2008,800 Selling and marketing($281,842)(158,980)(88,400)77.3%79.8%(70,580)-$122,862EQCommon shares79,00074,00074,000 Administrative($296,068)(174,630)(167,700)69.5%4.1%(6,930)-$121,438COGCost of goods sold982,800702,000540,000 Income (loss) from operations$110,050436,390123,900-74.8%252.2%312,490-$326,340LCCurrent tax liabilities7,5606,3006,300 Other income, net10,34012,20010,800-15.2%13.0%1,400-$1,860EXDepreciation expense230,400144,000144,000 Inc. (loss) before int. and inc. tax$120,390448,590134,700-73.2%233.0%313,890-$328,200EQDividends, common shares700700500 Interest expense($9,072)(22,680)(25,200)-60.0%-10.0%2,520$13,608EQDividends, preferred shares200700600 Income (loss) before inc. taxes$111,318425,910109,500-73.9%289.0%316,410-$314,592IOGain on disposal of PPE7,8409,8007,000 Income tax (exp.) recovered($55,659)(127,773)(54,750)-56.4%133.4%(73,023)$72,114IOIncome taxes expense (recovered)55,659127,77354,750 Net income (loss)$55,659$298,137$54,750-81.3%444.5%243,387-$242,478EXInsurance expense1,216760400 EXInterest expense9,07222,68025,200 Basic and diluted EPS$3.57$29.74$5.42ASInventory393,120210,600156,600 IOInvestment property rental income16,4089,7209,900 EXInvestment property upkeep13,9087,3206,100 LCOperating bank loan213,000106,50071,000 LNCNon-current bank