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Solution Manual for Intermediate Accounting Volume 1 8E Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel All Chapters 1-11 [With Appendix] A+

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Solution Manual for
Intermediate Accounting Volume 1 8E Thomas H. Beechy, Joan E. Conrod,
Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel
All Chapters 1-11 [With Appendix]

Chapter 1: The Framework for Financial Reporting

Case 1-1 Mulla and Yang
1-2 Richard Wright
1-3 Taylor Jay

Suggested Time
Technical 1-1 Chapter overview, true-false .............................. 10
1-2 Chapter overview, true-false .............................. 10
1-3 Acronyms……………………………………… 10
1-4 IFRS or ASPE…………………………………. 10
1-5 IFRS or ASPE…………………………………. 10
1-6 Disclosed basis of accounting………………… 10
1-7 GAAP and reporting currency ........................... 10
1-8 GAAP and reporting currency ........................... 10
1-9 Users and objectives………………………….. 10
1-10 Required financial statements ............................ 10

Assignment 1-1 IASB standard-setting ...................................... 10
1-2 International comparisons ................................ 10
1-3 Accounting choices .......................................... 10
1-4 Effect of accounting policies .......................... 15
1-5 Reporting alternatives ...................................... 10
1-6 Non-IFRS situations ........................................ 15
1-7 Reporting situations ......................................... 20
1-8 Reporting situations ......................................... 15
1-9 Objectives of financial reporting ..................... 20
1-10 Impact of differing objectives ......................... 20
1-11 Accounting policy disagreement...................... 15
1-12 Accounting policies and reporting objectives .. 10
1-13 Policy choice .................................................... 20

© 2022 McGraw Hill. All rights reserved
Solutions Manual to accompany Intermediate Accounting, Volume 1, 8th edition 2-1

,Cases

Case 1-1 (LO1.2, LO1.3, LO1.4, LO1.5)

Notes for Discussion With Elicia:

There is a conflict of interest between the objectives of Elicia and Dabika due to the
buyout clause in the shareholder agreement. Elicia will have a motivation to decrease
shareholders‘ equity since this will reduce the amount that she will be required to pay to
buy out Dabika. Dabika will be interested in increasing shareholders‘ equity to increase
the amount she will receive. It must be clarified who I am working for since I may have a
conflict of interest since I know both parties.

It is important that all accounting policies are ‗fair‘ to both sides. What is considered
‗fair‘? From Dabika‘s perspective, fair could be accounting policies consistent with prior
years. From Elicia‘s perspective, fair could be if the economic events change the
accounting policy would change. Fair could be both sides split the difference where
Dabika and Elicia disagree on value. In the future it is important that the shareholders
agreement is more specific.

Due to the choices allowed within GAAP a policy could be selected that would be more
beneficial to one of the parties. It is assumed since this is a small private company that
they are using ASPE. There is no indication that neither Elicia or Dabika would be using
IFRS nor that the bank requires it.

Inventory
Elicia wants to write off the inventory value for the garden gnomes and statues and this
will decrease the amount of the payment to Dabika. According to ASPE, inventory would
be valued at the lower of cost and net realizable value. Even though this inventory has
been sitting in the gardening centre there is still a few being sold each year. This indicates
there is still some value associated with the inventory and therefore it should not be
written down to zero. It should be determined what the net realizable value of this
inventory is to determine the amount of the write off. If it is all written off and then sold
at a later date this would not be fair to Dabika since Elicia would get the benefit of a
reduced shareholders‘ equity and thus a lower payment required to Dabika. The purchase
of this inventory would have been a decision made by both Dabika and Elicia so if the
inventory is unsellable they should both bear the impact of this decision.

Warranty
According to ASPE the accounting policy is appropriate and a warranty expense should
be included for the guarantee. The impact is that this would decrease shareholders‘ equity
and the amount of the payment to Dabika. This is a new policy that did not exist until this
year. The estimate of 5% was only based on sales from the fall. Since it is a new policy
that was made by Elicia on her own it may be appropriate that the impact of this is
excluded from the calculation of shareholders‘ equity. At a minimum the estimate should

©2022 McGraw Hill. All rights reserved
2-2 Solutions Manual to accompany Intermediate Accounting, Volume 1, 8th edition

,be reviewed to determine if it is reasonable. Furthermore, the estimate, if included in the
shareholders‘ equity calculation, should be agreed upon by both Elicia and Dabika.

Computer Equipment
ASPE is flexible in the method used to depreciate assets. The declining balance method
using 40% would write off the value of the computers in approximately two years. This is
very fast especially for a small company that is likely to use a computer for a longer
period of time due to limited resources as compared to a larger company. Just because the
computer may become obsolete quickly does not mean the business will not continue to
derive benefit from the continued use of the computer. The impact of higher depreciation
is a reduction in the payment to Dabika. If we look at consistency with other assets it
would be appropriate to use the straight line method. We should inquire with Elicia as to
her rationale for choosing declining balance instead of the straight-line depreciatoin
method used for all other assets and determine the declining method reflects the actual
usage of the asset (i.e. more of the asset used earlier on). Since again since this was a
decision made only be Elicia maybe it should be excluded from the calculation or maybe
the policy should be consistent with their other assets but further information is required.

Case 1-2 (LO1.2, LO1.3, LO1.4, LO1.5)

Dear Richard Wright:

I am happy to respond to your questions regarding the accounting changes that the new
banker has requested. It is important that you realize that the needs of the banker are
different than your needs. The bank is interested in your ability to make loan payments;
therefore, the banker wants to assess future cash flows, collateral and your ability to pay
back the loan.

First, there is the issue of moving to the accrual basis. While it‘s true that, ultimately,
what you earn is the net cash in your pocket, the cash basis of accounting doesn‘t wholly
capture all of the cash flows that will happen in the future. Your banker wants to know
what liabilities you‘ll have to pay in the coming months (and years), and what amounts
you currently are owed that will be collected in the future weeks or months. The accrual
method really gives a clear picture of future ―cash flow‖.

It‘s for much the same reason that he wishes you to show your cattle at market value. I‘m
sure he recognizes that both your dairy cattle and your breeders are intended for
continued use and are not for sale in the normal course of business.As saleable stock, the
cattle represent a potential cash resource in the event of bankruptcy or default. After all,
you probably use the cattle as collateral for loans, and he needs to know the value of that
collateral.

You should not try to estimate the value of your stock by yourself. For credibility, you
should obtain an independent estimate. The valuation will require a professional
evaluation (and the cost thereof), but will be necessary in order to satisfy the bank.

© 2022 McGraw Hill. All rights reserved
Solutions Manual to accompany Intermediate Accounting, Volume 1, 8th edition 2-3

, Sincerely,
Andriana

Case 1-3 (LO1.1, LO1.2, LO1.3, LO1.4, LO1.5)

Overview

This case is intended to get students to focus on the differences between companies and
the various factors that have a bearing on their financial reporting objectives. Students are
asked to prioritize the factors or characteristics that are most likely to affect each
company‘s financial reporting.

Company Characterics

All three companies are private enterprises. Significant characteristics of each are as
follows:

Breeze Inc. Saturn Software Intern’l Auto Parts
Business New mobile phone network Custom software Auto parts for international
development auto makers
Owners Private investors and venture Two entrepreneurs, not Wealthy family
capitalists wealthy
Other capital Egyptian fund Pension fund—pref. shares Debt through investment
sources Bank line of credit funds and by U.S. and Cdn.
banks
Capital Capital intensive start-up Salary-based operation; Established manufacturer;
requirements working capital needed expanding to gain foreign
customers
Constraints Egypt fund has 3 board seats Bank covenants: Probable debt covenants
– restrictions on
dividend/salary payouts
– new debt
Preferred dividend required
Reporting CRTC Pension fund Investment funds and banks
requirements Egypt fund; Japan partner Bank Potential new customers
IPO Not in the foreseeable future Unlikely Yes, anticipated in 2-3 years
probable?

©2022 McGraw Hill. All rights reserved
2-4 Solutions Manual to accompany Intermediate Accounting, Volume 1, 8th edition

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Solution Manual for Intermediate Accounting Volume 1 8E Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel All Chapters 1-11 [With Appendix] A+

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