SOLUTION MANUAL
Intermediate Accounting (Volume 1),
8th Canadian Edition
By Thomas H. Beechy, Joan E. Conrod, All Chapters 1 - 11
,TABLE OF CONTENTS
VOLUME 1
Chapter 1: The Framework for Financial Reporting
Chapter 2: Accounting Judgements
Chapter 3: Statements of Income and Comprehensive Income
Chapter 4: Statements of Financial Position and Changes in Equity; Disclosure Notes
Chapter 5: The Statement of Cash Flows
Chapter 6: Revenue Recognition
Chapter 7: Financial Assets: Cash and Receivables
Chapter 8: Cost-Based Inventories and Cost of Sales
Chapter 9: Long-Lived Assets
Chapter 10: Depreciation, Amortization, and Impairment
Chapter 11: Financial Instruments: Investments in Bonds and Equity Securities
Appendix: Fundamentals: The Accounting Information Processing System
,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
,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
,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.
,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?
,Prioritization
A possible ranking of significant factors may look as shown below from most significant to
least significant. This listing is not definitive, but students should exhibit some logic as to
why they rank some factors as more important than others.
Breeze Inc. Saturn Software Intern’l Auto Parts
Major foreign investor must be Liquidity requirements—cash flow IPO likely in near future—
kept happy—ASPE may not be prediction primary objective compliance with IFRS will be
understood so IFRS may be more necessary (ASPE not appropriate)
appropriate
Important Japanese partner Bank covenants—protect lines of Reflect good management
(Telyu) – there may be a bias to credit to be able to pay preferred performance to help attract new
decrease revenue to decrease dividends auto companies as customers
payment to Telyu
Need for major capital investment, Complex reporting not necessary; Satisfy investment funds‘
major competitors are public ASPE probably best, plus reporting expections (e.g., re
disclosure of salary information covenants)
Clear reporting of revenues on Continuously profitable— Exhibit success in attracting new
which 2% fee is based minimize income taxes to customers
conserve cash
CRTC requirements Employee profit sharing plan Show strong profitability to
attract high stock price on IPO
Assignments Technical
Review
TR 1-1 (LO1.1, LO1.2, LO1.3, LO1.4, LO1.5, LO1.6, LO1.7)
The question statement has been repeated below followed by the correct statement in
instances where the question statement is false.
F 1. The International Accounting Standards Board has authority for setting Canadian
accounting standards. Canadian standards are set and or endorsed the Accounting
Standards Board in Canada.
F 2. All Canadian corporations must comply with international accounting standards. This
only applies for publicly accountable enterprises. Private enterprises have a choice
between ASPE and IFRS.
T 3. Most public Canadian corporations are listed on the Toronto Stock Exchange.
T 4. IFRS must be used for the financial statements of every Canadian public
corporation.
T 5. The objective of general purpose financial reporting is to serve the information
needs of a wide variety of users, including lenders, shareholders, employees and
regulators.
T 6. The primary objective of financial accounting is to reveal information about an
enterprise’s financial performance.
,T 7. If a corporation has a restrictive bond covenant that specifies a minimum times-
interest-earned ratio, the corporation’s management will be motivated to pick
discretionary accounting policies that maximize income. (Note: Times-interest-
earned is calculated as income before interest and taxes, divided by interest.)
F 8. Income tax law has no impact on the accounting choices made by management.
There are certain sections of the tax act that are based on GAAP so certain
accounting policies will impact taxes paid.
T 9. The presence of a control block can have an impact on a public company’s choice
of accounting policies.
F 10. Any Canadian company that uses U.S. GAAP must prepare its statements in U.S.
dollars. No the currency a company uses for reporting on their financial
statements is not specified (in ASPE) or dependent on the functional currency for
reporting (IFRS).
TR 1-2 (LO1.1, LO1.2, LO1.3, LO1.4, LO1.5, LO1.6, LO1.7)
The question statement has been repeated below followed by the correct statement in
instances where the question statement is false.
F 1. IFRS and the CPA Canada Handbook, Part II have equal status in Canada for
financial reporting. In Canada Canadian companies must follow CPA Canada
Handbook. CPA Canada Handbook, Part I is based on IFRS and must be used by
publicly accountable enterprises. CPA Canada Handbook, Part II is an option for
private enterprises.
F 2. In a private corporation, the needs of external users have no impact on the company’s
financial reporting objectives. External users’ objectives are always considered in
the selection of accounting policies especially where GAAP allows a choice. They
will also impact on whether a private corporation will decide to use ASPE or
IFRS.
F 3. Canadian companies must always prepare their annual financial statements in
Canadian dollars. No the currency a company using for reporting on their financial
statements is not specified.
F 4. Canadian accounting standards are set by the Canada Business Corporations Act.
Canadian accounting standards are governed by the Accounting Standards Board.
F 5. The debt and equity securities of a private company cannot be traded on public
exchanges. Therefore, private companies have no external sources of financing.
Private companies can raise financing through private placements.
T 6. A company may take a ―big bath‖ in a loss year if management wishes to
maximize future earnings.
T 7. A public company may not use DBA for external public financial reporting.
F 8. When an enterprise’s primary reporting objective is cash flow assessment, the
enterprise will use a cash basis of reporting rather than an accrual basis. Accrual
accounting e.g. recording accounts receivables and accounts payable will help
, predict future cash flows.
T 9. Any Canadian company may use IFRS.
T 10. The IASB cannot require transnational corporations to use IFRS.TR1-3
(LO1.1)
1. J IASB
2. F ASPE
3. A AcSB
4. E IFRS
5. I TSX
6. D OSC
7. C CPA
8. B SEC
9. G FASB
10. H DBA
TR1-4 (LO1.1)
1. Bank – IFRS required since publicly accountable enterprise
2. Private company two shareholders – ASPE required for small group of shareholders;
likely do not need to incur cost of IFRS.
3. Public company - IFRS required since publicly accountable enterprise
4. Mutual fund - IFRS required since publicly accountable enterprise
5. Private company wholly owned subsidiary of public company – IFRS likely requested by
parent company to allow ease of consolidation
TR1-5 (LO1.1)
1. Private bank - IFRS required since it holds assets in a fiduciary capacity as one of its
primary businesses.
2. Private company many shareholders – ASPE since less costly unless shareholders
request IFRS
3. Private company major competitor public company – IFRS more likely since would be
more comparable to their competitor
4. Government business enterprise - IFRS required since publicly accountable enterprise
5. Private company intends to go public – IFRS more likely since will be required when go
public
TR1-6 (LO1.1)
The question statement has been repeated below followed by the correct statement in
instances where the question statement is false.
F 1. A disclosed basis of accounting is GAAP. DBA is an alternative to GAAP financial
statements. DBA is not considered to be GAAP.
T 2. An audit opinion can be provided on a disclosed basis of accounting.
, T 3. A disclosed basis of accounting is used to provide more useful information for the
users.
T 4. Note disclosure is required if a disclosed basis of accounting is used.
F 5. A public company can use a disclosed basis of accounting. A public company is
required to use IFRS. They cannot use DBA.
TR 1-7 (LO1.1, LO1.3, LO1.4)
1. F A private company based in Canada must follow the recommendations of the
CPA Canada Handbook. Most private Canadian companies report on the basis of
either IFRS or ASPE, both of which are contained in the CPA Canada Handbook.
However, private companies may also choose to use a disclosed basis of
accounting, one in which the company’s accounting standards differ in one or
more respects from the recommendations in the CPA Canada Handbook, either
Part I or Part II.
2. F A company that reports in U.S. dollars must use U.S. accounting standards. There is
no requirement that a company’s presentation currency be that of the country on
which its accounting standards are based.
3. F A company cannot report under Canadian accounting standards unless it uses
Canadian dollars as the unit of presentation in its financial statements. Same as
above–the company’s presentation currency is not tied to its accounting standards.
4. T A Canadian company that is listed on the TSX may use U.S. accounting standards if
they also file their financial statements in the U.S.
5. F All companies listed on the NYSE must use U.S. accounting standards. A reporting
entity that is based outside the U.S. may use either U.S. standards or IFRS.
TR1-8 (LO1.1, LO1.3, LO1.4)
1. F The U.S. SEC will accept financial statements from U.S.-listed foreign companies in
their home-country accounting standards. The U.S. SEC permits IFRS to be
used when a foreign-listed company requires IFRS. Therefore U.S.-listed foreign
companies can use either U.S. GAAP or IFRS.
2. F Each country that accepts IFRS commits to using the full set of standards. An
individual country can choose to review each IFRS standard and accept it, reject it,
or modify it to suit the national reporting environment.
3. F A Canadian private enterprise does not have access to outside investors if it uses
Canadian ASPE. A private company can obtain ―outside‖ capital from anywhere in
the world from private equity investors or from debt issues.
