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SOLUTION MANUAL FOR Intermediate Accounting Volume 1 8th Edition Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, All Chapters 1-11 [With Appendix] A++ €12,30
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SOLUTION MANUAL FOR Intermediate Accounting Volume 1 8th Edition Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, All Chapters 1-11 [With Appendix] A++
SOLUTION MANUAL FOR Intermediate Accounting Volume 1 8th
Edition Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell,
Ingrid McLeod-Dick, All Chapters 1-11 [With Appendix] A++ ..
SOLUTION MANUAL FOR Intermediate Accounting Volume 1 8th
Edition Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell,
Ingrid McLeod-Dick, All Chapters 1-11 [With Appendix] A++
Chapter 1: The Framework for Financial Reporting
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.
1
,Created By: Irfan Ali
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
2
,Created By: Irfan Ali
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)
3
, Created By: Irfan Ali
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.
4
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