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Intermediate Accounting Volume 1, Sixth Canadian Edition Solution Manual

Intermediate Accounting Volume 1, Sixth Canadian Edition Solution Manual is the perfect textbook guide, offering thorough solutions to all your textbook exercises.

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 1 Chapter 1 : The Framework for Financial Reporting Case 1 - 1 Richard Ploughwright 1 - 2 Milton Kidd 1 - 3 International Fashions Inc. Suggested Time Technical Review TR 1 - 1 Chapter overview, true - false ............................ 10 TR 1 - 2 Chapter overview, true - false .......................... . 10 TR 1 - 3 GAAP and R eporting C urrency ..................... . 10 TR 1 - 4 Acronyms ................................ ...................... . 10 Assignment A 1 - 1 IASB Standard S etting ................................ ... 10 A 1 - 2 International C omparisons ............................. 10 A 1 - 3 Accounting C hoices ................................ ....... 10 A 1 - 4 Effect of A ccounting P olicies (*W) ............... 1 5 A 1 - 5 Reporting A lternatives ................................ ... 10 A 1 - 6 Non - IFRS S ituations ................................ ...... 15 A 1 - 7 Reporting S ituations ................................ ...... 2 0 A 1 - 8 Reporting S ituations ................................ ...... 15 A 1 - 9 Objectives of financial reporting .................... 20 A 1 - 10 Impact of D iffering O bjectives ....................... 20 A 1 - 11 Accounting Policy D isagreement ................... 15 A 1 - 12 Accounting Policies and R eporting O bjectives 1 0 A 1 - 13 Policy C hoice ................................ ................ 20 *W The solution to this assignment is on the text web site , Connect. This solution is marked WEB .

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    1 - 2 S olutions Manual to accompany Intermediate Accounting, Volume 1, 6 th edition Questions 1. A public company issues securities (debt and/or equity) to the public; a private company does not issue securities to the public , but may raise capital through private placements. Public and publicly - accountable companies must use IFRS. Private companies (except publicly - accountable enterprises ) may use IFRS , Canadian Accounting Standards for Private Enterprises (ASPE) as provided in the CICA Handbook , or a disclosed basis of accounting (DBA) . 2. A control block exists when a small number of related or affiliated shareholders own enough shares to guarantee being able to cast a majority of shareholders’ votes. Controlling a majority of the votes enables the group to elect the board of directors. Financial reporting will often b e tailored to the needs of the controlling shareholders and not necessarily those of the minority shareholders. 3. Canadian accounting standards are set by the Accounting Standards Board (AcSB) which is a unit of the Canadian Institute of Chartered Accountants. For public companies, the AcSB has adopted IFRS. Standards for private companies are determined by t he AcSB and are maintained as Part II of the CICA Handbook . 4. Canadian private companies can choose to use (a) IFRS, (b) Part II of the CICA Handbook , or (c) a disclosed basis of accounting (DBA). 5. A private company may choose to use IFRS if it is competing with international firms for debt or private equity funding. By being directly comparable to public companies, IFRS - basis statements should make it easier for prospective lenders or investors to compare potential investees on a common basis. The company may thereby be able to lower its average cost of capital as a result. 6. A disclosed basis of a ccounting (DBA) is a set of accounting policies specifically chosen to meet specific user needs, either for private companies that are not constrained by GAAP, or as special - purpose statements intended to meet the accounting measurement requirements of specific contract s such as loan agreements . 7. The most important objective of general purpose financial statements is to serve the information needs public companies’ suppliers of debt and equity capital who normally have no direct access to information and must rely on the company’s general purpose financial reporting. Other users such as employees, customers, and regulators will find the information useful, but they are secondary users. 8. If an organization wishes to portray cash flows, accounting policies will be chosen that minimize inter - period allocations and provide maximum disclosure of future cash flow patterns.

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 3 9. Accounting policies that minimize revenues and maximize expenses (delay revenue recognition and speed up expense recognition) help to minimize income tax. These policies are only successful in meeting the tax minimization objective if they can be used for filing tax returns as well as financial reporting. 10. Income smoothing is the use of accounting policies and estimate s to even - out periodic fluctuations in earnin gs. In come smoothing is intended to produce a relatively smooth record of earnings, free from peaks and valleys that imply risk. One way of accomplishing this objective is to make relatively small adjustments to accounting estimates that can, cumulatively, have a significant impact on net earnings in a particular period. The deliberate use of accounting estimates to manipulate net earnings is an unethical practice. 11. A “big bath” occurs when a company, in the year of an operating loss, uses the opportunity to recognize as many losses or write - offs in that year as possible, thereby maximizing the loss. This makes it easier to report a larger net income in future years because assets are written down, reducing amortization, and because pessimistic loss provisions may be established. 12. A covenant is a provision in a debt agreement that requires a company to maintain a certain level of performance, for example, a maximum debt/equity ratio, or minimum times - interest - earned ratios. Accounting policies chosen by a company with restrictive covenants would be those that help meet the restriction, such as maximi ze earnings, minimize debt, etc. 13. Managers ma y be motivated by self - interest rather than a desire to maximize return for shareholders. They may wish to maximize their compensation, reputation, or keep lenders from getting edgy. Policies chosen to maximize net income are common if managers receive bonuses based on net income. 14. N ational practices concerning corporate debt differ between countries. In some countries, a high debt load indicates risk of banruptcy ; in others, a high debt load indicates that the banks and other lenders have confidence in the company and is a good sign. The world - wide use of IFRS may mislead investors into believing that financial statements can be compared directly between companies based in different countries. 15. A company’s financial reporting is affected by its economic and political environment. Each company’s reporting objectives is designed to suit its local environment. For example, in countries that require tax - book conformity, accounting judgements are driven by the tax law. In countries with high inflation, asset valuation will be affected, such as with substantial asset write - ups to reflect the higher nominal value of assets.

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    1 - 4 S olutions Manual to accompany Intermediate Accounting, Volume 1, 6 th edition Cases Case 1 - 1 Richard Ploughwright Dear Mr. Ploughwright: I am happy to respond to your questions regarding the accounting changes that the new banker has requested. 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 cash you currently are owed that will be collected in the future weeks or months. The accrual method really gives a clear picture of “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. As for my bill, that may change somewhat in the first year due to switching to the accrual method. However, once the accrual approach has been put in place, the cost of the annual review engagement will not be any higher than it would be had you continued to use the cash basis. Sincerely, Andrian

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 5 Case 1 - 2 Milton Kidd 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 not asked to provide the objectives, but rather 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. S ignificant characteristics of each are as follows: Breeze Inc. Saturn Software Intern’l Auto Parts Business New mobile phone network Custom software development Auto parts for international auto makers Owners Private investors Two entreprenuers , not wealthy Wealthy family Other capital sources Egypt ian fund Pension fund — pref erred shares Bank line of credit Debt through investment fund s and by U.S. and Canadian banks Capital requirements Capital intensive start - up Salary - based operation; working capital needed Estab lished mgfr; expanding to gain foreign customers Constraints Egypt fund has 3 board seats Bank covenants :  dividend/salary payouts  new debt Preferred dividend required Probable debt covenants Financial statement users CRTC Egypt fund; Japan partner Pension fund Bank Investment funds and banks Potential new customers IPO probable? Not in the foreseeable future Unlikely Yes, a ntipicpated in 2 - 3 years

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    1 - 6 S olutions Manual to accompany Intermediate Accounting, Volume 1, 6 th edition Prioritization A possible ranking of significant factors may look as shown below. This listing is not definitive , but students should exhibit some logic as to why they rank some factors as more important than others. From the most important to (possibly) the less important: Breeze Inc. Saturn Software Intern’l Auto Parts Major Egyptian investor must be kept happy — IFRS may be appropriate as ASPE may not be understood by the investor Liquidity requirements — cash flow/prediction primary objective IPO likely in near future — compliance with IFRS will be necessary (ASPE not appropriate) Important Japanese telecom partner that Breeze needs for network support Continuously profitable — but minimize income taxes to conserve cash Reflect good management performance to help attract new auto companies as customers Continuing need for major capital investment Bank covenants — protect lines of credit to be able to pay preferred dividends Satisfy investment funds’ reporting expections (e.g., re covenants) Cash needs to be preserved — minimize current incometaxes Salary information must be clearly disclosed Exhibit sucess in attracting new customers Clear reporting of revenues on which 2% fee is based is needed Complex reporting not necessary; ASPE probably best Minimize income taxes to conserve cash

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 7 Case 1 - 3 International Fashions Inc. Memo to: Manager Subject: Reporting objectives for International Fashions Inc. I have reviewed the ownership, organization, and financing of International Fashions Inc. (IFI). There seem to be several conflicting financial reporting objectives. The principal factors that affect the reporting objectives are as follows:  The company has been internally financed. However, they expect to need additional financing as they expand in China. The possible source of this financing has not be en identified. If the source is from Canada or U.S.A., GAAP is likely to be a constraint. F inancing might also be obtained through private equity sources or through debt sources in Asia (e.g., P.R.C., Hong Kong, Taiwan, or Singapore), in which case IFRS compliance may not be necessary.  Most of the IFI inventory is supplied by a parallel company that is under common ownership. The bulk of IFI’s activities is through related - party transactions, both for supplying inventory and for profit transfer via management fees.  There is a China - based partner for the P.R.C. subsidiary. The local partner is entitled to receive 35% of the subsidiary’s net income. This provides motivation for IFI to keep the subsidiary’s profits down, perhaps by charging high prices for inventory that is supplied by the owners’ Xiamen manufacturing facility.  The company is privately owned. The two shareholders are the active managers of the company. ASPE is a viable option for this company, provided that the reporting policies comply with any reporting requirements imposed by whomever provides the external financing.  The IFI head office is a Canadian corporation. Essentially, it is a holding company for the Asian subsidiaries. As a private company, they could use the option of not consolidating their subsidiaries, in which case the parent company’s assets would consist mainly of IFI’s investment in its subsidiaries. The company relies extensively on internal financing, but since there are no external users, there is no need to try to maximize earnings. Tax minimization (deferral) is a good objective because tax savings will retain earnings in the company for future expansion. In view of the tight control maintained by the owners, as well as the intercompany and related company operating structure, I would recommend minimum compliance as a principal reporting objective. We must be careful to give proper disclosure of the related party transactions, though, in order to give an ethical presentation. We don’t want to be party to hiding important information from possible future users of the statements. Because the future sources of financing are unclear, the company should use a generally - accepted set of accounting standards. Since the company is Canadian, either Canadian accounting standards for private enterprises (AS PE) or IRFS should be adopted. I suggest using ASPE to simplify the statements and reduce accounting costs.

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    1 - 8 S olutions Manual to accompany Intermediate Accounting, Volume 1, 6 th edition Consolidated statements may not be needed, since the owner - managers are in such tight control. Nevertheless, the owners may want consolidated statements for their own use in order to get a better overview of the overall status of the company and its operations. The decision on consolidation should be left to the owners. In summary, I recommend the following policies:  Cash flow prediction overall reporting objective  Tax minimization  ASPE compliance  Full disclosure of related party transactions  Minimum compliance There is minimal conflict between these objectives. However, for ethical reasons, full disclosure of related party transactions should take precedence over minimum compliance.

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 9 Technical Review T echn ical Review 1 - 1 F 1. The International Accounting Standards Board has authority for setting Canadian accounting standards. F 2. All Canadian corporations must comply with international accounting standards. F 3. Most Canadian corporations are listed on the Toronto Stock Exchange. F 4. IFRS must be used for the financial statements of every Canadian public corporation. T 5. The primary objective of general purpose financial reporting is to serve the information needs of the suppliers of capital — len ders and shareholders. F 6. The primary objective of financial accounting is to reveal all information about an enterprise’s financial performance. T 7. If a corporation has a restrictive bond covenant that specifies a minimum times - interest - earned rati o, the corporation’s management will be motivated to pick discretionary accounting policies that minimize 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 th e accounting choices made by management. T 9. The presence of a control block can have an impact on a public company’s choice of accounting policies. F 10. Any company using U.S. GAAP must prepare its statements in U.S. dollars.

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    1 - 10 S olutions Manual to accompany Intermediate Accounting, Volume 1, 6 th edition Technical Review 1 - 2 F 1. IFRS and the CICA Handbook , Part II have equal status in Canada for financial reporting. F 2. In a private corporation, the needs of external users have no impact on the company’s financial reporting objectives. F 3. Canadian companies must always p repare their annual financial statements in Canadian dollars. F 4. Canadian accounting standards are governed by the Canada Business Corporations Act. F 5. The debt and equity securities of a private company cannot be traded on public exchanges. Therefor e, private companies have no external sources of financing. T 6. A company may take a “big bath” in a loss year if management wishes to m aximize 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. T 9. Any Canadian company may use IFRS . T 10. The IASB cannot require transnational corporations to use IFR S.

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 11 Technical Review 1 - 3 1. F Most private Canadian companies report on the basis of either IFRS or ASPE, both of which are contained in the CICA Handbook . However, private companies may instead choose to use a disclosed basis of accounting, one in whic h the company’s accounting standards differ in one or more respects from the recommendations in the CICA Handbook , either Part I or Part II . 2. F There is no requirement that a company’s presentation currency be that of the country on which its accountin g standards are based. 3. F Same as above – the company’s presentation currency is not tied to its accounting standards. 4. T 5. F A reporting entity that is based outside the U.S. may use either U.S. standards or IFRS. 6. F The NYSE doesn’t co ntrol the accounting standards — that is the function of the SEC. The SEC permits foreign companies (including those based in Canada) to use either U.S. GAAP or IFRS. 7. F An individual country can choose to review each IFRS standard and accept it, reject it, or mod ify it to suit the national reporting environment. 8. F A private company can obtain “outside” capital from anywhere in the world from private equity investors or from debt issues. 9. F The presentation currency usually is the functional currency, but t hat link is not required. A company may report in a currency other than its functional currency for the convenience of its u s ers 10. F The presentation currency does not need to be the same as the functional currency; the subsidiary can report in British pound sterling to be compatible with the parent’s presentation currency.

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    1 - 12 S olutions Manual to accompany Intermediate Accounting, Volume 1, 6 th edition Technical Review 1 - 4 1. K IASB 2. F ASPE 3. A AcSB 4. E IFRS 5. I TSX 6. D OSC 7. J KFC 8. C CICA 9. B SEC 10. G FASB 11. H DBA

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 13 Assignments Assignment 1 - 1 [Note: the website descriptions change slightly from time to time, so word - perfect responses are not necessary. This suggested solution is based on the continuing general description of the IASB’s processes.] The IASB website indicates six stages of IFRS development: 1. Setting the agenda 2. Planning the project 3. Developing and publishing the discussion paper 4. Developing and publishing the exposure draft 5. Developing and publishing the standard 6. After the standard is issued The last stage can properly be viewed by students as not being a part of developing the standard, and thus a satisfactory response will focus on the first five stages. Setting the agenda Items are added to the agenda after receiving suggested topics from staff, from the Standards Advisory Council, from national standard - setting bodies, and from the corporate sector. After deliberation, the IASB decides which topics merit development and which ones either are already covered adequately by current standards or are not of sufficient economic importance to be added to the agenda. Planning the project The IASB decides how to go about developing a potential new standard. The IASB may decide to develop a new standard on its own, or the Board may invite other standard - setting bodies (e.g., the U.S. FASB) to enter into a cooperative development plan. The IASB may also choose establish a “working group” to help in developing the project. Discussion paper In some projects (but not all), the Board may decide that there is sufficient complexity and/or controversy about the topic that the various views and research should be gathered together and published as a discussion paper for broad circulation. The paper typically includes:  a comprehensive overview of the issue ;  possible approaches in addressing the issue ;  the preliminary views of its authors or the IASB ; and  an invitation to comment .

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    1 - 14 S olutions Manual to accompany Intermediate Accounting, Volume 1, 6 th edition Exposure draft Issuance of an exposure draft (ED) is a mandatory step in the process. After the IASB collects and analyzes responses to its discussion paper received from the public , the Board begins deliberations that lead to an exposure draft, which is a draft of a proposed final standard. Issuance of the ED is followed by a limited public comment period. After the comment period on the ED has ended, the Board considers the received comments. If the comments indicate more discussion is necessary, the Board may take engage in further discussions and issue new ED. and may make slight changes to the ED. Final standard After the comment period on a new or revised ED, the Board may make minor only changes to the exposed standard. Board members then vote on the proposed standard. If the new standard is accepted, the Board then publishes the final standard. After the standard... (not required in the student responses) After an IFRS is issued, the staff and the IASB members hold regular meetings with interested parties, including other standard - setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its proposals.

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 6 th edition 1 - 15 As signment 1 - 2 Memo to: Manager Subject: Viewpoint of conference speaker I attended the conference where I heard Mr. Steans claimed that the financial statements of all companies can now easily be compared between nations because they all are prepared using IFRS. In my view, Mr. Stearns is somewhat naive about the economic realities that underlie financial statements. Financial statements are a product of their reporting environment. The application of IFRS requires a great many accounting decision s , especially accounting estimates. Management’s estimates will be affected by their reporting objectives, such as to minimize current income taxes or to maximize earnings in order to support their stock price. Each company’s legal, economic and political environment affects its financial reporting, as do the ways of doing business in a country. While IFRS gives the appearance of uniformity in financial statement presentation, there is a great deal of variance in the substance underlying the apparent comparability. As a banker, Mr. Stearns will be dealing with both private and public companies. The reporting requirements for private companies will vary among nations, and although private companies’ financial statement s may look uniform, in fact they may be prepared on quite different bases. Although IFRS does establishe principles that can make the financial statements of companies based in different countries much more similar in content and appearance, Mr. Streans over simplifies the situation because he doesn’t take into consideration the significant national differences in the political, eco nomic, and business environment.

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