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Solution Manual for Intermediate Accounting, 2nd Edition

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Solution Manual for Intermediate Accounting, 2nd Edition - Page 1 preview imageSOLUTIONSMANUALto accompanyIntermediate AccountingVolume 2Second EditionKin LoUniversity of British ColumbaGeorge FisherDouglas College
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 2 preview image
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 3 preview imageContentsChapter 11:Current Liabilities and Contingencies................................................1Chapter 12:Non-Current Financial Liabilities.....................................................43Chapter 13:Equities.............................................................................................88Chapter 14:Complex Financial Instruments......................................................126Chapter 15:Earnings per Share..........................................................................158Chapter 16: Accounting for Income Taxes ........................................................205Chapter 17: Pensions and Other Employee Future Benefits ..............................238Chapter 18:Accounting for Leases....................................................................256Chapter 19:Statement of Cash Flows................................................................291Chapter 20:Accounting Changes.......................................................................346
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 4 preview imageChapter 11Current Liabilities and Contingencies11-1Chapter 11Current Liabilities and ContingenciesM. ProblemsP11-1.Suggested solution:ItemLiabilityFinancial or non-financialobligation?Explanation1.Accounts payableF2.Warranties payableNObligation is to delivergoods or services3.USD bank loanF4.Bank overdraftF5.Sales tax payableNObligation is not contractualin nature6.Notes payableF7.Unearned revenueNObligation is to delivergoods or services8.Finance lease obligationF9.HST payableNObligation is not contractualin nature10.Bank loanF11.Bonds payableF12.Obligation under customerloyalty planNObligation is to delivergoods or services13.Income taxes payableNObligation is not contractualin natureP11-2.Suggested solution:To be classified as a liability, the item must: i) be a present obligation; ii) have arisen from a pastevent; and iii) be expected to result in an outflow of economic benefits. This is an “and” situationas all three criteria must be present before a liability is recorded. The precise amount of theobligation need not be known, provided that a reliable estimate can be made of the amount due.Provisions are liabilities in which there is some uncertainty as to the timing or amount ofpayment.Trade accounts payable meet the criteria of a liability as set out below:*Present obligation: The debtor is presently contractually obliged to pay for goods or servicesreceived.*Past event: The trade payable arose from a good or service the debtor previously received orconsumed.
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 5 preview imageChapter 11Current Liabilities and Contingencies11-2*Outflow of economic benefits: Trade payables are typically settled in cash—an outflow ofeconomic benefits.P11-3.Suggested solution:a.Provisions are liabilities in which there is some uncertainty as to the timing or amount ofpayment.b.Financial liabilities are contracts to deliver cash or other financial assets to another party.They differ from non-financial liabilities as the latter category is typically settled through theprovision of goods or services.c.A non-exhaustive list of financial liabilities includes accounts payable; bank loans; notespayable; bonds payable; and finance leases. A non-exhaustive list of non-financialobligations includes warranties payable; unearned revenue; and income taxes payable.P11-4.Suggested solution:a.The three broad categories of liabilities are:1. Financial liabilities held for trading2. Other financial liabilities3. Non-financial liabilitiesb.*Held-for-trading liabilities are initially recognized at fair value.*Other financial liabilities are initially reported at fair value minus the transaction costsdirectly resulting from incurring the obligation.*The initial measurement of non-financial liabilities depends on their nature. For instance,warranties are recorded at management’s best estimate of the downstream cost of meetingthe entity’s contractual obligations, while prepaid magazine subscription revenue isvalued at the consideration initially received.c.*Held-for-trading liabilities are subsequently recognized at fair value.*Other financial liabilities are subsequently measured at amortized cost using the effectiverate method.*Non-financial liabilities are subsequently measured at the initial obligation less theamount earned to date or satisfied to date through performance. For example, a publisherthat received $750 in advance for a three-year subscription and has delivered themagazine for one year would report an obligation of $500 ($750 – $250).
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 6 preview imageChapter 11Current Liabilities and Contingencies11-3P11-5.Suggested solution:ItemLiabilityCurrent ornon-currentliability, orpotentiallyboth?Explanation1.Accounts payableC2.Warranties payableBThe obligation that is expected to besettled within one year of the balancesheet date is current, the balance non-current3.DepositsBThe classification of the deposit ascurrent or non-current depends upon theexpected settlement date. If less than oneyear after the balance sheet date, theobligation is classified as current4.Bank overdraftC5.Sales tax payableC6.Bank loan maturing in fiveyears was in default duringthe year; before year-end,the lender grants a graceperiod that extends 12months after the balancesheet dateNThe obligation is reported as a non-current liability because the grace periodwas granted before the balance sheet dateand extends twelve months after year-end7.Five-year term loan,amortized payments arepayable annuallyBThe principal portion of the paymentsdue within one year of the balance sheetdate are classified as current, the balanceas non-current8.Unearned revenueBThe classification of the obligation ascurrent or non-current depends uponwhen revenue is the expected to berecognized. If less than one year after thebalance sheet date, the obligation isclassified as current9.Finance lease obligationBThe principal portion of the paymentsdue within one year of the balance sheetdate are classified as current, the balanceas non-current10.HST payableC11.90-day bank loanC12.Bond payable that maturesin two yearsNThe obligation is reported as non-currentas the maturity date is two years after thebalance sheet date13.Obligation under customerloyalty planBThe classification of the obligation ascurrent or non-current depends upon the
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 7 preview imageChapter 11Current Liabilities and Contingencies11-4expected redemption date. If less thanone year after the balance sheet date, theobligation is classified as current14.Income taxes payableC15.Bank loan that matures infive years that is currentlyin defaultC16.Three-year bank loan thatmatures six months afterthe balance sheet dateCP11-6.Suggested solution:Summary journal entries1.Dr. Inventory10,000Dr. HST recoverable ($10,000 × 12%)1,200Cr. Accounts payable ($10,000 + $1,200)11,2002.Dr. Equipment ($20,000 + $500)20,500Dr. HST recoverable ($20,500 × 12%)2,460Cr. Accounts payable ($20,500 + $2,460)22,9603.Dr. Cash [$15,000 × (1 + 12%)]16,800Cr. Sales15,000Cr. HST payable ($15,000 × 12%)1,800Dr. Cost of goods sold ($15,000 x 50%)7,500Cr. Inventory7,5004.Dr. Accounts receivable [$20,000 × (1 + 12%)]22,400Cr. Sales20,000Cr. HST payable ($20,000 × 12%)2,400Dr. Cost of goods sold ($20,000 x 50%)10,000Cr. Inventory10,0005.Dr. Accounts payable22,960Cr. Cash22,9606.Dr. HST payable ($12,000 + $1,800 + $2,400)16,200Cr. HST recoverable ($8,000 + $1,200 + $2,460)11,660Cr. Cash ($16,200 – $11,660)4,540
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 8 preview imageChapter 11Current Liabilities and Contingencies11-5P11-7.Suggested solution:Summary journal entries1.Dr. Inventory12,000Dr. HST recoverable ($12,000 × 15%)1,800Cr. Accounts payable ($12,000 + $1,800)13,8002.Dr. Equipment ($15,000 + $1,000)16,000Dr. HST recoverable ($16,000 × 15%)2,400Cr. Accounts payable ($16,000 + $2,400)18,4003.Dr. Cash [$11,000 × (1 + 15%)]12,650Cr. Sales11,000Cr. HST payable ($11,000 × 15%)1,650Dr. Cost of goods sold ($11,000 x 80%)8,800Cr. Inventory8,8004.Dr. Accounts receivable [$20,000 × (1 + 15%)]23,000Cr. Sales20,000Cr. HST payable ($20,000 × 15%)3,000Dr. Cost of goods sold ($20,000 x 80%)16,000Cr. Inventory16,0005.Dr. Accounts payable13,800Cr. Cash13,8006.Dr. HST payable ($22,000 + $1,650 + $3,000)26,650Cr. HST recoverable ($20,000 + $1,800 + $2,400)24,200Cr. Cash ($26,650 – $24,200)2,450
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 9 preview imageChapter 11Current Liabilities and Contingencies11-6P11-8.Suggested solution:Summary journal entries1.Dr. Inventory ($42,000 – $2,000)40,000Dr. GST recoverable ($40,000 × 5%)2,000Cr. Accounts payable [$40,000 × (1 + 5%)]42,000The purchase of inventory for resale is PST exempt.2.Dr. Cash [$30,000 × (1 + 5%) × (1 + 10%)]34,650Cr. Sales30,000Cr. GST payable ($30,000 × 5%)1,500Cr. PST payable [$30,000 × (1 + 5%) × 10%]3,150Dr. Cost of goods sold ($30,000 × 2/3)20,000Cr. Inventory20,0003.Dr. Accounts receivable [$60,000 × (1 + 5%) × (1 + 10%)]69,300Cr. Sales60,000Cr. GST payable ($60,000 × 5%)3,000Cr. PST payable [$60,000 × (1 + 5%) × 10%]6,300Dr. Cost of goods sold ($60,000 × 2/3)40,000Cr. Inventory40,0004.Dr. GST payable ($20,000 + $1,500 + $3,000)24,500Dr. PST payable ( $22,000 + $3,150 + $6,300)31,450Cr. GST recoverable ($21,000 + $2,000)23,000Cr. Cash ($24,500 + $31,450 – $23,000)32,950
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 10 preview imageChapter 11Current Liabilities and Contingencies11-7P11-9.Suggested solution:Summary journal entries1.Dr. Inventory30,000Dr. GST recoverable ($30,000 × 5%)1,500Cr. Accounts payable [$30,000 × (1 + 5%)]31,500The purchase of inventory for resale is PST exempt.2.Dr. Cash [$20,000 × (1 + 5% + 5%)]22,000Cr. Sales20,000Cr. GST payable ($20,000 × 5%)1,000Cr. PST payable ($20,000 × 5%)1,000Dr. Cost of goods sold ($20,000 × 75%)15,000Cr. Inventory15,0003.Dr. Accounts receivable [$50,000 × (1 + 5% + 5%)]55,000Cr. Sales50,000Cr. GST payable ($50,000 × 5%)2,500Cr. PST payable ($50,000 × 5%)2,500Dr. Cost of goods sold ($50,000 × 75%)37,500Cr. Inventory37,5004.Dr. GST payable ($18,000 + $1,000 + $2,500)21,500Dr. PST payable ( $14,000 + $1,000 + $2,500)17,500Cr. GST recoverable ($15,000 + $1,500)16,500Cr. Cash ($21,500 + $17,500 – $16,500)22,500
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 11 preview imageChapter 11Current Liabilities and Contingencies11-8P11-10.Suggested solution:Oct. 31,2015Dr. Retained earnings30,000Cr. Dividends payable on preferred shares(10,000 sh × $1.00/sh × 2) + (5,000 sh × $2.00/sh)30,000The preferred shares B are non-cumulative in natureand as such are not entitled to dividends for 2014 asthey were not declared.Nov. 30,2015Dr. Retained earnings50,000Cr. Dividends payable on common shares(100,000 sh × $0.50 sh)50,000Dec. 1,2015Dr. Dividends payable on preferred shares30,000Cr. Cash30,000Jan. 2, 2016Dr. Dividends payable on common shares50,000Cr. Cash50,000P11-11.Suggested solution:Oct. 31,2016Dr. Retained earnings175,000Cr. Dividends payable on preferred shares(50,000 sh × $2.00/sh) + (25,000 sh × $1.00/sh ×3)175,000The preferred shares A are non-cumulative in natureand as such are not entitled to dividends for 2014 or2015 as they were not declared.Nov. 30,2016Dr. Retained earnings300,000Cr. Common stock dividends distributable(200,000 sh × 10%/sh × $15.00)300,000Dec. 1,2016Dr. Dividends payable on preferred shares175,000Cr. Cash175,000Jan. 2, 2017Dr. Common stock dividends distributable300,000Cr. Common shares300,000
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 12 preview imageChapter 11Current Liabilities and Contingencies11-9P11-12.Suggested solution:Jan. 31Dr. Franchise fee expense2,500Cr. Royalty fee payable($50,000 × 5%)2,500Dr. Sales and marketing expense1,250Cr. Royalty fee payable($50,000 × 2.5%)1,250Feb. 15Dr. Royalty fee payable3,750Cr. Cash($2,500 + $1,250)3,750Feb. 28Dr. Franchise fee expense2,000Cr. Royalty fee payable($40,000 × 5%)2,000Dr. Sales and marketing expense1,000Cr. Royalty fee payable($40,000 × 2.5%)1,000Mar. 15Dr. Royalty fee payable3,000Cr. Cash($2,000 + $1,000)3,000Mar. 31Dr. Franchise fee expense3,000Cr. Royalty fee payable($60,000 × 5%)3,000Dr. Sales and marketing expense1,500Cr. Royalty fee payable($60,000 × 2.5%)1,500Apr. 15Dr. Royalty fee payable4,500Cr. Cash($3,000 + $1,500)4,500
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 13 preview imageChapter 11Current Liabilities and Contingencies11-10P11-13.Suggested solution:a.Jan. 1, 2016Dr. Franchise agreement30,000Cr. Cash30,000Dec. 31, 2016Dr. Amortization expense - franchise3,000Cr. Franchise agreement($30,000/10 years)3,000Dec. 31, 2016Dr. Royalty fee expense59,500Cr. Royalty fee payable($850,000 × 7%)59,500Dec. 31, 2016Dr. Sales and marketing expense17,000Cr. Royalty fee payable($850,000 × 2%)17,000b.Jan. 15, 2017Dr. Royalty fee payable76,500Cr. Cash($59,500 + $17,000)76,500P11-14.Suggested solution:a. Summary journal entries2014Dr. Cash (6×$2,000)12,000Cr. Deferred revenue12,0002014Dr. Cash (2×$3,000)6,000Dr. Deferred revenue (2×$2,000)4,000Cr. Revenue (2×$5,000)10,000Dr. Cost of goods sold (2×$2,300)4,600Cr. Cash4,6002015Dr. Cash (4×$3,000)12,000Dr. Deferred revenue (4×$2,000)8,000Cr. Revenue (4×$5,000)20,000Dr. Cost of goods sold (4×$2,300)9,200Cr. Cash9,200b.The balance in the deferred revenue account as at December 31, 2014 was $8,000 ($12,000–$4,000 or $2,000×4)
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 14 preview imageChapter 11Current Liabilities and Contingencies11-11P11-15.Suggested solution:1.Dr. Warranty expense30,000Cr. Provision for warranty obligations30,0002,500 × ($5 + $7) = $30,0002.Dr. Provision for warranty obligations6,000Cr. Wage expense6,0003.The total provision for warranty obligations that will be reported at year-end is $24,000($30,000 – $6,000). Of this amount, $6,500 will be reported as a current obligation [(2,500 × $5)– $6,000 = $6,500] and the $17,500 balance as a non-current liability (2,500 × $7 = $17,500) or($24,000 – $6,500 = $17,500).4.Companies offer warranties that their products will be free from defects for a specifiedperiod to facilitate the sale of their merchandise.P11-16.Suggested solution:The obligation is initially valued at the spot exchange rate evident on the transaction date andrevalued at period end using the period ending spot rate.May 1,2016Dr. Cash (US$140,000 × $1.02)142,800Cr. Bank loan142,800Dec. 31,2016Dr. Foreign exchange loss (US$140,000 × ($1.04 – $1.02))2,800Cr. Bank loan2,800
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 15 preview imageChapter 11Current Liabilities and Contingencies11-12P11-17.Suggested solution:The obligation is initially valued at the spot exchange rate evident on the transaction date andrevalued at period end and payment date using the applicable spot rate.Dec. 15, 2015Dr. Supplies expense (US$5,000 × $1.04)5,200Cr. Trade account payable5,200Dec. 31, 2015Dr. Trade account payable150Cr. Foreign exchange gain(US$5,000 × ($1.04 – $1.01))150Jan. 3, 2016Dr. Foreign exchange loss100Cr. Trade account payable(US$5,000 × ($1.03 – $1.01))100Dr. Trade account payable ($5,200 - $150 + $100)5,150Cr. Cash(US$5,000 × $1.03)5,150P11-18.Suggested solution:a.Revenue is recognized for the award portion of company-offered rewards when thecustomer claims their reward. Revenue is recognized for the award portion of third-partyrewards at the time of sale.b.The awards portion is determined using fair value techniques. Sales revenue is a residualamount equal to the price charged less that allocated to awards revenue.P11-19.Suggested solution:Summary journal entriesTo recognize the sales-related revenue in 2015a.Dr. Cash(20,000 × $600)12,000,000Cr.Sales12,000,000Dr. Cost of goods sold (20,000 × $350)7,000,000Cr.Inventory7,000,000Dr. Manufacturer’s rebate expense ((20,000 × $50 × 30%)300,000Cr.Provision for manufacturer’s rebates300,000To recognize the issuance of the rebate chequesin2016b.Dr. Provision for manufacturer’s rebates300,000Cr. Cash300,000
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Solution Manual for Intermediate Accounting, 2nd Edition - Page 16 preview imageChapter 11Current Liabilities and Contingencies11-13P11-20.Suggested solution:a.Dr. Computer system19,231Cr. Note payable ($20,000 / 1.04)19,231Using a BAII PLUS financial calculator1N, 4 I/Y, 20000 FV, CPT PVPV = –19,231b.Dr. Interest expense769Cr. Note payable769$19,231 × 4% = $769c.Dr. Note payable20,000Cr. Cash20,000No entry for interest is required as it had been accrued on December 31, 2014.P11-21.Suggested solution:a.Dr. Automobile40,000Cr. Note payable30,000Cr. Cash10,000b.Dr. Interest expense605Cr. Accrued interest payable605$30,000 × 4% × 184 / 365 = $605 (rounded)c.Dr. Interest expense296Dr. Accrued interest payable605Dr. Note payable30,000Cr. Cash ($30,000 + $296 + $605)30,901$30,000 × 4% × 90 / 365 = $296 (rounded)
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Intermediate Accounting, by Kin Lo,...

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