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Solution Manual For Intermediate Accounting Volume 1, Seventh Canadian Edition

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 1 Chapter 1 : The Framework for Financial Reporting Case 1 - 1 North and South 1 - 2 Richard Ploughwright 1 - 3 Milton Kidd 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 (*W) ................. 1 5 1 - 5 Reporting alternatives ................................ .... 10 1 - 6 Non - IFRS situations . ................................ .... 15 1 - 7 Reporting situations ................................ ....... 2 0 1 - 8 Reporting situations ................................ ....... 15 1 - 9 Objectives of financial reporting .................... 20 1 - 10 Impact of differing objectives (*W) ............... 20 1 - 11 Accounting policy disagreement .................... 15 1 - 12 Accounting policies and reporting objectives . 1 0 1 - 13 Policy choice ................................ ................. 20 *W The solution to this exercise/problem is on the text Web site and in the Study ............ Guide. This solution is marked WEB .

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    © 201 6 McGraw - Hill Ryerson Ltd. All rights reserved 1 - 2 S olutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition Cases Case 1 - 1 Notes for Discussion With Leanne: There is a conflict of interest between the objectives of Leanne and James due to the shareholder agreement. Leanne will have a motivation to decrease shareholders ’ equity since this will reduce the amount that she will be required to pay to buy out James. James will be interested in increasing shareholders ’ equity to increase the amount he 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’? Fair could be consistent accou n ting policies with the past since that would be the expectation of James that the accounting policies would be the same. Fair could be if the economic events change the accounting policy would change. Fair could be both sides split the difference. 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 they would be using IFRS. Inventory Leanne wants to write off the inventory value for the garden gnomes and statues and this will decrease the amount of her payment to James. According to ASPE inventory would be valued at the lower of cost and net realizable value. Even though this inventory ha s been sitting in the gardening centre there is still a few being sold each year. This indicates there is still some value and they should not be written off 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 James since Leanne would get the benefit if these are sold at a later date. The purchase of this inventory would have been a decision made by both James and Leanne so if it was a bad decision 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 James. 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 Leanne on her own it may be appropriate that the impact of this is excluded from the calculation of the shareholders equity. At a minimum the estimate shou l d be reviewed to determine if it is reasonable. Computer Equipment ASPE is flexible in the method used to depr e ciate assets. The declining balance method using 40% would write off the value of the computers in approximately two years. Th i s is

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 3 very fast esp ecially for a small company than is likely to use a computer for a longer period of time that a large company due to limited resources. Just because it will become obsolete quickly does not mean the business will not continue to use the computer. The impact of this is this would reduce the payment to James. If we look at consistency with other assets it would be appropriate to use the straight line method. Since again since this was a decision made only be Leanne maybe it should be excluded from the calculation or maybe they policy should be consistent with their other assets.

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    © 201 6 McGraw - Hill Ryerson Ltd. All rights reserved 1 - 4 S olutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition Case 1 - 2 Dear Mr. Ploughwright: 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 wants to know your future cash flows as well as if you cannot pay ba ck the loan and the value of any collateral. 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 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. 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 compilation or review engagement (case not specific about type of engagement) will not be any higher than it would be had you continued to use the cash basis. Sincerely, Andrian a

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 5 Case 1 - 3 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 and venture capitalists Two entreprene u rs , not wealthy Wealthy family Other capital sources Egypt ian fund Pension fund — pref. shares Bank line of credit Debt through investment fund s and by U.S. and Cdn. banks Capital requirements Capital intensive start - up Salary - based operation; working capital needed Estab lished m anufacturer ; 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 Reporting requirements 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 ntic i pated in 2 - 3 years

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    © 201 6 McGraw - Hill Ryerson Ltd. All rights reserved 1 - 6 S olutions Manual to accompany Intermediate Accounting, Volume 1, 7 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. Breeze Inc. Saturn Software Intern’l Auto Parts Major foreign investor must be kept happy — ASPE may not be understood Liquidity requirements — cash flow/prediction primary objective IPO likely in near future — compliance with IFRS will be necessary (ASPE not appropriate) Important Japanese partner – may be a bias to decrease revenue to decrease payment Bank covenants — protect lines of credit to be able to pay preferred dividends Reflect good management performance to help attract new auto companies as customers Need for major capital investment Complex reporting not necessary; ASPE probably best, plus disclosure of salary information Satisfy investment funds’ reporting expections (e.g., re covenants) Clear reporting of revenues on which 2% fee is based Continuously profitable — minimize income taxes to conserve cash Exhibit su c cess in attracting new customers CRTC requirements Employee profit sharing plan Show st rong profitability to attract high stock price on IPO

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 7 Assignments Technical Review T R 1 - 1 F 1. The International Accounting Standards Board has authority for setting Canadian accounting standards. Canadian standards are set and or endorsed the Acco unting 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 Cana dian 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 le nders , shareholders , employees and regulators . T 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 covena nt that specifies a minimum times - interest - earned ratio, the corporation’s management will be motivated to pick discretion ary accounting policies that max imize 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 th e currency a company using for reporting on their financial statements is not specified.

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    © 201 6 McGraw - Hill Ryerson Ltd. All rights reserved 1 - 8 S olutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition T R 1 - 2 F 1. IFRS and the C P A 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 wi ll 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 trade d 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 earnin gs. 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 acc ounting 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.

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 9 TR1 - 3 1. J IASB 2. F ASPE 3. A AcS B 4. E IFRS 5. I TSX 6. D OSC 7. C CPA 8. B SEC 9. G FASB 10. H DBA

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    © 201 6 McGraw - Hill Ryerson Ltd. All rights reserved 1 - 10 S olutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition TR1 - 4 1. Bank – IFRS required since publicly accountable enterprise 2. ASPE – small group of shareholders likely do not need cost 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

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 11 TR1 - 5 1. Private bank - IFRS required since publicly accountable enterprise 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

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    © 201 6 McGraw - Hill Ryerson Ltd. All rights reserved 1 - 12 S olutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition TR1 - 6 F 1. A disclosed basis of accounting is GAAP. DBA is an alter n ative 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. Public company is required to use IFRS. They cannot use DBA.

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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 13 T R 1 - 7 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 C PA 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 C P A Canada Handbook , either Part I or Part II. 2. F A company that reports in U.S. dol lars 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 Can adian 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 TSE may use U.S. accounting standards. 5. F Al l 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.

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    © 201 6 McGraw - Hill Ryerson Ltd. All rights reserved 1 - 14 S olutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition TR1 - 8 1 . F The U.S. SEC will accept financial statements from U.S. - listed foreign companies in t heir home - country a c counting standards. The NYSE doesn’t control the accounting standards; that is the function of the SEC. A company can use either U.S. GAAP or IFRS. 2 . F Each country that accepts IFRS commits to using the full set of standards. An indi vidual 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 com pany can obtain “outside” capital from anywhere in the world from private equity investors or from debt issues. 4 . F Under Canadian ASPE, a company must report in its functional currency. IN ASPE the term functional currency is not used in the standards. The currency used for reporting on the financial statements is usually the same as the currency they deal with on a daily basis. A company may report in a ny currency for the convenience of its u s ers . 5 . F A private Canadian company that is a subsidiary o f a U.K. parent company may not report in British pound ste r ling unless the pound also is its functional currency. As far as terminology it depends on if the company is using ASPE or IFRS. 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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    Solutions Manual to accompany Intermediate Accounting , Volume 1, 7 th edition 1 - 15 T R 1 - 9 1. C - Bank – cash flow prediction to determine if their loan can be repaid. 2. B - Small private company - income tax deferral since they would want to minimize the amount of income taxes they need to pay 3. A – Not for profit organization – stewardship since they want to ensure assets are used for the correct purposes. 4. E – Management – performance evaluation to see how will company is performing 5. D – Shareholders with agreement – contract compliance to see if agreement is adhered to or not

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