Solution Manual For Intermediate Accounting Volume 1, Seventh Canadian Edition

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-1Chapter 1: TheFramework forFinancial ReportingCase 1-1North and South1-2Richard Ploughwright1-3Milton KiddSuggested TimeTechnical1-1Chapter overview, true-false............................101-2Chapter overview, true-false...........................101-3Acronyms………………………………………101-4IFRS or ASPE………………………………….101-5IFRS or ASPE………………………………….101-6Disclosed basis of accounting…………………101-7GAAP and reporting currency.........................101-8GAAP and reporting currency.........................101-9Users and objectives…………………………..101-10Required financial statements.........................10Assignment1-1IASB standard-setting....................................101-2International comparisons..............................101-3Accounting choices........................................101-4Effect of accounting policies(*W).................151-5Reporting alternatives....................................101-6Non-IFRS situations.....................................151-7Reporting situations.......................................201-8Reporting situations.......................................151-9Objectives of financial reporting....................201-10Impact of differing objectives(*W)...............201-11Accounting policy disagreement....................151-12Accounting policies and reporting objectives.101-13Policy choice.................................................20*WThe solution to this exercise/problem is on the text Web site and inthe Study............Guide. This solution is markedWEB.

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©2016McGraw-Hill Ryerson Ltd. All rights reserved1-2Solutions Manualto accompanyIntermediate Accounting,Volume 1,7theditionCasesCase 1-1Notes for Discussion With Leanne:There is a conflict of interest between the objectives of Leanne and James due to theshareholder agreement. Leanne will have a motivation to decrease shareholders’equitysince this will reduce the amount that she will be required to pay to buy out James. Jameswill be interested in increasing shareholders’equity to increase the amount he willreceive. It must be clarified who I am working for since I may have a conflict of interestsince I know both parties.It is important that all accounting policies are ‘fair’to both sides. What is considered‘fair’?Fair could be consistent accounting policies with the past since that would be theexpectation of James that the accounting policies would be the same. Fair could be if theeconomic events change the accounting policy would change. Fair could be both sidessplit the difference. In the future it is important that the shareholders agreement is morespecific. Due to the choices allowed within GAAP a policy could be selected that wouldbe more beneficial to one of the parties.It is assumed since this is a small privatecompany that they are using ASPE. There is no indication that they would be using IFRS.InventoryLeanne wants to write off the inventory value for the garden gnomes and statuesandthiswill decrease the amount of her payment to James. According to ASPE inventory wouldbe valued at the lower of cost and net realizable value. Even though this inventory hasbeen sitting in the gardening centre there is still a few being sold each year. This indicatesthere is still some value and they should not be written off to zero. It should bedetermined what the net realizable value of this inventory is to determine the amount ofthe write off. If it is all written off and then sold at a later date this would not be fair toJames since Leanne would get the benefit if these are sold at a later date.The purchase ofthis inventory would have been a decision made by both James and Leanne so if it was abad decision they should bothbearthe impact of this decision.WarrantyAccording to ASPE the accounting policy is appropriate and a warranty expense shouldbe included for the guarantee. The impact is that this would decrease shareholders equityand the amount of the payment to James. This is a new policy that did not exist until thisyear.The estimate of 5% was only based on sales from the fall.Since it is a new policythat was made by Leanne on her own it may be appropriate that the impact of this isexcluded from the calculation of the shareholders equity. At a minimum the estimateshould be reviewed to determine if it is reasonable.Computer EquipmentASPE is flexible in the method used to depreciate assets. The declining balance methodusing 40% would write off the value of the computers in approximately two years. This is

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-3very fast especially for a small company thanis likely to use a computer for a longerperiod of time that a large company due to limited resources. Just because it willbecomeobsolete quickly does not mean the business will not continue to use the computer. Theimpact of this is this would reduce the payment to James. If we look at consistency withother assets it would be appropriate to usethestraight line method. Since again since thiswas a decision made only be Leanne maybe it should be excluded from the calculation ormaybe they policy should be consistent with their other assets.

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©2016McGraw-Hill Ryerson Ltd. All rights reserved1-4Solutions Manualto accompanyIntermediate Accounting,Volume 1,7theditionCase 1-2Dear Mr. Ploughwright:I am happy to respond to yourquestions regarding the accounting changes that the newbanker has requested.It is important that you realize that the needs of the banker aredifferent than your needs. The bank is interested in your ability to make loan paymentstherefore wants to know your future cash flows as wellasif you cannot pay backthe loanandthe 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 whollycapture all of the cash flows that will happen in the future. Your banker wants to knowwhat liabilities you’ll have to pay in the coming months (and years), and what cash youcurrently are owed that will be collected in the future weeks or months. The accrualmethod really gives a clear picture offuture“cash flow”.It’s for much the same reason that he wishes you to show your cattle at market value. I’msure he recognizes that both your dairy cattle and your breeders are intended forcontinued use and are not for sale in the normal course of business.As saleable stock, thecattle 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 thatcollateral.You should not try to estimate the value of your stock by yourself.Forcredibility, youshouldobtainanindependentestimate.Thevaluationwillrequireaprofessionalevaluation (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 accrualmethod. However, once the accrual approach has been put in place, the cost of the annualcompilation orreview engagement(case not specific about type of engagement)will notbe any higher than it would be had you continued to use the cash basis.Sincerely,Andriana

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-5Case 1-3OverviewThis case is intended to get students to focus on the differences between companies andthe various factors that have a bearing on theirfinancial reporting objectives. Students arenot asked to provide the objectives, but rather to prioritize the factors or characteristicsthat are most likely to affect each company’s financial reporting.Company CharactericsAll three companies are private enterprises.Significant characteristics of each are asfollows:Breeze Inc.Saturn SoftwareIntern’l Auto PartsBusinessNew mobile phone networkCustom softwaredevelopmentAuto parts for internationalauto makersOwnersPrivate investorsand venturecapitalistsTwoentrepreneurs, notwealthyWealthy familyOthercapitalsourcesEgyptianfundPension fund—pref. sharesBank line of creditDebt through investmentfundsand by U.S. and Cdn.banksCapitalrequirementsCapital intensive start-upSalary-based operation;working capital neededEstablished manufacturer;expanding to gainforeigncustomersConstraintsEgypt fund has 3 board seatsBank covenants:–dividend/salary payouts–new debtPreferred dividend requiredProbable debt covenantsReportingrequirementsCRTCEgypt fund; Japan partnerPension fundBankInvestment funds and banksPotential new customersIPOprobable?Not in the foreseeable futureUnlikelyYes, anticipated in 2-3 years

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©2016McGraw-Hill Ryerson Ltd. All rights reserved1-6Solutions Manualto accompanyIntermediate Accounting,Volume 1,7theditionPrioritizationA possible ranking of significant factors may look as shown below. Thislistingis notdefinitive, butstudentsshould exhibit some logic as to why they rank some factors asmore important than others.Breeze Inc.Saturn SoftwareIntern’l Auto PartsMajor foreign investormust bekept happy—ASPE may not beunderstoodLiquidityrequirements—cashflow/prediction primary objectiveIPO likely in near future—compliance with IFRSwill benecessary (ASPE not appropriate)ImportantJapanese partner–maybe a bias to decrease revenue todecrease paymentBankcovenants—protect lines ofcredit to be able to pay preferreddividendsReflect good managementperformance to helpattract newauto companies as customersNeed for major capital investmentComplex reporting not necessary;ASPE probably best, plusdisclosure of salary informationSatisfy investment funds’reporting expections (e.g., recovenants)Clear reporting of revenues onwhich 2% fee is basedContinuously profitable—minimize income taxes toconserve cashExhibit success in attracting newcustomersCRTC requirementsEmployee profit sharing planShow strong profitability toattract high stock price on IPO

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-7AssignmentsTechnical ReviewTR1-1F1.The International Accounting Standards Board has authority for setting Canadianaccounting standards.Canadian standards are set and or endorsed the AccountingStandards Board in Canada.F2.All Canadian corporations must comply with international accounting standards.This only applies for publicly accountable enterprises. Private enterprises have achoice between ASPE and IFRS.T3.MostpublicCanadian corporations are listed on the Toronto Stock Exchange.T4.IFRSmustbeusedforthe financialstatementsofeveryCanadianpubliccorporation.T5.The objective of general purpose financial reporting is to serve the informationneeds ofa widevariety of users, including lenders,shareholders, employees andregulators.T6.The primary objective of financial accounting is to reveal all information about anenterprise’s financial performance.T7.If a corporation has a restrictive bond covenant that specifies a minimum times-interest-earned ratio, the corporation’s management will be motivated to pickdiscretionary accounting policies that maximize income. (Note: Times-interest-earned is calculated as income before interest and taxes, divided by interest.)F8.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 certainaccounting policies will impact taxes paid.T9.The presence of a control block can have an impacton a public company’s choiceof accounting policies.F10.AnyCanadiancompanythat usesU.S. GAAP must prepare its statements in U.S.dollars.No thecurrencyacompanyusingforreportingon theirfinancialstatements is not specified.

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©2016McGraw-Hill Ryerson Ltd. All rights reserved1-8Solutions Manualto accompanyIntermediate Accounting,Volume 1,7theditionTR1-2F1.IFRS and theCPACanadaHandbook, Part IIhave equal status in Canada forfinancial reporting.In Canada Canadian companies must follow CPA CanadaHandbook.CPA Canada Handbook, Part Iis based on IFRS and must be used bypublicly accountable enterprises.CPA Canada Handbook, Part IIis an option forprivate enterprises.F2.In a private corporation, the needs of external users have no impact on thecompany’s financial reporting objectives.External users objectives are alwaysconsidered in the selection of accounting policies especially where GAAP allowsa choice. They will also impact on whether a private corporation will decide touse ASPE or IFRS.F3.Canadian companies must always prepare their annual financial statements inCanadian dollars.No the currencya company using for reporting on theirfinancial statementsis not specified.F4.Canadian accounting standards aresetby the Canada Business Corporations Act.Canadian accounting standards are governed by the accounting standards board.F5.The debt and equity securities of a private company cannot be traded on publicexchanges. Therefore, private companies have no external sources of financing.Private companies can raise financing through private placements.T6.A company may take a “big bath” in a loss yearif management wishes tomaximizefuture earnings.T7.A public company may not use DBA for external public financial reporting.F8.When an enterprise’s primary reporting objective is cash flow assessment, theenterprise will use a cash basis of reporting rather than an accrual basis.Accrualaccounting e.g. recording accounts receivables and accounts payable will helppredict future cash flows.T9.Any Canadian company may use IFRS.T10.The IASB cannot require transnational corporations to use IFRS.

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-9TR1-31.JIASB2.FASPE3.AAcSB4.EIFRS5.ITSX6.DOSC7.CCPA8.BSEC9.GFASB10.HDBA

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©2016McGraw-Hill Ryerson Ltd. All rights reserved1-10Solutions Manualto accompanyIntermediate Accounting,Volume 1,7theditionTR1-41.Bank–IFRS required since publicly accountable enterprise2. ASPE–small group of shareholders likely do not need cost IFRS3. Public company-IFRS required since publicly accountable enterprise4. Mutual fund-IFRS required since publicly accountable enterprise5. Private company wholly owned subsidiary of public company–IFRS likely requestedby parent company to allow ease of consolidation

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-11TR1-51. Private bank-IFRS required since publicly accountable enterprise2. Private company many shareholders–ASPE since less costly unless shareholdersrequest IFRS3. Private company major competitor public company–IFRSmore likelysince would bemore comparable to their competitor4. Government business enterprise-IFRS required since publicly accountable enterprise5. Private company intends to go public–IFRSmore likelysince will be required whengo public

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©2016McGraw-Hill Ryerson Ltd. All rights reserved1-12Solutions Manualto accompanyIntermediate Accounting,Volume 1,7theditionTR1-6F1. A disclosed basis of accounting is GAAP. DBA is an alternative to GAAP financialstatements.DBA is not considered to be GAAP.T2.An audit opinion can be provided on a disclosed basis of accounting.T3. A disclosed basis of accounting is used to provide more useful information for theusers.T4.Note disclosure is required if a disclosed basis of accounting is used.F5.A public company can use a disclosed basis of accounting.Public company isrequired to use IFRS.They cannot use DBA.

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-13TR1-71.FA private company based in Canada must follow the recommendations of theCPA CanadaHandbook.Most private Canadian companies report on the basis ofeither IFRS or ASPE, both of which are contained in theCPA CanadaHandbook.However,privatecompaniesmayalsochoosetouseadisclosedbasisofaccounting, one in which the company’s accounting standards differ in one ormore respects from the recommendations in theCPACanadaHandbook, eitherPart I or Part II.2.FA company that reports in U.S. dollars must use U.S. accounting standards.Thereis no requirement that a company’s presentation currency be that of the country onwhich its accounting standards are based.3.FA company cannot report under Canadian accounting standards unless it usesCanadian dollars as the unit of presentation in its financial statements.Same asabove–the company’s presentation currency is not tied to its accounting standards.4.TA Canadian company that is listed on the TSE may use U.S. accounting standards.5.FAll companies listed on the NYSE must use U.S. accounting standards.Areporting entity that is based outside the U.S. may use either U.S. standards orIFRS.

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©2016McGraw-Hill Ryerson Ltd. All rights reserved1-14Solutions Manualto accompanyIntermediate Accounting,Volume 1,7theditionTR1-81.FThe U.S. SEC will accept financial statements from U.S.-listed foreign companiesintheir home-country accounting standards.The NYSE doesn’t control theaccounting standards; that is the function of the SEC.A company can use eitherU.S. GAAP or IFRS.2.FEach country that accepts IFRS commits to using the full set of standards.Anindividual country can choose to review each IFRS standard and accept it, rejectit, or modify it to suit the national reporting environment.3.FA Canadian private enterprise does not have access to outside investors if it usesCanadian ASPE.A private company can obtain “outside” capital from anywherein the world from private equity investors or from debt issues.4.FUnder Canadian ASPE, a company must report in its functional currency.INASPE the term functional currency is not used in the standards.The currencyusedfor reporting on the financial statements isusually thesame as the currency theydeal with on a daily basis.A company may report in anycurrency for theconvenience of its users.5.FA private Canadian company that is a subsidiary of a U.K. parent company maynot report in British pound sterling unless the pound also is its functionalcurrency.As far as terminology it depends on if the company is using ASPE orIFRS.The presentation currency does not need to be the same as the functionalcurrency; the subsidiary can report in British pound sterling to be compatible withthe parent’s presentation currency.

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Solutions Manualto accompanyIntermediate Accounting,Volume 1,7thedition1-15TR1-91.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 minimizethe amount of income taxes they need to pay3.A–Not for profit organization–stewardship since they want to ensure assets are usedfor the correct purposes.4.E–Management–performance evaluation to see how will company is performing5.D–Shareholders with agreement–contract compliance to see if agreement is adheredto or not

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