Intermediate Accounting Volume 2, 13th Canadian EditionDonald E. Kieso

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 13 NON-FINANCIAL AND CURRENT LIABILITIES CHAPTER STUDY OBJECTIVES 1. Understand the importance of non-financial and current liabilities from a business perspective. Cash flow management is a key control factor for most businesses. Taking advantage of supplier discounts for prompt payment is one step companies can take. Control of expenses and related accounts payable can improve the efficiency of a business, and can be particularly important during economic downturns.

2. Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are measured. Liabilities are defined as an obligation of an entity arising from past transactions or events that are settled through a transfer of economic resources in the future. The entity should have little (or no) ability to avoid the duty or responsibility. Financial liabilities are a subset of liabilities. They are contractual obligations to deliver cash or other financial assets to another party, or to exchange financial assets or liabilities with another party under conditions that are potentially unfavourable. Financial liabilities are initially recognized at fair value, and subsequently either at amortized cost or fair value. ASPE does not specify how non-financial liabilities are measured. However, unearned revenue is generally measured at the fair value of the goods or services to be delivered in the future, while others are measured at the best estimate of the resources needed to settle the obligation. Under IFRS, non-financial liabilities other than unearned revenue are measured at the best estimate of the amount the entity would rationally pay at the date of the SFP to settle the present obligation.

3. Define current liabilities and identify and account for common types of current liabilities. Current liabilities are obligations that are payable within one year from the date of the SFP or within the operating cycle if the cycle is longer than a year. IFRS also includes liabilities held for trading and any obligation where the entity does not have an unconditional right to defer settlement beyond 12 months after the date of the SFP. There are several types of current liabilities. The most common are accounts and notes payable, and payroll-related obligations.

4. Identify and account for the major types of employee-related liabilities. Employee-related liabilities include (1) payroll deductions, (2) compensated absences, and (3) profit-sharing and bonus agreements. Payroll deductions are amounts that are withheld from employees and result in an obligation to the government or another party. The employer’s matching contributions are also included in this obligation. Compensated absences earned by employees are company obligations that are recognized as employees earn an entitlement to them, as long as they can be reasonably measured. Bonuses based on income are accrued as an expense and liability as the income is earned.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

5. Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. A decommissioning, restoration, or asset retirement obligation (ARO) is an estimate of the costs a company is obliged to incur when it retires certain assets. It is recorded as a liability and is usually long-term in nature. Under ASPE, only legal obligations are recognized. They are measured at the best estimate of the cost to settle them at the date of the SFP, and the associated cost is included as part of the cost of property, plant, and equipment. Under IFRS, both legal and constructive obligations are recognized. They are measured at the amount the entity would rationally pay to be relieved of the obligation, and are capitalized as part of property, plant and equipment or to inventory, if due to production activities. Over time, the liability is increased for the time value of money and the asset costs are amortized to expense. Entities disclose information about the nature of the obligation and how it is measured, with more disclosures required under IFRS than ASPE.

6. Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Historically, an expense approach has been used to account for the outstanding liability, and this type of approach is still used for assurance-type warranties as initially discussed in Chapter 6. More recently, standards such as IFRS 15 have moved to a revenue approach for warranties that are not included in the sales price of the product (that is, for service-type warranties). Under the expense approach, the outstanding liability is measured at the cost of the economic resources needed to meet the obligation. The assumption is that, along with the liability that is required to be recognized at the reporting date, the associated expense needs to be measured and matched with the revenues of the period. Under the revenue approach, the outstanding liability is measured at the value of the obligation. The proceeds received for any goods or services yet to be delivered or performed are considered to be unearned revenue at the point of sale. Until the revenue is earned, the obligation— the liability—is reported at its sales or fair value. The liability is then reduced as the revenue is earned. More generally, when an entity receives proceeds in advance or for multiple deliverables, unearned revenue is recognized to the extent the entity has not yet performed. This is measured at the fair value of the remaining goods or services that will be delivered. When costs remain to be incurred in revenue transactions where the revenue is considered earned and has been recognized, estimated liabilities and expenses are recognized at the best estimate of the expenditures that will be incurred. This is an application of the matching concept.

7. Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Under existing standards, a loss is accrued and a liability recognized if (1) information that is available before the issuance of the financial statements shows that it is likely (or more likely than not under IFRS) that a liability has been incurred at the date of the financial statements, and (2) the loss amount can be reasonably estimated (under IFRS, it would be a rare situation where this could not be done). Some minor changes are under consideration by the IASB as described in the Looking Ahead section of the chapter. Guarantees in general are accounted for similarly to contingencies. Commitments, or contractual obligations, do not usually result in a liability at the date of the SFP. Information about specific types of outstanding commitments is reported at the date of the SFP.

8. Indicate how non-financial and current liabilities are presented and analyzed. Current liability 13-2 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

accounts are commonly presented as the first classification in the liability section of the SFP, although under IFRS, an alternative presentation is to present current assets and liabilities at the bottom of the statement. Within the current liability section, the accounts may be listed in order of their maturity or in order of their liquidation preference. IFRS requires information about and reconciliations of any provisions. Additional information is provided so that there is enough to meet the requirement of full disclosure. Information about unrecognized loss contingencies is reported in notes to the financial statements, including their nature and estimates of possible losses. Commitments at year end that are significant in size, risk, or time are disclosed in the notes to the financial statements, with significantly more information required under IFRS. Three common ratios used to analyze liquidity are the current, acid-test, and days payables outstanding ratios.

9. Identify differences in accounting between IFRS and ASPE and what changes are expected in the near future. In June 2015, a Staff Paper on the Research—Provisions, Contingent Liabilities and Contingent Assets (IAS 37) project was published. In 2020, as a follow-up, the IASB limited its study to matters such as aligning the definition of a liability and requirements for identifying liabilities in IAS 37 with updates in the Conceptual Framework for Financial Reporting, which became effective in 2020. Other goals are to clarify the costs to include in the measure of a provision and to specify whether the rates used by entities to discount provisions should reflect their own credit risk.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer c c b b a d c b c d a b c a b a b d b d b c d c d c c d a d c b b c b d b b c b a b d

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Essential characteristics of liabilities Constructive obligation Recognition and accounting for financial liabilities Non-financial liabilities Classification of notes payable Zero-interest-bearing notes Refinancing of long-term debts Identify item that is not a current liability Identify the current liability. Classification of stock dividends distributable Goods and Services Tax Identify current liability Accounting for GST Provincial Sales Tax Corporation income tax Knowledge of accounts payable Adjusting entry for zero-interest-bearing note Journal entry for payment of interest-bearing note Determine amount of short-term debt to be reported Determine amount of short-term debt to be reported Calculate accounts receivable including sales taxes Calculate cost of purchase for own use Payment of GST Adjusting entry for corporate income tax Determine amount of short-term debt to be reported Calculate accrued interest payable Calculate HST collected Calculate a zero-interest bearing note Calculate interest on a zero-interest bearing note Current liabilities in general – determine false statement Determine employer’s payroll costs Recording payroll expenses – ASPE Accumulating rights to benefits Accrual of liability for compensated absences Non-accumulating rights to benefits Methods of calculating employee bonuses Calculate payroll tax expense Calculate vacation pay expense to be reported Calculate accrued vacation pay liability Calculate net pay Calculate accrued salaries payable Accrual of payroll taxes Total source deductions owing 13-4

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c d c Answer a d b b a b c d b d c b a a c a b c b a c a d c d b d d d d c c d c a b c c

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.

Definition of a provision Recognition of an asset retirement obligation Recognition of an asset retirement obligation Description Recording accretion expense for ARO Entry for asset retirement obligation Entry for asset retirement obligation accretion Calculate asset retirement obligation Accounting for asset retirement obligations – IFRS Accounting for asset retirement obligations – ASPE Revenue approach for product guarantees Determine false statement regarding warranties Accounting for premiums and coupons IFRS re customer loyalty programs Adjusting entry for unearned revenue Determine current and long-term portions of debt Expense approach to warranty Revenue approach to warranty Calculate warranty liability (expense approach) Calculate liability for unredeemed coupons Calculate unearned service contract revenue Calculate liability from unredeemed trading stamps Service-Type Warranty Liability Account for Warranty Liability Recognition of contingencies (ASPE) Recognition of contingencies (IFRS) Accrual of contingent liability Disclosure of commitments Determine range of loss accrual Determine amount to accrue as a loss contingency Determine amount to accrue as a gain contingency Determine uncertain liabilities Contingent gains Acid-test ratio elements Days payable outstanding elements Calculate quick (acid-test) ratio Calculate current ratio Calculate quick ratio Calculate days payables outstanding Essential characteristics of liabilities Proposed amendments regarding provisions and contingencies New conceptual framework

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Item E13-85 E13-86 E13-87 E13-88 E13-89 E13-90 E13-91 E13-92 E13-93 E13-94 E13-95 E13-96 E13-97 E13-98 E13-99 E13-100

Description Non-financial versus financial liabilities Interest bearing note Zero interest bearing note Notes payable Sales taxes Income Taxes Payable Payroll entries Compensated absences Compensated absences Asset retirement obligation – ASPE Asset retirement obligation – IFRS Product guarantee and expense approach Product guarantee and cash basis method Premiums Premiums Contingent liabilities

PROBLEMS Item P13-101 P13-102 P13-103 P13-104 P13-105 P13-106 P13-107 P13-108 P13-109 P13-110 P13-111 P13-112 P13-113

Description Common types of current liabilities Accounts and notes payable Presentation of short-term debt Refinancing of short-term debt Payroll deduction entries Employee-related liabilities Asset retirement obligation – IFRS Asset retirement obligation – ASPE Premiums: expense versus revenue approach Premiums: multi-years Warranties Unredeemed coupons Contingences

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. According to the new Conceptual Framework and under ASPE in the CPA Canada Handbook Part II, which of the following is NOT an essential characteristic of a liability? a) It embodies a duty or responsibility. b) The transaction or event that obliges the entity has occurred. c) The obligation is enforceable on the other party. d) The entity has little or no discretion to avoid the duty. Answer: c Difficulty: Easy Learning Objective: Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are measured. Section Reference: Recognition and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. A constructive obligation arises when a) the entity is legally obligated to honour the obligation. b) the entity makes an unconditional promise to pay money in the future. c) past or present company practice reveals the entity acknowledges a potential economic burden. d) the entity has a conditional obligation which becomes unconditional if an uncertain future event occurs. Answer: c Difficulty: Easy Learning Objective: Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are measured. Section Reference: Recognition and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

3. Which of the following statements is NOT true about recognition and subsequent accounting for financial liabilities? a) They are initially recognized at their fair value. b) After acquisition, they continue to be accounted for at fair value. c) After acquisition, they are generally accounted for at amortized cost. d) Short-term liabilities, such as accounts payable, are usually recorded at their maturity value. 13-7 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Easy Learning Objective: Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are measured. Section Reference: Recognition and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. Which of the following characteristics of non-financial liabilities is NOT correct? a) The exact timing of these obligations is generally not known. b) Non-financial obligations are generally easier to measure. c) Non-financial obligations are subject to different measurement standards than financial obligations. d) Non-financial obligations are satisfied with goods and services. Answer: b Difficulty: Easy Learning Objective: Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are measured. Section Reference: Recognition and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. Among Oslo Corp.’s short-term obligations, on its most recent statement of financial position date, are notes payable totaling $250,000 with the Provincial Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on Oslo’s statement of financial position as a) current liabilities. b) deferred charges. c) long-term liabilities. d) shareholders’ equity. Answer: a Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 13-8 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

6. Regarding zero-interest-bearing notes, a) they do not have an interest component. b) the debtor receives the future value of the note and pays back the present value. c) any interest is never recognized until the note is repaid. d) the debtor receives the present value of the note and pays back the future value. Answer: d Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

7. Under IFRS, even if the entity plans to refinance long-term debt, the current portion must be reported as a current liability UNLESS a) long-term financing has been completed after the statement of financial position date, but before the financial statements are released. b) management intends to refinance the debt on a long-term basis. c) at statement of financial position date, the entity expects to refinance under an existing agreement for at least a year, and the decision is solely at its discretion. d) management intends to discharge the debt by issuing shares. Answer: c Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

8. Which of the following should NOT be included in the current liabilities section of the statement of financial position? a) trade accounts payable b) current portion of long-term debt to be retired by non-current assets c) short-term zero-interest-bearing notes payable d) a liability due on demand (callable debt)

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

9. Which of the following is a current liability? a) preferred dividends in arrears b) stock dividends distributable c) preferred cash dividends payable d) stock splits Answer: c Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. Stock dividends distributable should be classified on the a) income statement as an expense. b) statement of financial position as an asset. c) statement of financial position as a liability. d) statement of financial position as an item of shareholders' equity. Answer: d Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) is a value added tax. b) is a sales tax charged by each province on all taxable goods. c) in some provinces, is an income tax. d) must be collected by all businesses in Canada. Answer: a Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

12. Which of the following may be classified as a current liability? a) stock dividends distributable b) accounts receivable credit balances c) losses expected to be incurred within the next twelve months in excess of the company's insurance coverage d) tenant’s rent deposit not returnable until the end of a long-term lease Answer: b Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

13. Accounting for GST includes a) crediting GST Payable to record GST paid on inventory for resale. b) crediting GST Receivable to record GST collected from customers. c) debiting GST Receivable to record GST paid to suppliers. d) debiting GST Payable to record GST collected from customers. Answer: c Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities 13-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

14. Regarding Provincial Sales Tax (PST), a) the purchaser includes any PST paid in the cost of the goods or services. b) all PST paid is recorded in a “PST Expense” account. c) all PST paid is recorded in a “PST Recoverable” account. d) for statement of financial position presentation, a PST registrant “nets” any PST paid against any PST collected from customers. Answer: a Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

15. Corporation income taxes payable a) must always be approved by an external auditor. b) are reviewed and approved by Canada Revenue Agency (CRA). c) also apply to proprietorships and partnerships. d) are always the same under GAAP and Canadian tax laws. Answer: b Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

16. Which of the following is generally associated with current liabilities classified as accounts payable? Periodic Payment Secured of Interest by Collateral a) No No b) No Yes 13-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) d)

Yes Yes

No Yes

Answer: a Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic Feedback: Accounts payable generally are zero-interest-bearing and unsecured.

17. On November 1, 2023, France Corp. signed a three-month, zero-interest-bearing note for the purchase of $60,000 of inventory. The maturity value of the note was $60,600, based on the bank’s discount rate of 4%. The adjusting entry prepared on December 31, 2023 in connection with this note will include a a) debit to Note Payable for $400. b) credit to Note Payable for $400. c) debit to Interest Expense for $600. d) credit to Interest Expense for $200. Answer: b Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $60,000 x 4% x 2 ÷ 12 = $400

18. On December 1, 2023, Ruby Ltd. borrowed $180,000 from its bank, by signing a four-month, 5% interest-bearing note. Assuming Ruby has a December 31, year end and does NOT use reversing entries, the journal entry to record payment of this note on April 1, 2024 will include a a) credit to Note Payable of $180,000. b) debit to Interest Expense of $3,000. c) debit to Interest Payable of $2,250. d) debit to Interest Payable of $750. Answer: d

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Interest payable that would have been recorded at Dec 31/20 $180,000 x 5% x 1 ÷ 12 = $750.

19. On February 10, 2023, after issuance of its financial statements for calendar 2022, Mantack Corp. entered into a financing agreement with Friedman Bank, allowing Mantack Corp. to borrow up to $4,000,000 at any time through 2025. Amounts borrowed under the agreement bear interest at 3% above the bank's prime interest rate and mature two years from the date of the loan. Mantack presently has $1,500,000 of notes payable with Bringham Bank maturing March 15, 2024. The company intends to borrow $2,500,000 under the agreement with Friedman and pay off the notes payable to Bringham. The agreement with Friedman also requires Mantack to maintain a working capital level of $9,000,000 and prohibits the payment of dividends on common shares without prior approval by Friedman. From the above information only, the total short-term debt of Mantack Corp. on the December 31, 2022 statement of financial position is a) $0. b) $1,500,000. c) $2,500,000. d) $4,000,000. Answer: b Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $1,500,000 (No agreement in place at year end.)

20. On December 31, 2023, Gumble Ltd. has $3,150,000 in short-term notes payable due on February 14, 2024. On January 10, 2024, Gumble arranged a line of credit with Caldi Bank, which allows Gumble to borrow up to $2,000,000 at 2% above the prime rate for three years. On February 2, 2024, Gumble borrowed $1,400,000 from Caldi Bank and used $600,000 additional cash to liquidate $1,200,000 of the short-term notes payable. Assuming Gumble adheres to IFRS, the amount of the short-term notes payable that should be reported as current liabilities on Gumble’s December 31, 2023 statement of financial position (to be issued on March 5, 2024) is a) $0. 13-14 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) $600,000. c) $1,400,000. d) $3,150,000. Answer: d Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $3,150,000 (No agreement in place at year end.)

21. Mason Corp. operates in a province with 8% PST. The store must also collect 5% GST on all sales. For the month of May, Mason sold $120,000 worth of goods to customers, 40% of which were cash sales and the balance being on account. Based on the above information, what is the total debit to accounts receivable for the month of May? a) $72,000 b) $81,360 c) $54,240 d) $35,600 Answer: b Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $120,000 x 60% x 1.13 = $81,360

22. Xylex Ltd., a GST registrant, buys $6,200 worth of Supplies for their own use. The purchase is subject to 6% PST and 5% GST. What amount will be debited to the Supplies account as a result of this transaction? a) $6,200 b) $6,510 c) $6,572 d) $6,882 Answer: c 13-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

23. At December 31, 2023, Nixel Corp.’s records show the following balances, all of which are normal: PST Payable, $800; GST Payable, $500; GST Receivable, $345. In January 2024, Nixel pays the Federal Government the net amount owing for GST owing from December. The journal entry to record this payment will include a a) debit to GST Payable of $155. b) credit to Cash of $500. c) credit to GST Payable of $500. d) credit to GST Receivable of $345. Answer: d Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: to clear GST Receivable account

24. Baxter Ltd. has made a total of $46,500 in instalments for corporate income tax for calendar 2023, all of which have been debited to Current Tax Expense. At year end, Dec 31, 2023, the accountant has calculated that the corporation’s actual tax liability is only $43,000. What is the correct adjusting entry to reflect this fact? a) Dr. Current Tax Expense $3,500, Cr. Income Taxes Payable $3,500 b) Dr. Income Taxes Payable, $3,500, Cr. Current Tax Expense $3,500 c) Dr. Income Taxes Receivable $3,500, Cr. Current Tax Expense $3,500 d) Dr. Current Tax Expense $43,000, Cr. Income Taxes Payable $43,000 Answer: c Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. 13-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $46,500 – $43,000 = $3,500 overpaid = Income Taxes Receivable

25. Included in Harrison Inc.’s account balances at December 31, 2023, were the following: 4% note payable issued October 1, 2023, maturing September 30, 2024 $250,000 6% note payable issued April 1, 2023, payable in six equal annual instalments of $100,000 beginning April 1, 2024 600,000 Harrison’s December 31, 2023 financial statements were to be issued on March 31, 2024. On January 15, 2024, the entire $600,000 balance of the 6% note was refinanced by issuance of a long-term note to be repaid in 2027. In addition, on March 10, 2024, Harrison made arrangements to refinance the 4% note on a long-term basis. Under IFRS, on the December 31, 2023 statement of financial position, the amount of the notes payable that Harrison should classify as current liabilities is a) $0. b) $100,000. c) $250,000. d) $350,000. Answer: d Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $250,000 + $100,000 = $350,000

26. On September 1, 2023, Coffee Ltd. issued a $1,800,000, 12% note to Humungous Bank, payable in three equal annual principal payments of $600,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2024. At December 31, 2024, Coffee should record accrued interest payable of a)$72,000. b)$66,000. c) $48,000. d)$44,000. Answer: c Difficulty: Medium 13-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($1,800,000 – $600,000) ×.12 × 4 ÷ 12 = $48,000

27. Jordan Corp. operates in Ontario, selling a variety of goods. For most of these goods, Jordan must charge 13% HST, for some they only have to charge 5% HST; while a very few are tax exempt. During June of this year, the company reported sales of $200,000, on which 70% were charged 13% HST, 25% were charged only 5% HST, and the rest were tax exempt sales. The total amount of HST collected in June was a) $10,000. b) $18,200. c) $20,700. d) $26,000. Answer: c Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($200,000 x 13% x 70%) + ($200,000 x 5% x 25%) = $20,700

28. On February 1, Triple H Enterprises issues a $50,000 6 month note payable to MBO bank. It is a zero-interest bearing note and the bank’s discount rate is 4%. Which one of the following entries is required on February 1 by Triple H Enterprises? (Round to the nearest dollar.) a) Cr. Notes Payable $50,000 b) Dr. Notes Payable $50,000 c) Cr. Notes Payable $48,077 d) Cr. Notes Payable $49,020 Answer: d Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting 13-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: $50,000 ÷ (1 + (4% x 6/12)) = $49,020

29. On February 1, Triple H Enterprises issues a $50,000 6 month note payable to MBO bank. It is a zero-interest bearing note and the bank’s discount rate is 4%. How much interest expense is recognized upon maturity? (Round to the nearest dollar.) a) $980 b) $1,000 c) $2,000 d) None, this is a zero-interest bearing note. Answer: a Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $50,000 ÷ (1 + (4% x 6/12)) = $49,020; $50,000 – $49,020 = $980

30. Which of the following statements is FALSE? a) Under IFRS, a company may exclude a short-term obligation from current liabilities if, at statement of financial position date, the entity expects to refinance under an existing agreement for at least a year, and the decision is solely at its discretion. b) Cash dividends should be recorded as a liability when they are declared by the board of directors. c) Under the cash basis method, warranty costs are charged to expense as they are paid. d) Federal income taxes withheld from employees' payroll cheques should be recorded as a long-term liability. Answer: d Difficulty: Easy Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

31. Which of the following are included in the employer's Salaries and Wages Expense? a) employee income tax deducted, employer portion of CPP/QPP and EI b) employer portion of CPP/QPP and EI, union dues c) employer portion of CPP/QPP and EI only d) employer portion of EI, union dues, and employee income tax deducted Answer: c Difficulty: Easy Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

32. Under ASPE, payroll taxes such as the employer portion of EI should be recognized as an expense a) when the amount is remitted to the government. b) when the related payroll is recorded. c) when the employee amount is remitted. d) using whatever policy the company chooses. Answer: b Difficulty: Easy Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

33. Accumulating rights to benefits (for employees) a) are rarely mandated by provincial labour law. b) include vested rights that do not depend on the employee’s continued service. c) are rights that do not accrue with employee service. d) are not accrued as an expense in the period earned. Answer: b Difficulty: Easy Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Knowledge 13-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

34. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should a) be accrued during the period when the compensated time is expected to be used by employees. b) be accrued during the period following vesting. c) be accrued during the period when earned. d) not be accrued unless a written contractual obligation exists. Answer: c Difficulty: Easy Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

35. Non-accumulating rights to benefits, such as parental leave, are generally accounted for by a) the full accrual method. b) the event accrual method. c) the cash method. d) financial statement note disclosure only. Answer: b Difficulty: Easy Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

36. Which of the following is generally NOT used as a basis for calculating bonuses or profit-sharing amounts? a) a percentage of the employees’ regular pay rates b) the company’s pre-tax income c) productivity increases d) gross sales Answer: d Difficulty: Easy 13-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

37. The total payroll of Carbon Company for the month of October was $240,000, all subject to CPP deductions of 5.45% and EI deductions of 1.58%. As well, $60,000 in federal income taxes and $6,000 of union dues were withheld. The employer matches the CPP employee deductions and contributes 1.4 times the employee EI deductions. What amount should Carbon record as employer payroll tax expense for October? a) $16,872.00 b) $18,388.80 c) $24,388.80 d) $78,388.80 Answer: b Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($240,000 × 5.45%) + ($240,000 × 1.58% × 1.4) = $18,388.80

Use the following information for questions 38–39. Silver Ltd. has 35 employees who work 8-hour days and are paid hourly. On January 1, 2023, the company began a program of granting its employees 10 days paid vacation each year. Vacation days earned in 2023 may be taken starting on January 1, 2024. Information relative to these employees is as follows:

Year 2023 2024 2025

Hourly Wages $12.90 13.50 14.25

Vacation Days Earned by Each Employee 10 10 10

Vacation Days Used by Each Employee 0 8 10

Silver has chosen to accrue the liability for compensated absences (vacation pay) at the current rates of pay in effect when the vacation pay is earned.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

38. What is the amount of vacation pay expense that should be reported on Silver’s income statement for 2023? a) $37,800 b) $36,120 c) $34,440 d) $0 Answer: b Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $12.90 × 8 × 10 × 35 = $36,120

39. What is the amount of the Vacation Wages Payable that should be reported at December 31, 2025? a) $39,900 b) $45,360 c) $47,460 d) $47,880 Answer: c Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($14.25 × 8 × 10 × 35) + ($13.50 × 8 × 2 × 35) = $47,460

40. Information regarding Oxygen Inc.’s payroll for the period ending March 22 follows: Gross salaries and wages ................................ $100,000 CPP rate ........................................................... 5.45% EI rate ............................................................... 1.58% Employee income tax ...................................... deducted $20,000 Company pension deducted ........................... 5% of gross salaries and wages Union dues deducted ...................................... $800 Assume 100% of the gross salaries and wages are subject to CPP and EI. Therefore, the NET pay for this period is a)$73,340. b)$67,170. 13-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c)$68,390. d)$72,220. Answer: b Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $100,000 – (100,000 x (.0545 +.0158 +.05)) – $20,000 – $800 = $67,170

41. Dixon Company's salaried employees are paid biweekly. Information relating to salaries for the calendar year 2023 is as follows: Accrued salaries payable Jan. 1, 2023 ............ $182,000 Salaries expense for 2023 ................................ 1,820,000 Salaries paid during 2023 (gross) .................... 1,750,000 At December 31, 2023, what amount should Dixon report for accrued salaries payable? a) $252,000 b) $240,000 c) $182,000 d) $70,000 Answer: a Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,820,000 + $182,000 – $1,750,000 = $252,000

42. Willow Corp.'s payroll for the period ended October 31, 2023 is summarized as follows: Amount of Wages Subject Department Total Income Tax to Payroll Taxes Payroll Wages Withheld CPP/QPP EI Factory $ 75,000 $10,000 $66,000 $22,000 Sales 22,000 3,000 16,000 2,000 Office 18,000 2,000 8,000 — $115,000 $15,000 $90,000 $24,000 Assume the following payroll tax rates: CPP/QPP for employer and employee 5.45% each 13-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Employment Insurance

1.58% for employee 1.4 times employee premium for employer What amount should Willow accrue as its share of payroll taxes in its October 31, 2023 statement of financial position? (Round to 2 decimal places.) a) $4,853.40 b) $5,435.88 c) $5,284.20 d) $20,435.88 Answer: b Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($90,000 ×.0545) + ($24,000 ×.0158 × 1.4) = $5,435.88

43. Elm Corp.'s payroll for the period ended July 31, 2023 is summarized as follows: Amount of Wages Subject Department Total Income Tax to Payroll Taxes Payroll Wages Withheld CPP/QPP EI Factory $ 75,000 $10,000 $66,000 $22,000 Sales 22,000 3,000 16,000 2,000 Office 18,000 2,000 8,000 — $115,000 $15,000 $90,000 $24,000 Assume the following payroll tax rates: CPP/QPP for employer and employee 5.45% each Employment Insurance 1.58% for employee 1.4 times employee premium for employer What is the total amount Elm must remit to the government for payroll? (Round to 2 decimal places.) a) $15,000.00 b) $5,435.88 c) $10,720.08 d) $25,720.08 Answer: d Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 13-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: ($90,000 ×.0545) + ($24,000 ×.0158 × 1.4) +($90,000 ×.0545) + ($24,000 ×.0158) + $15,000 = $25,720.08

44. Under IFRS, a provision is a) a special fund set aside to pay long-term debt. b) unearned revenue. c) a liability of uncertain timing or amount. d) an allowance for future dividends to be paid. Answer: c Difficulty: Easy Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

45. At the time of recognition of an asset retirement obligation, the present value should be a) recorded as a separate long-term asset and as an asset retirement obligation. b) expensed and recorded as an asset retirement obligation. c) expensed to “Asset Retirement Expense” in the period actually paid. d) added to the related asset cost and recorded as an asset retirement obligation. Answer: d Difficulty: Easy Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

46. Under ASPE, an asset retirement obligation should be recognized when a) an asset is impaired and is available for sale. b) operation of an asset has resulted in an additional obligation such as the cost of cleaning up an oil spill. c) there is a legal obligation to restore the site of the asset at the end of its useful life. d) the company has an obligation to purchase a long-lived asset. Answer: c 13-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

47. Which of the following statements is INCORRECT regarding the recording of the related increase or accretion in the carrying amount of an asset retirement obligation (ARO)? a) Under ASPE, it is recognized as interest expense. b) Under ASPE, it is recognized as an operating expense (but not as interest expense). c) Under IFRS, it is recognized as a borrowing cost. d) The amount should be calculated using the same discount (interest rate) as was used to calculate the initial present value of the ARO. Answer: a Difficulty: Easy Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Use the following information for questions 48–49. Antimony Inc., a private company following ASPE developed a new gold mine during 2023, and is required by provincial law to restore the site to its previous condition once mining operations are completed. The company estimates that the mine will close in 20 years and that the land restoration will cost $5,000,000. Antimony uses a 6% discount rate.

48. To the nearest dollar, the entry to record the asset retirement obligation is a) Restoration Expense .................................................................................... 93,541 Asset Retirement Obligation ................................................................. b) Restoration Expense .................................................................................... 250,000 Asset Retirement Obligation ................................................................. c) Gold Mine ...................................................................................................... 5,000,000 Asset Retirement Obligation ................................................................. d) Gold Mine...................................................................................................... 1,559,024 Asset Retirement Obligation .................................................................

93,541 250,000 5,000,000 1,559,024 13-27

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Medium Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 20 N 6 I 5000000 FV CPT PV => $1,559,024

49. To the nearest dollar, the adjusting entry to record accretion at the end of Year One is a) Accretion Expense ........................................................................................ 250,000 Asset Retirement Obligation ................................................................. b) Accretion Expense ........................................................................................ 93,541 Asset Retirement Obligation ................................................................. c) Gold Mine ...................................................................................................... 93,541 Asset Retirement Obligation ................................................................. d) Interest Expense........................................................................................... 93,541 Asset Retirement Obligation .................................................................

250,000 93,541 93,541 93,541

Answer: b Difficulty: Medium Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,559,024 x 6% = $93,541

50. On April 30, 2023, Canuck Oil Corp. purchased an oil tanker depot for $1,200,000 cash. The company expects to operate this depot for eight years, at which time they will be legally required to dismantle the structure and remove the underground storage tanks. Canuck Oil estimates this asset retirement obligation (ARO) will cost $200,000. Assuming a 5% discount rate, to the nearest dollar, the amount to be recorded as the ARO is a) $25,000. b) $135,368. c) $150,000. d) $295,491. Answer: b 13-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 8 N 5 I/Y 200000 FV CPT PV => $135,368

51. On January 1, Thermal Power Incorporated builds a nuclear plant 50 miles outside of Timmins Ontario that it is legally required to dismantle and remove at the end of its 40-year useful life. The total cost of dismantling and removing the plant is estimated at $650,000,000. The discount rate is 12%. Which of the following entries would be used to record the interest liability relating to the asset retirement obligation at the end of year one using IFRS? (Round to the nearest whole number.) a) Dr. Interest expense $838,250 b) Dr. Accretion expense $838,250 c) Dr. Asset retirement obligation $838,250 d) Dr. Interest expense $1,950,000 Answer: a Difficulty: Medium Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 40 N 12 I/Y 650,000,000 FV CPT PV => $6,985,419, $6,985,419 x 12% = $838,250

52. On January 1, Thermal Power Incorporated builds a nuclear plant 50 miles outside of Timmins Ontario that it is legally required to dismantle and remove at the end of its 40-year useful life. The total cost of dismantling and removing the plant is estimated at $650,000,000. The discount rate is 12%. Which of the following entries would be used to record the interest liability relating to the asset retirement obligation at the end of year one using ASPE? (Round to the nearest whole number.) a) Dr. Interest expense $838,250 b) Dr. Accretion expense $838,250 c) Dr. Asset retirement obligation $838,250 d) Dr. Interest expense $1,950,000 Answer: b Difficulty: Medium 13-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 40 N 12 I/Y 650000000 FV CPT PV => $6,985,419; $6,985,419 x 12% = $838,250

53. Using the revenue approach of accounting for product guarantees and warranty obligations a) the liability is measured at the estimated cost of meeting the obligation. b) there is no effect on future income. c) the liability is measured at the value of the services to be provided. d) the liability is measured at the value of the services to be provided, but there is no effect on future income. Answer: c Difficulty: Easy Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

54. Which of the following statements is INCORRECT concerning warranties? a) Using the expense approach, the warranty is provided with the product or service with no additional fee. b) Where warranty costs are immaterial or when the warranty period is quite short, the warranty costs may be accounted for using the cash basis. c) Using the revenue approach, the warranty is a separate deliverable from the related product or service. d) The revenue approach must be used for income tax purposes. Answer: d Difficulty: Easy Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

55. The current (commonly used) accounting treatment for premiums and coupons requires that the costs should a) be recorded at the maximum possible redemption cost in the year of the related sales. b) be recorded at the total estimated redemption cost in the year of the related sales. c) be recorded in the year(s) that the redemption is expected to occur. d) not be recorded at all. Answer: b Difficulty: Easy Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

56. What are the current International Financial Reporting Standards regarding how customer loyalty programs (such as frequent flyer points) should be accounted for? a) They are recognized only in the financial statement notes. b) They are recognized only when customers redeem their points. c) They are not explicitly addressed. d) The current proceeds are to be split between the original transaction and the award credits (as unearned revenue). Answer: d Difficulty: Easy Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

57. On Dec 12, 2023, Ivory Coast, CGA, received $5,000 from a customer as an advance payment for accounting work to be done. The payment was credited to Service Revenue. Thirty percent of the work was performed in December 2023, with the rest to be done in January 2024, at which time the customer will be billed. The required adjusting entry at December 31, 2023 (year-end) is a) Dr. Unearned Revenue $1,500, Cr. Service Revenue $1,500. b) Dr. Service Revenue $1,500, Cr. Unearned Revenue $1,500. c) Dr. Service Revenue $3,500, Cr. Unearned Revenue $3,500. d) Dr. Unearned Revenue $3,500, Cr. Service Revenue $3,500. 13-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Analysis Feedback: Remove 70% of revenue and transfer to liability. AACSB: Analytic

58. On January 1, 2023, Wick Ltd., a private company following ASPE leased a building to Candle Corp. for a ten-year term at an annual rental of $90,000. At the inception of the lease, Wick received $360,000 covering the first two years rent of $180,000 and a security deposit of $180,000. This deposit will NOT be returned to Candle upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $360,000 should be shown as a current and long-term liability, respectively, in Wick's December 31, 2023 statement of financial position? Current Liability Long-term Liability a) $0 $360,000 b) $90,000 $180,000 c) $180,000 $180,000 d) $180,000 $90,000 Answer: b Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $90,000 (50% to be earned in 2024) and $180,000 (security deposit)

59. Platinum Corp. uses the expense approach to account for warranties. They sell a used car for $30,000 on Oct 25, 2023, with a one-year warranty covering parts and labour. Warranty expense is estimated at 2% of the selling price, and the appropriate adjusting entry is recorded at Dec 31, 2023. On March 12, 2024, the car is returned for warranty repairs. This cost Platinum $200 in parts and $120 in labour. When recording the March 12, 2024 transaction, Platinum would debit Warranty Expense with a) zero. b) $120. c) $200. 13-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) $320. Answer: a Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Debit is to the liability account, not the expense acct.

60. Robertson Corp. uses the revenue approach to account for warranties. During 2023, the company sold $750,000 worth of products, all of which carried a two-year warranty (included in the price). It was estimated that 2% of the selling price represented the warranty portion, and that 40% of this related to 2023, and 60% to 2024. Assuming that Robertson incurred costs of $5.500 to service the warranties in 2024, what is the net warranty revenue (revenue minus warranty costs) for 2024? a) $3,500 b) $9,500 c) $5,500 d) $9,000 Answer: a Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $750,000 x 2% x 60% = $9,000; $9,000 – $5,500 costs = $3,500

61. In 2023, Hydrogen Corp. began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows: First year of warranty 2% Second year of warranty 5% Sales and actual warranty expenditures for 2023 and 2024 are presented below: 2023 2024 Sales $450,000 $600,000 Actual warranty expenditures 15,000 30,000 Hydrogen uses the expense approach to account for warranties. What is the estimated warranty 13-33 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

liability at the end of 2024? a) $73,500 b) $43,500 c) $28,500 d) $12,000 Answer: c Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: [($450,000 + $600,000) ×.07] – $15,000 – $30,000 = $28,500

62. Krypton Foods distributes coupons to consumers which may be presented, on or before a stated expiry date, to grocery stores for discounts on certain Krypton products. The stores are reimbursed when they send the coupons in to Krypton. In Krypton's experience, only about 50% of these coupons are redeemed. During 2023, Krypton issued two separate series of coupons as follows: Coupon Amounts Reimbursed Issued On Total Value Expiry Date as of Dec 31/23 Jan 1/23 $250,000 Jun 30/23 $118,000 Jul 1/23 360,000Dec 31/23 150,000 Krypton’s only journal entries for 2023 recorded debits to Premium Expense, and credits to Cash of $268,000. Their December 31, 2023 statement of financial position should include an Estimated Liability for Premiums of a) $0. b) $30,000. c) $62,000. d)$180,000. Answer: a Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: All coupons have expired by Dec 31/23.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

63. Woodwards Store sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Revenue. This account had a balance of $600,000 at December 31, 2019 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $150,000 at December 31, 2019. Outstanding service contracts at December 31, 2022 expire as follows: During 2023 During 2024 During 2025 $125,000 $200,000 $90,000 What amount should be reported as Unearned Revenue in Woodwards’ December 31, 2022 statement of financial position? a) $450,000 b) $415,000 c) $300,000 d) $275,000 Answer: b Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $125,000 + $200,000 + $90,000 = $415,000

64. Jackpine Trading Stamp Co. records trading stamp revenue and provides for the cost of redemptions in the year stamps are sold. Jackpine's past experience indicates that only 75% of the stamps sold will be redeemed. Jackpine's liability for stamp redemptions was $3,000,000 at December 31, 2022. Additional information for 2023 is as follows: Stamp revenue from stamps sold to licensees ....................... $2,000,000 Cost of redemptions for stamps sold prior to 2023................. 1,350,000 If all the stamps sold in 2023 were presented for redemption in 2023, the redemption cost would be $1,000,000. What amount should Jackpine report as a liability for stamp redemptions at December 31, 2023? a) $3,750,000 b) $2,650,000 c) $2,400,000 d) $1,650,000 Answer: c Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. 13-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $3,000,000 + ($2,000,000 × 75%) – $1,350,000 – ($1,000,000 x 75%) = $2,400,000

65. Appliances R US sells high end programmable convection ovens for $2,500. The selling price includes a $300 two-year warranty package that provides for repairs and maintenance. In 2023, Appliances R Us sold 100 ovens and incurred $11,250 in servicing costs. Which of the following entries is required, assuming the revenue is earned evenly over the two-year term, to account for the remeasurement of unearned revenues at the end of 2023? a) Dr. Warranty expense $15,000 b) Dr. Unearned revenue $15,000 c) Dr. Materials, Cash, Payables $11,250 d) Dr. Warranty Revenue $11,250 Answer: b Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300 x 100 x 1/2 = $15,000

66. Appliances R US sells high end programmable convection ovens for $2,500. The selling price includes a $300 two-year warranty package that provides for repairs and maintenance. In 2023, Appliances R Us sold 100 ovens and incurred $11,250 in servicing costs. Which of the following entries is required to account for the servicing costs at the end of 2023? a) Dr. Warranty expense $11,250 b) Dr. Unearned revenue $15,000 c) Dr. Materials, Cash, Payables $11,250 d) Dr. Warranty Revenue $11,250 Answer: a Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application 13-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

67. Under ASPE, a contingent liability is recognized if a) it is certain that funds are available to settle the contingency. b) an asset may have been impaired. c) the amount of the loss can be reasonably estimated and it is likely that an asset has been impaired or a liability incurred as of the financial statement date. d) it is likely that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated. Answer: c Difficulty: Easy Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

68. Under current IFRS requirements, a provision is recognized if a) the amount of the loss can be reliably measured, and it is probable that an asset has been impaired or a liability incurred as of the financial statement date. b) the amount of the loss cannot be measured reliably but it is probable that an asset has been impaired, or a liability incurred as of the financial statement date. c) it relates to a lawsuit commenced after the statement of financial position date, the outcome of which can be reliably measured. d) it relates to an asset recognized as impaired after the statement of financial position date. Answer: a Difficulty: Easy Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

69. Which of the following may NOT be accrued as a contingent liability? a) threat of expropriation of assets 13-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) pending or threatened litigation c) guarantees of indebtedness of other d) potential income tax refunds Answer: d Difficulty: Easy Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

70. Which of the following commitments would NOT require disclosure in the financial statement notes? a) major property, plant and equipment expenditures b) payments under non-cancellable operating leases c) large purchases of materials in the normal course of business d) commitments involving significant risk Answer: c Difficulty: Easy Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

71. Harriet Ltd. has a likely loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. Under ASPE, the loss accrual should be a) zero. b) the maximum of the range. c) the mean of the range. d) the minimum of the range. Answer: d Difficulty: Easy 13-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

72. Asbestos Corp. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals. Asbestos's lawyer states that it is likely the corporation will lose the suit and be found liable for a judgement which may cost Asbestos anywhere from $300,000 to $1,500,000. However, the lawyer states that the most likely cost is $900,000. As a result of the above facts, using ASPE, Asbestos should accrue a) a loss contingency of $300,000 and disclose an additional contingency of up to $1,200,000. b) a loss contingency of $900,000 and disclose an additional contingency of up to $600,000. c) a loss contingency of $900,000 but not disclose any additional contingency. d) no loss contingency but disclose a contingency of $300,000 to $1,500,000. Answer: b Difficulty: Medium Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $900,000 and $600,000

73. At January 1, 2023, Neon Corp. owned a machine that had cost $100,000. The accumulated depreciation to date was $60,000, estimated residual value was $6,000, and fair value was $160,000. On January 4, 2023, this machine suffered major damage due to Argon Corp.’s actions and was written off as worthless. In October 2023, a court awarded damages of $160,000 against Argon in favour of Neon. At December 31, 2023, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Neon's attorney, Argon's appeal will be denied. At December 31, 2023, what amount should Neon accrue for this gain contingency? a) $160,000 b) $130,000 c) $100,000 d) $0 Answer: d

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $0; Gain contingencies are not accrued.

74. When a company is threatened with litigation, which of the following factors needs to be considered in determining whether a liability should be recorded under IFRS? a) the time period in which the cause of action occurred b) the likelihood of an unfavourable outcome c) the ability to make a reasonable estimate of the loss d) All factors must be considered. Answer: d Difficulty: Easy Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

75. Under IFRS, a contingent gain will be recorded in the financial statements when a) it is deemed likely to occur and the amount can be reasonably estimated. b) it is deemed likely to occur. c) the amount can be reasonably estimated. d) there is virtual certainty of recovery. Answer: d Difficulty: Easy Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 13-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

76. The numerator of the acid-test ratio consists of a) total current assets. b) cash and marketable securities. c) cash and net receivables. d) cash, marketable securities, and net receivables. Answer: d Difficulty: Easy Learning Objective: Indicate how non-financial and current liabilities are presented and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

77. The denominator of the days payable outstanding ratio can be a) average daily sales. b) average trade accounts payable. c) average daily cost of goods sold. d) average trade accounts receivable. Answer: c Difficulty: Easy Learning Objective: Indicate how non-financial and current liabilities are presented and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

78. Presented below is information available for Radon Corp.: Current Assets Cash .......................................................... $ 8,000 Marketable securities .............................. 150,000 Accounts receivable ................................. 122,000 Inventories ............................................... 220,000 Prepaid expenses ..................................... 60,000 Total current assets ......................... $560,000 Total current liabilities are $100,000. To two decimals, Radon’s acid-test ratio is a) 5.60. b) 5.30. c) 2.80. 13-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) .36. Answer: c Difficulty: Medium Learning Objective: Indicate how non-financial and current liabilities are presented and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($8,000 + $150,000 + $122,000) / $100,000 = 2.80

79. Lee Kim Inc.'s most recent statement of financial position includes Cash.................................................................. $7,500 Accounts receivable ........................................ 10,000 Inventory .......................................................... 13,300 Plant and equipment (net) .............................. 73,700 Accounts payable ............................................ 14,000 Long-term bonds payable ............................... 50,000 Common shares............................................... 20,000 Retained earnings............................................ 20,500 To two decimals, Lee Kim Inc. has a current ratio of a) .27. b) .48. c) 1.63. d) 2.20. Answer: d Difficulty: Medium Learning Objective: Indicate how non-financial and current liabilities are presented and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback:$7,500 + $10,000 + $13,300 = 2.20 $14,000

80. Lee Kim Inc.'s most recent statement of financial position includes Cash.................................................................. $7,500 Accounts receivable ........................................ 10,000 Inventory .......................................................... 13,300 Plant and equipment (net) .............................. 73,700 Long-term bonds payable ............................... 50,000 13-42 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Common shares............................................... 20,000 Retained earnings............................................ 20,500 Lee Kim Inc. has a quick ratio of 1.25. What is the value of the current liabilities? a) $83,600 b) $24,640 c) $14,000 d) $8,000 Answer: c Difficulty: Medium Learning Objective: Indicate how non-financial and current liabilities are presented and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($7,500 + $10,000) / x = 1.25; x = $17,500 / 1.25 = $14,000

81. Helium Corp. provides the following information for 2023 and 2024: 2023 2024 Current assets ........................................ $23,000 $27,000 Accounts payable .................................. 9,000 10,000 Other current liabilities ......................... 5,000 4,000 Non-current liabilities ........................... 50,000 62,000 Sales revenue......................................... 125,000 135,000 Cost of goods sold ................................. 75,000 79,600 To one decimal, Helium’s days payable outstanding for 2024 is a) 43.6 days. b) 46.2 days. c) 47.2 days. d) 48.7 days. Answer: a Difficulty: Medium Learning Objective: Indicate how non-financial and current liabilities are presented and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($10,000 + $9,000) ÷ 2 = 43.6 days $79,600 ÷ 365

82. According to the new Conceptual Framework, which of the following is NOT an essential 13-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

characteristic of a liability? a) It exists in the present time. b) There is certainty about the amount of future outflows. c) The obligation is enforceable on the obligor entity. d) It represents an economic burden or obligation. Answer: b Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

83. According to the Exposure Draft of Proposed Amendments to IAS 37, Provisions, Contingent Liabilities and Contingent Assets, a) only conditional obligations are recorded. b) liabilities must have measurement certainty. c) the term “provisions” is being considered for elimination or replacement. d) a conditional obligation related to an unconditional obligation is not recognized. Answer: c Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

84. The IASB issued a new Conceptual Framework for Financial Reporting that, among other things, provides, a) no changes in the definitions of assets and liabilities. b) no changes in the definitions of assets and liabilities but more detailed guidance for interpreting definitions. c) clearer definitions of assets and liabilities including more detailed guidance for interpreting definitions. d) clearer definitions of assets and liabilities and consequently less detailed guidance for interpreting definitions. Answer: c 13-44 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 13-85 Non-financial versus financial liabilities Why are non-financial liabilities more difficult to measure than financial liabilities? Solution 13-85 Non-financial liabilities are more difficult to measure than financial liabilities because the obligations will be met with goods and services (that is, non-financial resources), and the timing of meeting the obligation and its amount are not fixed. Difficulty: Easy Learning Objective: Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are measured. Section Reference: Recognition and Measurement CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 13-86 Interest bearing note Hanson Bank agrees to lend $250,000 to Mishin Corp. on May 1, 2023 and the company signs a $250,000, three-month, 6% note maturing on August 1, 2023. Instructions Prepare the journal entry to record the cash received by Mishin Corp. on May 1, the entry to record interest expense at Mishin’s year-end of July 31 and the entry at maturity of the note. Solution 13-86 May 1 Cash ................................................................................................ Notes Payable ......................................................................... July 31

Aug

250,000 250,000

Interest Expense ............................................................................. Interest Payable ...................................................................... ($250,000 × 6% × 3/12 = $3,750)

3,750

Notes Payable................................................................................. Interest Payable ............................................................................. Cash.........................................................................................

250,000 3,750

3,750

253,750

Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting 13-46 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

Ex. 13-87 Zero interest bearing note Mishin Corp. issues a $250,000, three-month zero-interest-bearing note payable to Hanson Bank on May 1, 2023. The note has a present value of $246,305 based on the bank’s discount rate of 6%. Instructions Prepare the journal entry to record the cash received by Mishin on May 1, the entry to record interest expense at the company’s July 31 year-end and the entry at maturity of the note. Solution 13-87 May 1 Cash ................................................................................................ Notes Payable ......................................................................... July 31

Aug

246,305 246,305

Interest Expense ............................................................................. Notes Payable ......................................................................... ($246,305 × 6% × 3/12 = $3,695)

3,695

Notes Payable................................................................................. Cash.........................................................................................

250,000

3,695

250,000

Ex. 13-88 Notes payable On August 31, 2023, Kamloops Corp. paid the Regal Bank part of an outstanding $300,000 long-term 10% note payable obtained one year earlier (August 31, 2022), by paying $180,000 plus $18,000 interest. In order to do this, Kamloops used $51,211 cash and signed a new one-year, zero-interestbearing $160,000 note discounted at 9% by Regal (i.e. the bank issued a note at a discount designed to provide a 9% return over the one year period). Instructions a) Prepare the entry to record the refinancing. b) Prepare the adjusting entry at December 31, 2023 in connection with the new zero-interestbearing note. Solution 13-88 a) Notes Payable ...........................................................................................

180,000 13-47

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Interest Expense ....................................................................................... Notes Payable ($160,000/1.09) ......................................................... Cash ...................................................................................................

18,000

Interest Expense ($146,789 x 9% x 4 ÷ 12) ............................................... Notes Payable ...................................................................................

4,403.67

146,789 51,211

4,403.67

Ex.13-89 Sales taxes For the month of November, Parry Sound Sales Ltd. recorded $280,000 in sales, 40% of which were on account (terms N30), and 60% of which were cash sales. The company is required to charge 6% PST and 5% GST on all sales. Instructions Prepare one journal entry to record the company’s sales for November. Solution 13-89 Accounts Receivable ($280,000 x 1.11 x 40%) ......................................... Cash ($280,000 x 1.11 x 60%).................................................................... Sales Revenue ................................................................................... GST Payable ($280,000 x 5%) ........................................................... PST Payable ($280,000 x 6%) ............................................................

124,320 186,480 280,000 14,000 16,800

Ex. 13-90 Income Taxes Payable Avalanche Ltd. operates a profitable business in a relatively stable market. Management estimates that monthly profit subject to taxes is $25,000. In order to ensure that the financial statements reflect all current obligations, management estimates the amount of taxes payable each month and makes the appropriate journal entries to the ledger. The company is subject to a 15% effective tax rate.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions a) What is the monthly journal entry? b) At the end of the 12 months, Avalanche completes its tax return and owes the tax authority $48,000 for the year. What is the adjusting journal entry? Solution 13-90 a) Income Tax Expense ................................................................................. Income Tax Payable .......................................................................... b)

Income Tax Expense ($48,000 – (12 x $3,750))......................................... Income Tax Payable ................................................................................. Cash ...................................................................................................

3,750 3,750 3,000 45,000 48,000

Ex. 13-91 Payroll entries The total payroll of Lyndon Inc. was $230,000. Income taxes withheld were $55,000. The EI rate is 1.58% for the employee and 1.4 times the employee premium for the employer. The CPP contributions are 5.45% for both the employee and employer. Instructions (Round all values to the nearest dollar, if necessary.) a) Prepare the journal entry for the salaries and wages paid. b) Prepare the entry to record the employer payroll taxes. Solution 13-91 a) Salaries and Wages Expense .................................................................... Employee Income Tax Deductions Payable..................................... EI Premiums Payable ($230,000 x 1.58%) ........................................ CPP Contributions Payable ($230,000 x 5.45%)............................... Cash ................................................................................................... b)

Payroll Tax Expense.................................................................................. EI Premiums Payable ($3,634 × 1.4) ................................................. CPP Contributions Payable ..............................................................

230,000 55,000 3,634 12,535 158,831 17,623 5,088 12,535

Difficulty: Medium Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting 13-49 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

Ex. 13-92 Compensated absences Sycamore Ltd. began operations on January 2, 2023. The company employs 15 people who work 8hour days. Each employee earns 10 paid vacation days annually. Vacation days may be taken after January 10 of the year following the year in which they are earned. The average hourly wage rate was $12.00 in 2023 and $12.75 in 2024. The average number of vacation days used by each employee in 2024 was 9. Sycamore accrues the cost of compensated absences at rates of pay in effect when earned. Instructions Prepare journal entries to record the transactions related to paid vacation days during 2023 and 2024. Solution 13-92 2023 Salaries and Wages Expense .................................................................... Vacation Wages Payable ................................................................... 1

14,4001 14,400

15 × 8 × $12.00 × 10 = $14,400

2024 Salaries and Wages Expense .................................................................... Vacation Wages Payable .......................................................................... Cash ................................................................................................... Salaries and Wages Expense .................................................................... Vacation Wages Payable ...................................................................

810 12,9602 13,7703 15,3004 15,300

$14,400 ÷ 10 × 9 = $12,960 15 × 8 × $12.75 × 9 = $13,770 4 $15 × 8 x $12.75 x 10 = $15,300 2 3

Ex.13-93 Compensated absences HangTen Corp. prides itself on offering competitive compensation packages to its employees. Each employee is entitled to 40% of their wages for a period of 15 weeks upon being granted maternity / paternity leave. Ron Baker told his manager on May 1st that on Aug 1st he would like to take 15 weeks 13-50 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

of paternity leave to be with his newborn child. Ron earns $65,000 a year in salary. Ron’s manager has approved his request. Instructions a) What is the journal entry to record this compensated absence? b) Are there any subsequent entries as a result of this transaction? Solution 13-93 a) Employee Benefit Expense....................................................................... Parental Leave Benefits Payable ...................................................... b)

$7,500 $7,500

As Ron is paid by the company while he is away, the payable will be reduced by the cash paid to Ron according to his pay schedule.

Ex.13-94 Asset Retirement Obligation – ASPE Tin Mines International Ltd. discovered a new iron ore deposit, the Grouse Mine, and began production on January 1, 2023. The province requires mining companies to return the land to its natural state at the end of mining activity. Tin Mines International estimates that it will operate the mine for 25 years, at which time it will cost $25,000,000 for the land restoration project. Tin Mines International uses an 8% discount rate, and follows ASPE. Instructions a) Record any obligation for land restoration at January 1, 2023. b) Record any entry required related to this obligation at December 31, 2023. Solution 13-94 a) January 1, 2023 Mineral Resources .................................................................................... Asset Retirement Obligation ............................................................

3,650,448 3,650,448

25 N 8 I 25000000 FV CPT PV => $3,650,448 b) December 31, 2023 Accretion Expense .................................................................................... Asset Retirement Obligation ............................................................

292,036 292,036 13-51

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$3,650,448 x 8% = $292,036 Difficulty: Medium Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex.13-95 Asset Retirement Obligation – IFRS Nickel Mines Global Inc. discovered a new nickel ore deposit, the Flush Mine, and began production on January 1, 2023. The province requires mining companies to return the land to its natural state at the end of mining activity. Nickel Mines Global estimates that it will operate the mine for 25 years, at which time it will cost $25,000,000 for the land restoration project. Nickel Mines Global uses an 8% discount rate and follows IFRS. Instructions a) Record any obligation for land restoration at January 1, 2023. b) Record any entry required related to this obligation at December 31, 2023. Solution 13-95 a) January 1, 2023 Mineral Resources .................................................................................... Asset Retirement Obligation ............................................................

3,650,448 3,650,448

25 N 8 I 25000000 FV CPT PV => $3,650,448 b) December 31, 2023 Interest Expense ....................................................................................... Asset Retirement Obligation ............................................................

292,036 292,036

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ex.13-96 Product guarantee and expense approach Chapelle Appliances sells dishwashers for $1,200 each, which includes a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2023, Chapelle sold 600 dishwashers on account. Based on past experience, the company has estimated the total 2-year warranty costs at $40 for parts and $75 for labour. (Assume sales all occur at December 31, 2023.) In 2024, Chapelle Company incurred actual warranty costs relative to 2023 dishwasher sales of $4,000 for parts and $7,500 for labour. Instructions Using the expense warranty approach, prepare the entries to reflect the above transactions (accrual method) for 2023 and 2024. Solution 13-96 2023 Accounts Receivable ................................................................................ Sales Revenue (600 x $1,200)............................................................ Warranty Expense (600 x ($40 + $75)) ...................................................... Warranty Liability.............................................................................. 2024 Warranty Liability ..................................................................................... Inventory ........................................................................................... Salaries and Wages Payable .............................................................

720,000 720,000 69,000 69,000

11,500 4,000 7,500

Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex.13-97 Product guarantee and expense approach Chapelle Appliances sells dishwashers for $1,200 each, which includes a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2023, Chapelle sold 600 dishwashers on account. Based on past experience, the company has estimated the total 2-year warranty costs at $40 for parts and $75 for labour. (Assume sales all occur at December 31, 2023.) In 2024, Chapelle Company incurred actual warranty costs relative to 2023 dishwasher sales of $4,000 for parts and $7,500 for labour. Instructions Using the cash basis method, what are the Warranty Expense balances for 2023 and 2024 and prepare the entries?

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 13-97 Warranty expense balance: 2023 $0 Chapelle was not required to honour any warranty during 2023, so no entry is required. 2024 $11,500 ($4,000 + $7,500) Warranty Expense ............................................................................................ Inventory ........................................................................................... Salaries and Wages Payable .............................................................

11,500 4,000 7,500

Ex. 13-98 Premiums Modern Music gives its customers coupons which are redeemable for a poster plus a Hens and Chicks DVD. One coupon is issued for each dollar of sales. On presentation of 100 coupons and $5.00 cash, the customer receives the poster and DVD. Modern estimates that 80% of the coupons will be presented for redemption. Sales for Year One were $1,050,000, and 510,000 coupons were redeemed. Sales for Year Two were $1,260,000, and 1,275,000 coupons were redeemed. Modern bought 30,000 posters at $2.00 each, and 30,000 DVDs at $5.50 each. Instructions Prepare the following entries for both years, assuming all the coupons expected to be redeemed from Year One were redeemed by the end of Year Two. Entry Year One Year Two —————————————————————————————————————————— a) To record coupons redeemed —————————————————————————————————————————— b) To record estimated liability —————————————————————————————————————————— Solution 13-98 Entry a) Estimated Liability for Premiums Premium Expense [($510,000 ÷ 100) x ($7.50 – $5)] Cash ($510,000 ÷ 100) × $5 Inventory of Premiums

Year One

12,750

Year Two 8,250 *23,625

25,500

**63,750 38,250

95,625

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*[($1,275,000 ÷ 100) x ($7.50 – $5)] – $8,250 **($1,275,000 ÷ 100) x $5 b)

Premium Expense Estimated Liability for Premiums

*8,250

1,575 8,250

1,575

*[($1,050,000 x.80) – $510,000] ÷ 100 × $2.50 Difficulty: Medium Learning Objective: Explain the issues and account for product guarantees, other customer program obligations, and unearned revenue. Section Reference: Product Guarantees, Customer Programs and Unearned Revenue CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 13-99 Premiums Fido Corp. includes one coupon in each bag of dog food it sells. In return for three coupons, customers receive a dog toy that the company purchases for $1.20 each. Fido's experience indicates that 60% of the coupons will be redeemed. During 2023, 100,000 bags of dog food were sold, 12,000 toys were purchased, and 45,000 coupons were redeemed. During 2024, 120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were redeemed. Instructions Determine the premium expense to be reported in the income statement and the estimated liability for premiums on the statement of financial position for 2023 and 2024. Solution 13-99 Premium expense Estimated liability for premiums (1) (2) (3) (4)

2023 $24,000 (1) 6,000 (2)

2024 $28,800 (3) 10,800 (4)

100,000 ×.6 = 60,000; 60,000 ÷ 3 = 20,000; 20,000 × $1.20 = $24,000 45,000 ÷ 3 = 15,000; 20,000 –15,000 = 5,000; 5,000 × $1.20 = $6,000 120,000 ×.6 = 72,000; 72,000 ÷ 3 = 24,000; 24,000 × $1.20 = $28,800 60,000 ÷ 3 = 20,000; 5,000 + 24,000 – 20,000 = $9,000; 9,000 × $1.20 = $10,800

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ex. 13-100 Contingent liabilities Below are three independent situations: 1. In August, 2023, a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued his employer, Prince Corp., for $500,000. Prince’s legal counsel believes it is possible that the outcome of the suit will be unfavourable and that the settlement would cost the company from $150,000 to $400,000. 2. On October 4, 2023, a lawsuit for breach of contract seeking damages of $2,400,000 was filed by an author against Queen Corp. Queen's legal counsel believes that an unfavourable outcome is more likely than not. A reliable measurement of the award to the plaintiff is between $600,000 and $1,800,000. 3. King Ltd. is involved in a pending court case. King's lawyers believe it is likely that King will be awarded damages of $700,000. Instructions Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers. Assume all companies involved use IFRS. Solution 13-100 1. Prince should disclose, in the notes to the financial statements, the existence of a possible contingent liability related to the law suit. The note should indicate the range of the possible loss. The contingent liability should not be accrued because the loss is only possible, not probable (as required by IFRS). 2. The likely award should be accrued by a debit to an estimated loss account and a credit to an estimated liability using the expected value method. Queen should disclose the following in the notes to the financial statements: the amount of the suit, the nature of the contingency, the reason for the accrual, and the range of the possible loss. The accrual is made because it is more likely than not (probable) that a liability has been incurred and the amount of the loss can be measured reliably. 3. King should not record the gain contingency until it is realized. Usually, gain contingencies are neither accrued nor disclosed. The $700,000 gain contingency should be disclosed only if the likelihood that it will be realized is very high. Difficulty: Medium Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 13-101 Common types of current liabilities Define and identify common types of current liabilities and how they are valued. Solution 13-101 Current liabilities are obligations due within one year or the operating cycle where this is longer than one year from the statement of financial position date. The liquidation of a current liability is reasonably expected to require the use of current assets or the creation of other current liabilities. Theoretically, liabilities should be measured at the present value of the future outlay of cash required to liquidate them. In practice, current liabilities, other than borrowings, are usually recorded in accounting records and reported in financial statements at their full maturity value. There are several types of current liabilities, the most common being accounts and notes payable, sales taxes payable, and payroll-related obligations. Difficulty: Easy Learning Objective: Define liabilities, distinguish financial liabilities from other liabilities, and identify how they are measured. Section Reference: Recognition and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Pr. 13-102 Accounts and Notes Payable Below are selected transactions of Blackbird Ltd. for 2023, which uses a perpetual inventory system: 1. On May 10, the company purchased goods from Jay Corp. for $60,000, terms 2/10, n/30. The invoice was paid on May 18. 2. On June 1, the company purchased equipment for $180,000 from Seagull Ltd., paying $60,000 in cash and giving a one-year, 8% note for the balance. 3. On September 30, the company borrowed $162,000 from the Second National Bank by signing a one year, zero-interest-bearing note for $178,200. The discount rate was 10%. Instructions a) Prepare the journal entries necessary to record these transactions using appropriate dates. b) Prepare the adjusting entries necessary at December 31, 2023 in order to properly report interest expense related to the above transactions. c) Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of Blackbird's December 31, 2023 statement of financial position. d) CRITICAL THINKING: The purchase of equipment and inventory on credit are both examples of the company borrowing to purchase items needed to operate the business. Are the amounts owing categorized differently under liabilities and why? Solution 13-102 13-57 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) May 10, 2023 Inventory ................................................................................................... Accounts Payable.............................................................................. May 18, 2023 Accounts Payable ..................................................................................... Inventory ........................................................................................... Cash ................................................................................................... June 1, 2023 Equipment ................................................................................................ Cash ................................................................................................... Notes Payable ................................................................................... September 30, 2023 Cash........................................................................................................... Notes Payable ................................................................................... b)

60,000 60,000

60,000 1,200 58,800

180,000 60,000 120,000

162,000 162,000

Interest Expense ....................................................................................... Interest Payable ($120,000 × 8% × 7 ÷ 12) ........................................

5,600

Interest Expense ....................................................................................... Notes Payable ($16,200 x 3 ÷ 12) ......................................................

4,050

Current Liabilities Interest payable ........................................................................................ Note payable—Seagull Ltd. ...................................................................... Note payable—Second Provincial Bank ($162,000 +$4,050) ..................

5,600

4,050

$ 5,600 120,000 166,050 $291,650

CRITICAL THINKING: Yes, they are categorized differently. The purchase of goods for resale such as inventory, and even supplies, are categorized as accounts payable if they are purchased on credit instead of with cash. The term accounts payable implies that the borrowing is short term (generally 30 to 90 days) and typically does not have an interest arrangement. The purchase of equipment (a long-term asset), if purchased on credit, would normally be for a longer term, but more importantly would also require an interest arrangement and stated due date. Once a payable has a due date and interest arrangement, it is classified as a note payable. Notes payable can be classified as either current (due within one year of the statement of financial position date), or long term. This distinction helps the user understand the difference in the nature of the liabilities.

Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities 13-58 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. 13-103 Presentation of short-term debt At their last year end, December 31, 2023, the liabilities outstanding of Copper Corp. included the following: 1. Cash dividends on common shares, $100,000, payable on January 15, 2024 2. Note payable to Manitoba Bank, $850,000, due January 20, 2024 3. Serial bonds, $2,000,000, of which $500,000 matures during 2024 4. Note payable to Ontario Bank, $200,000, due January 27, 2024 The following transactions occurred early in 2024: January 15: The cash dividends were paid. January 20: The note payable to Manitoba Bank was paid. January 25: Copper entered into a financing agreement with Saskatchewan Bank, enabling it to borrow up to $1,000,000 at any time through the end of 2024. Amounts borrowed under the agreement would bear interest at 1% above the bank's prime rate and would mature 3 years from the date of the loan. The corporation immediately borrowed $800,000 to replace the cash used in paying its January 20 note to Manitoba Bank. January 26: 40,000 common shares were issued for $300,000. $200,000 of the proceeds was used to pay off the note payable to Ontario Bank. February 1: The financial statements for 2023 were issued. Instructions a) Prepare a partial statement of financial position for Copper Corp., showing the manner in which the above liabilities should be presented at December 31, 2023 under IFRS. The liabilities should be properly classified between current and long-term, and any appropriate note disclosure should be included. b)

CRITICAL THINKING: Identify and describe some reasons why Copper Corp. would issue shares to pay off a note payable.

Solution 13-103 a) Current liabilities: Dividends payable on common shares.................................................... Notes payable—Manitoba Bank ............................................................. Note payable—Ontario Bank—Note 1 ..................................................... Currently maturing portion of serial bonds............................................. Total current liabilities ..................................................................... Long-term debt: Serial bonds not maturing currently .......................................................

$100,000 850,000 200,000 500,000 $1,650,000

1,500,000 13-59

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Total long-term debt ........................................................................ Total liabilities .................................................................................................

1,500,000 $3,150,000

Note 1: On January 26, 2024, the corporation issued 40,000 common shares and received proceeds totaling $300,000, of which $200,000 was used to liquidate a note payable that matured on January 27, 2024. b) CRITICAL THINKING: A company should always be reviewing its capital structure to ensure that it is efficient from both a cost and investor satisfaction perspective. In this particular case the cost of equity is less than the cost of this particular debt, Ontario bank issued a demand for payment, an existing investor wanted to increase its position in Copper Corp. and there was no other operational use for the cash. Copper Corp. was having difficulty making the interest/principal payments on the note and needed a cash injection. Difficulty: Medium Learning Objective: Define current liabilities and identify and account for common types of current liabilities. Section Reference: Common Current Liabilities CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. 13-104 Refinancing of short-term debt HighTide Inc. is a new business that has been operating for just under two years with great success. Located on a beach, HighTide is in the business of everything to do with surfing. The owner Alex is an avid surfer. In addition to selling boards, accessories, etc. Alex provides surfing lessons on a regular basis. Some of the lessons are located on other beaches in the area. As a result, Alex purchased a new van for the company using a line of credit that the bank extended after the first year of operating the business. The bank found out that Alex did this during the annual review and required Alex take out a term loan to pay off the line of credit. The amount still owing on the line of credit related to the van purchase is $35,000. The bank set up the term loan for 4 years, with a $800 monthly payment. Instructions a) Prepare the journal entries for this refinancing arrangement b) How would the term loan be presented on the statement of financial position c) CRITICAL THINKING Why did the bank make HighTide restructure the debt in this way? Solution 13-104 a) Line of Credit............................................................................................. Bank Loans ........................................................................................ b)

Current Liabilities Current Portion of Bank Loan ..................................................................

35,000 35,000

9,600

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bank Loans ............................................................................................... c)

25,400

CRITICAL THINKING: Lines of credit are extended for companies to bridge working capital / cash shortfalls. HighTide should be using the line of credit to pay for timing differences related to inventory purchases and cash collections from sales to customers.. A purchase of a van, which is a long-term asset, would not be an acceptable use of the line of credit because long term assets should be paid for with long term debt.

Pr. 13-105 Payroll deduction entries Boxcom Company had a total bi-weekly payroll of $90,000. The entire payroll was subject to CPP (5.45%), EI (1.58%), and income tax withholdings of $11,880. Union dues of $1,125 and Health insurance premiums of $2,850 were also withheld. Instructions a) Prepare the journal entries to record the employee wages/salaries and payroll deductions. b) Prepare the journal entries to record the employer payroll contributions. c) Prepare the journal entries to record the remittance to the Receiver General. Solution 13-105 a) Salaries and Wages Expense ............................................................................ Employee Income Tax Deductions Payable ............................................ CPP Contributions Payable (5.45% x $90,000) ........................................ EI Premiums Payable (1.58% x $90,000) .................................................. Union Dues Payable ................................................................................. Health Insurance Premium Payable ........................................................ Cash........................................................................................................... b) Payroll Tax Expense ......................................................................................... CPP Contributions Payable ...................................................................... EI Premiums Payable (1.58% x $90,000 x 1.4).......................................... c) Employee Income Tax Deductions Payable .................................................... CPP Contributions Payable ($4,905 + $4,905 .................................................. EI Premiums Payable ($1,422 + $1,991) ...........................................................

90,000 11,880 4,905 1,422 1,125 2,850 67,843

6,896 4,905 1,991

11,880 9,810 3,413 13-61

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash...........................................................................................................

25,103

Pr. 13-106 Employee-related liabilities Identify and account for the major types of employee-related liabilities Solution 13-106 Employee-related liabilities include (1) payroll deductions, (2) compensated absences and (3) bonus agreements. Payroll deductions are amounts withheld from employees along with the employer’s required contributions that have not yet been remitted to the government. Compensated absences earned by employees are company obligations that should be recognized as the employees earn the entitlement to them, provided they can be reasonably measured. Bonuses based on income should be accrued as an expense and liability as the income is earned. Difficulty: Easy Learning Objective: Identify and account for the major types of employee-related liabilities. Section Reference: Employee-Related Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Pr. 13-107 Asset Retirement Obligation – IFRS Extraction Friendly Ltd. (EFL) specializes in extracting ore. It prides itself for following high environmental standards in the extraction process. On January 1, 2019, EFL purchased the rights to use a parcel of land from the province of New Brunswick. The rights cost $15,000,000 and allowed the company to extract ore for five years, i.e., until Dec 31, 2023. EFL expects to extract the ore evenly over the contract period. At the end of the contract, EFL has one year to clean up and restore the land. EFL estimates this will cost $2,000,000. EFL uses a discounted cash flow method to calculate the fair value of this obligation and believes that 8% is the appropriate discount rate. EFL uses straight-line depreciation method. EFL uses the calendar year as its fiscal year and follows IFRS. As a helpful suggestion, students may want to draw a timeline of events before solving the questions given below. Instructions (Round all values to the nearest dollar.) a) Prepare the journal entries to be recorded on January 1, 2019. 13-62 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c) d)

Prepare the journal entries to be recorded on December 31, 2019. Show the amounts and accounts to be reported on the classified statement of financial position at December 31, 2019. Prepare the journal entries to be recorded on December 31, 2023. Show the amounts and accounts reported on the classified statement of financial position at December 31, 2023. After 2023, EFL was supposed to clean up and restore the land. Even though the company spent a considerable amount of money on restoration, it was sued by the province of New Brunswick for not following the contract’s requirements. On February 3, 2025, judgement was rendered against EFL for $3,000,000. The company claims that because the language in the contract was misleading regarding the restoration costs, it plans to appeal the judgement and expects the ruling to be reduced to anywhere between $1,000,000 and $2,000,000, with $1,500,000 being the probable amount. EFL has not yet released its 2024 financial statements. Discuss how EFL should report this matter on its financial statements for the year ended December 31, 2024.

Solution 13-107 a) To record the purchase of the rights and the ARO: January 1, 2019 Extraction Rights ...................................................................................... 15,000,000 Cash ................................................................................................... 15,000,000 Extraction Rights ...................................................................................... Asset Retirement Obligation ............................................................

1,361,166 1,361,166

5 N 8 I 2000000 FV CPT PV => 1,361,166 b) To depreciate the extraction rights over 5 years and also record accretion (interest) expense on the obligation. December 31, 2019 Depreciation Expense............................................................................... 3,272,233 (($15,000,000 + $1,361,166) ÷ 5) Accumulated Depreciation ............................................................... 3,272,233 Interest Expense** .................................................................................... ($1,361,166 x 8%) Asset Retirement Obligation ............................................................

108,893 108,893

**If the company were using ASPE, the debit is to Accretion Expense Statement of financial position amounts: Account Amount Extraction rights net of accumulated depreciation $13,088,928* Asset retirement obligation $1,470,059**

Classification Long-term assets Long-term liabilities

*$15,000,000 + $1,361,166 – $3,272,231 = $13,088,935 **$1,361,166 + $108,893 = $1,470,059 13-63 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) For the depreciation of the extraction rights, the journal entry is the same every year. December 31, 2023 Depreciation Expense............................................................................... 3,272,233 Accumulated Depreciation ...............................................................

3,272,233

For the accretion (interest) costs, first you need to find the carrying value of the ARO at January 1, 2023 and then to calculate the expense. Since the carrying value at January 1, 2023 is $1,851,852, the interest expense is 1,851,852 x 8% = 148,149. Interest Expense ....................................................................................... Asset Retirement Obligation ............................................................ Statement of financial position amounts: Account Amount Extraction rights net of accumulated depreciation 0 Asset retirement obligation $2,000,000

148,148 148,148

Classification

Current liabilities

Since by the end of 2023 the liability is due to be discharged within a year, it should be classified as a current liability. d) This is a somewhat complicated situation. Clearly EFL is expecting a contingent loss of anywhere between $1,500,000 and $3,000,000. However, a $3,000,000 judgement has already been rendered against them, while the reduction in the loss is uncertain. There are two legitimate approaches to this issue. The first approach is to record a loss of $1,500,000 for 2024 (since this amount is deemed probable) and to provide full disclosure in the notes about the ruling and the expected appeal. The second approach is that the firm has incurred a contingent loss of $3,000,000 and expects a contingent gain of $1,500,000. Because losses are recorded immediately and contingent gains are not, then EFL should record a loss of $3,000,000 for 2024and provide full disclosure on the possible contingent gain. Difficulty: Medium Learning Objective: Explain the recognition, measurement, and disclosure requirements for decommissioning and restoration obligations. Section Reference: Decommissioning and Restoration Obligations CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. 13-108 Asset retirement obligation – ASPE Grow It All Farms Ltd. is an agri-business that grows a variety of different grains on the land that it owns. Operations have been steadily expanding over the last few years. The company has now reached a point where it needs to create a reservoir for irrigation purposes. Management has applied to the municipality for permission to create the reservoir by creating a diversion from a creek that 13-64 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

flows through land that the company owns. The permit has been approved on the condition that Grow It All Farms restore the land and creek to its natural state when operations cease. The company is required to provide the municipality financial statements on an annual basis. Management agreed to the condition and has engaged an engineering firm to scope and price out the work. The cost to create the reservoir and divert the creek is $4,000,000. The cost of the restoration is estimated to be $6,000,000 in 20 years. Grow It All Farms borrows at an average rate of 6% from its lenders. Instructions a) Prepare the journal entries to set up the asset and the obligation imposed by the municipality b) Assume that the fiscal year end is a full 12 months from the date of setting up the asset. Prepare any year end journal entries c) After 5 years, the municipality has discovered that due to the creek diversion, the fish population has dramatically been depleted, which has affected local communities. To keep the permit in place, the municipality has demanded that Grow It All Farms pay to repopulate the creek immediately, and again when the restoration work is done in the future. Management has agreed. Prepare the journal entries to reflect these requirements assuming that the cost today is $250,000 and $500,000 in the future. d) CRITICAL THINKING: Why is the municipality requiring Grow It All Farms to provide annual financial statements? Solution 13-108 a) Land Improvements ................................................................................ Cash ................................................................................................... To record the creation of the reservoir Land Improvements ................................................................................. Asset Retirement Obligation ............................................................ To record the restoration obligation $1,870,828 =

4,000,000 4,000,000

1,870,828 1,870,828

PV calculation, FV $6,000,000 N 20 I/Y 6% b)

Depreciation Expense............................................................................... Accumulated Depreciation – Land Improvements .........................

293,541 293,541

($4,000000 + $1,870,828) / 20 = $293,541

Accretion Expense .................................................................................... Asset Retirement Obligation ............................................................

$112,250

Land Improvements ................................................................................. Cash ................................................................................................... To record the immediate cost of repopulating the creek

$250,000

Land Improvements ................................................................................. Asset Retirement Obligation ............................................................

$208,633

$112,250

$250,000

$208,633 13-65

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

To record the additional restoration obligation $208,633 = PV Calculation, FV $500,000, N 15, I/Y 6% d)

CRITICAL THINKING: The municipality is now a user of Grow It All Farms financial statements. The requirement to restore the land and creek to its natural state is a significant and expensive obligation. The municipality will want to review the financial statements of Grow It All Farms regularly to ensure that enough of a provision has been made to guarantee that the restoration will happen. A company can promise to clean up a site but making sure that there is enough resources to do so requires planning.

Pr. 13-109 Premiums: expense vs revenue approach Fancie Cosmetics offers its customers a traveler’s gift set as a premium in exchange for $20 if the customer purchases one of the top brand cosmetic makeup kits. The company purchased for cash 2,000 gift sets at $25 each. It estimates that 60% of customers will participate in the promotion and that 10% of the amount received from customers relates to the awarded premiums. In 2023, the company sold 3,000 makeup kits at a sales price of $80 resulting in sales revenue of $240,000. By the end of the year, 1,500 customers took advantage of the promotion. Instructions a) Prepare the appropriate journal entries assuming that Facie follows ASPE and uses the expense approach. b) Prepare the appropriate journal entries assuming that Fancie follows IFRS and uses the revenue approach. For this part of the question, assume the selling price includes the offer for the premium. Solution 13-109 a) Inventory of Premiums ............................................................................. Cash ($25 x 2,000 = $50,000) .............................................................

50,000 50,000

240,000

Cash (1,500 x $20) ..................................................................................... Premium Expense..................................................................................... Inventory of Premiums (1,500 x $25)................................................

30,000 7,500

240,000

37,500 13-66

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Premium Expense..................................................................................... Estimated Liability for Premiums.....................................................

1,500

*Total kits sold ................................................................................................. Total estimated redemptions (60%) ............................................................... Customer redemption in 2023 ......................................................................... Estimated future redemptions ........................................................................ Cost per premium: ($25 – $20) ......................................................................... Cost of estimated claims outstanding (300 x $5) ............................................

3,000 1,800 1,500 300 $5.00 $1,500

1,500

b) Inventory of Premiums ............................................................................. Cash ($25 x 2,000 = $50,000) .............................................................

50,000

Cash........................................................................................................... Sales Revenue ................................................................................... Unearned Revenue ...........................................................................

240,000

30,000 7,500

Unearned Revenue ................................................................................... Sales Revenue ($40,000 x 1,500 / 1,800) ...........................................

33,333

50,000

200,000 40,000

37,500

33,333

Pr. 13-110 Premiums: multi-years Creamy Candy Company offers a coffee mug as a premium for every ten 50-cent candy bar wrappers presented by customers together with $1.00. The purchase price of each mug to the company is 90 cents; in addition it costs 60 cents to mail each mug. The results of the premium plan for the years 2023 and 2024 are as follows (assume all purchases and sales are for cash): 2023 2024 Coffee mugs purchased ......................................................................... 480,000 400,000 Candy bars sold ...................................................................................... 3,750,000 4,500,000 Wrappers redeemed............................................................................... 1,900,000 2,800,000 2023 wrappers expected to be redeemed in 2024 ................................ 1,300,000 2024 wrappers expected to be redeemed in 2025 ................................ 1,800,000 Instructions 13-67 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) b)

Prepare the general journal entries that should be made in 2023 and 2024 related to the above plan by assuming Creamy Candy uses the expense approach. Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the statement of financial position and income statement at the end of 2023 and 2024.

Solution 13-110 a) 2023 Inventory of Premium (480,000 × $.90 = $432,000) ................................. Cash ...................................................................................................

432,000

Cash........................................................................................................... Sales Revenue (3,750,000 × $.50 = $1,875,000) ................................

1,875,000

Cash [1,900,000 ÷ 10 × ($1.00 – $.60) = $76,000] ...................................... Premium Expense..................................................................................... Inventory of Premium (190,000 × $.90 = $171,000) ..........................

76,000 95,000

Premium Expense (1,300,000 ÷ 10 × $.50 = $65,000) ............................... Estimated Liability for Premiums.....................................................

65,000

2024 Inventory of Premium (400,000 × $.90 = $360,000) ................................. Cash ...................................................................................................

432,000

1,875,000

171,000

65,000

360,000 360,000

Cash........................................................................................................... Sales Revenue (4,500,000 × $.50 = $2,250,000) ................................

2,250,000

Cash [2,800,000 ÷ 10 × ($1.00 – $.60) = $112,000] .................................... Estimated Liability for Premiums ............................................................ Premium Expense..................................................................................... Inventory of Premium (280,000 × $.90 = $252,000) ..........................

112,000 65,000 75,000

Premium Expense..................................................................................... Estimated Liability for Premiums..................................................... (1,800,000 ÷ 10 × $.50 = $90,000)

90,000

2,250,000

252,000

90,000

Statement of financial position Name Inventory of Premium Mugs Estimated Liability for Premiums

Classification Current Asset Current Liability

2023 $261,000 65,000

2024 $369,000 90,000

Income Statement Name Premium Expense

Classification Operating Expense

2023 160,000

2024 165,000 13-68

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pr. 13-111 Warranties Alaska Computer Company sells computers for $2,000 each, which includes a 3-year warranty that requires the company to perform periodic services and to replace defective parts. During 2023, Alaska sold 500 computers on account. Based on past experience, the company has estimated the total 3year warranty costs at $80 for parts and $100 for labour. (Assume sales all occur at December 31, 2023.) In 2024, Alaska Computer Company incurred actual warranty costs relative to 2023 computer sales of $10,000 for parts and $12,000 for labour. Instructions a) Using the expense warranty approach, prepare the entries to reflect the above transactions (accrual method) for 2023 and 2024. b) Using the cash basis method, what are the Warranty Expense balances for 2023 and 2024? c) The transactions of part a) create what balance under current liabilities in the 2023 statement of financial position? Solution 13-111 a) 2023 Accounts Receivable ................................................................................ Sales Revenue ................................................................................... Warranty Expense (500 x ($80 + $100)) .................................................... Warranty Liability.............................................................................. 2024 Warranty Liability ..................................................................................... Inventory ........................................................................................... Salaries and Wages Payable ............................................................. b)

2023 $0 2024 $22,000

2023 Current Liabilities—Warranty Liability $30,000 (The remainder of the $90,000 liability is a long-term liability.)

1,000,000 1,000,000 90,000 90,000

22,000 10,000 12,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pr. 13-112 Unredeemed coupons During 2023, Red Deer Corp. sold 200,000 tickets for hockey games for $60 each under a new sales promotion program. Each ticket contains one coupon. Any person who presents 2 coupons can receive a ticket to an Edmonton Flames football game for only $2. Red Deer pays $8.00 per football ticket and at the beginning of 2023 had purchased 80,000 tickets (any tickets not used in 2023 can be used in 2024). The company estimates that 60% of the coupons will be redeemed even though only 50,000 coupons had been processed during 2023. Instructions a) What amount should Red Deer report as a liability for unredeemed coupons on December 31, 2023? b) What amount of expense will Red Deer report on its 2023 income statement as a result of the promotional program? c) Prepare any necessary 2023 journal entries related to the promotion program. d) Explain how the accounting treatment for this promotion is treated under IFRS. Solution 13-112 a) The number of coupons expected to be processed is 200,000 x 60% = 120,000. In 2023, 50,000 coupons were processed, so 70,000 more are expected to be processed and accordingly 35,000 tickets to be purchased. The additional net cost per ticket is $6 and therefore the liability for unredeemed coupons at December 31, 2023 should be 35,000 x 6 = $210,000. b)

Promotion expense = (120,000 ÷ 2) x 6 = 360,000.

Inventory of Premium (80,000 x $8) ......................................................... Cash ...................................................................................................

640,000 640,000

Cash (200,000 x $60) ................................................................................. 12,000,000 Sales Revenue ................................................................................... Estimated Liability for Premiums ............................................................ Cash (50,000 ÷ 2 x $2)................................................................................ Inventory of Premium (50,000 ÷ 2 x $8) ............................................

150,000 50,000

Premium Expense..................................................................................... Estimated Liability for Premiums.....................................................

360,000

12,000,000

200,000

360,000 13-70

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Under IFRS, this promotion would be considered a multiple deliverables arrangement. Red Deer is selling two separate products (the hockey tickets and the football tickets), with the selling price of the hockey tickets inflated to encourage the ticket purchasers to also purchase football tickets. Therefore some of the revenue from the sale of each hockey ticket should be deferred and allocated to the delivery of the football tickets. An estimated amount should be deferred to 2024 when the remaining coupons will be redeemed.

Pr. 13-113 Contingencies You have been hired by Yew Corp. to advise them on how to reflect the events below in their financial statements for the year ended December 31, 2023 under ASPE. Event 1: The Division A employees union has been negotiating a new contract with Yew Corp. The union is requesting a 5% wage increase retroactive for two years. Yew’s management has offered the union a 2% wage increase retroactive for one year. While the negotiations are still ongoing, the company believes that an agreement will soon be reached for a 4% wage increase retroactive for one year, but there is no guarantee that this will be the outcome of the negotiations. Event 2: The Division B employees union is also negotiating a new contract with Yew Corp. However, these negotiations are proving to be very tough. So far there has not been much progress and management is pessimistic about a quick resolution. The company is concerned that during 2024 the Division B employees will decide to go on strike; in fact, Yew considers it very likely. At this point it is difficult to assess the economic consequences of the potential strike. Event 3: Toward the end of 2023, a fire destroyed one of Yew’s plants. The damage is estimated to be $8,000,000 and the company’s insurance policy has maximum coverage of $15,000,000 for this. The deductible on the policy is $300,000. The company is concerned that the insurance premium ($200,000 in 2023) will double in 2024. Instructions For each of the above events, state the accounting treatment you believe is most appropriate. Be specific and give your rationale. Solution 13-113 Event 1: The event is more likely than not to happen and the cost can be reasonably estimated. Yew Corp. should accrue an additional expense for 2023 based on the most likely outcome of a 4% wage increase retroactive for one year. In the notes to the financial statements, they should provide the range for the potential expense (2-5%, 1-2 years). Event 2: If Yew Corp. considers this to be a contingent liability, note disclosure only would be 13-71 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

appropriate, since the event is likely to happen but cannot be reasonably estimated. If they do not, then no disclosure is required. Event 3: The $300,000 deductible payment should be accrued in 2023 as a loss from fire. While the premium is likely to increase and can be reasonably measured, the cost relates to future periods and therefore no expense should be accrued for 2023. Full disclosure of the event and of the expected cost increase for next year is appropriate, unless the amount is immaterial. Alternatives the company could consider: 1. Shop around for a better deal on insurance. 2. Avoid the potential premium increase by choosing to self-insure. Difficulty: Medium Learning Objective: Explain and account for contingencies and uncertain commitments, and identify the accounting and reporting requirements for guarantees and commitments. Section Reference: Contingencies, Uncertain Commitments, and Requirements for Guarantees and Other Commitments CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

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Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 14 LONG-TERM FINANCIAL LIABILITIES CHAPTER STUDY OBJECTIVES 1. Understand the nature of long-term debt financing arrangements. Incurring long-term debt is often a formal procedure. Corporation bylaws usually require the approval of the board of directors and the shareholders before bonds can be issued or other long-term debt arrangements can be contracted. Generally, long-term debt has various covenants or restrictions. The covenants and other terms of the agreement between the borrower and the lender are stated in the bond indenture or note agreement. Notes are similar in substance to bonds but do not trade as readily in capital markets, if at all. The variety of types of bonds and notes is a result of attempts to attract capital from different investors and risk takers and to satisfy the issuers’ cash flow needs. External credit rating agencies rate bonds and assign a credit rating based on the riskiness. The credit rating helps investors decide whether to invest in a particular bond. Companies sometimes extinguish debt early using a defeasance arrangement. In a defeasance arrangement, funds are deposited into a trust and the trust continues to make the regularly scheduled payments until maturity. By using debt financing, companies can maximize income through the use of leverage. Capitalintensive industries often have higher levels of debt. Continued access to low-cost debt is important for maximizing shareholder value.

2. Understand how long-term debt is measured and accounted for. The investment community values a bond at the present value of its future cash flows, which consist of interest and principal. The rate that is used to calculate the present value of these cash flows is the interest rate that provides an acceptable return on an investment that matches the issuer’s risk characteristics. The interest rate written in the terms of the bond indenture and ordinarily appearing on the bond certificate is the stated, coupon, or nominal rate. This rate, which is set by the issuer of the bonds, is expressed as a percentage of the bond’s face value, which is also called the par value, principal amount, or maturity value. If the rate used by the buyers differs from the stated rate, the bond’s present value calculated by the buyers will differ from the bond’s face value. The difference between the bond’s face value and the present value is either a discount or a premium. Long-term debt is measured at fair value on initial recognition, including transaction costs where the instruments will be valued at amortized cost. Subsequently, the instruments are measured at amortized cost or, in certain limited situations, fair value, under the fair value option. The discount (premium) is amortized and charged (credited) to interest expense over the period of time that the bonds are outstanding. IFRS requires the effective-interest method; however, ASPE allows a choice and often smaller private entities use the straight-line method. Bonds and notes may be issued with zero interest or for a non-monetary consideration. Measurement of the bonds and the consideration must reflect the underlying substance of the transaction. In particular, reasonable interest rates must be imputed. The fair value of the debt and of the nonmonetary consideration should be used to value the transaction. 14-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

3. Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. At the time of reacquisition, the unamortized premium or discount and any costs of issue that apply to the debt must be amortized up to the reacquisition date. The amount that is paid on extinguishment or redemption before maturity, including any call premium and expense of reacquisition, is the reacquisition price. On any specified date, the debt’s net carrying amount is the amount that is payable at maturity, adjusted for unamortized premium or discount and the cost of issuance. Any excess of the net carrying amount over the reacquisition price is a gain from extinguishment, whereas the excess of the reacquisition price over the net carrying amount is a loss from extinguishment. Legal defeasance results in derecognition of the liability. In substance defeasance does not. Where debt is settled by exchanging the old debt with new debt (generally in troubled debt situations), it is treated as a settlement where the terms of the agreements are substantially different, including a size test, and where the new debt is with a new lender. If not treated as a settlement, it is treated as a modification of the old debt and a new interest rate is imputed under ASPE. Under IFRS, a gain/loss is recognized. Off–balance sheet financing is an attempt to borrow funds in such a way that the obligations are not recorded. One type of off–balance sheet financing involves the use of certain variable interest entities. Accounting standard setters are studying this area with the objective of coming up with a new definition of what constitutes the reporting entity.

4. Explain how long-term debt is presented, disclosed and analyzed. Companies that have large amounts and many issues of long-term debt often report only one amount in the SFP and support this with comments and schedules in the accompanying notes. Long-term debt that matures within one year should be reported as a current liability, unless it will be retired without using current assets. If the debt is to be refinanced, converted into shares, or retired from a bond retirement fund, it should continue to be reported as non-current and accompanied by a note explaining the method to be used in its liquidation unless certain conditions are met. Note disclosures are significant and generally indicate the nature of the liabilities, maturity dates, interest rates, call provisions, conversion privileges, restrictions imposed by the creditors, and assets designated or pledged as security as well as other details. Debt to total assets and times interest earned are two ratios that provide information about debtpaying ability and long-term solvency.

5. Identify major differences in accounting standards between IFRS and ASPE, and what changes are expected in the near future. IFRS and ASPE are largely converged as they relate to long-term debt. Small differences relate to whether the debt is presented as current or non-current and in measurement. For example, ASPE has measurement standards for related party transactions. The standard setters have been working on a project entitled Financial Instruments with the Characteristics of Equity.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer a b d c c b a d b a b d c d b d b d d a a a b c a c a c b c b b b a c a c d b c a d b

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Liability identification Restrictions in restricted covenants Bond vocabulary Bond vocabulary Bond vocabulary Convertible bond Commodity backed bond Rate of interest earned by bondholders Bond premium and interest rates Interest and discount amortization Effective-interest amortization method Impact of effective-interest method Bonds issued between interest dates Bonds issued between interest dates Valuation of bonds Bond face value Notes with zero interest or non-monetary consideration Fair value option Note issued for property, goods, or services Calculate the present value of bond principal Calculate the present value of bond interest Calculate the issue price of bonds Interest expense using effective-interest method Interest expense using effective-interest method Interest on noninterest-bearing note Interest on instalment note payable Calculate balance of note payable Calculate proceeds from bond issue Calculate balance in bonds payable account Calculate balance in bonds payable account Calculate bond interest expense Bonds trading at a discount Straight-line interest amortization method Comparison of IFRS and ASPE Callable bonds Debt refunding Modification of terms in troubled debt restructuring Gain/loss on troubled debt restructuring Gain/loss on troubled debt restructuring Creditor's calculations for modification of terms In substance defeasance Off-balance-sheet financing Calculate gain on retirement of bonds 14-3

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a c b Answer b b d b b a b c d d c a b b d b c a d b d c b b b a

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72

Calculate gain or loss on retirement of bonds Calculate loss on retirement of bonds Bond retirement with call premium Description Calculate loss on retirement of bonds. Transfer of equipment in debt restructure Recognizing gain on debt restructure Interest and troubled debt restructuring Calculate loss on retirement of bonds. Calculate loss on retirement of bonds. Calculate gain or loss on retirement of bonds. Calculate gain or loss on retirement of bonds. Classification of gains from troubled debt restructuring Substance of defeasance Off-balance-sheet financing Presentation Presentation Long-term debt disclosures Disclosure Disclosure Times interest earned ratio Debt to total assets ratio Times interest earned ratio Debt to total assets ratio Calculate times interest earned ratio Calculate debt to total assets ratio Calculate times interest earned ratio Calculate debt to total assets ratio Comparison of IFRS and ASPE Restructuring of debt with no substantial modification

EXERCISES Item E14-73 E14-74 E14-75 E14-76 E14-77 E14-78 E14-79 E14-80 E14-81 E14-82 E14-83

Description Underwriting for bond issues Terms related to long-term debt Amortization of premium Bond issue price and premium amortization Amortization of discount Bond issue price and discount amortization Note issued for cash and other rights Note issued for non-cash consideration Sale and subsequent buyback of bonds Entries for bonds payable Repayment of bond before maturity 14-4

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

E14-84 E14-85 E14-86 E14-87 E14-88

Retirement of bonds Early extinguishment of debt and bond redemptions Accounting for a troubled debt settlement Accounting for troubled debt restructuring Accounting for troubled debt

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Item P14-89 P14-90 P14-91 P14-92 P14-93 P14-94 P14-95 P14-96 P14-97 P14-98 P14-99

Description Bond interest and premium amortization Bond interest and premium amortization Bond interest and discount amortization Bond interest and discount amortization Fair value option and calculation Entries for bonds payable Entries for bonds payable Accounting for bond issuance and gain on retirement Accounting for bond issuance and loss on retirement Bond accounting, ratios, debt covenants Accounting for a troubled debt settlement

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. Which of the following is NOT generally classified as a long-term liability? a) stock dividends distributable b) pension liabilities c) mortgages payable d) lease liabilities Answer: a Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. Restrictions included in restricted covenants do NOT generally include a) working capital restrictions. b) limits on executive compensation. c) dividend restrictions. d) limitations on incurring additional debt. Answer: b Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. A contract representing the covenants and other terms of the agreement between the issuer of bonds and the lender is known as a a) bond debenture. b) long-term note payable. c) registered bond. d) bond indenture. Answer: d Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. 14-7 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Understanding Debt Instruments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. The term used for bonds that are backed by collateral is a) convertible bonds. b) debenture bonds. c) secured bonds. d) callable bonds. Answer: c Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. Bonds frequently used by schools and municipalities that mature in instalments are called a) convertible bonds. b) revenue bonds. c) serial bonds. d) callable bonds. Answer: c Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

6. A bond that may be exchanged for common shares is a) a bearer bond. b) a convertible bond. c) an income bond. d) a registered bond. Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

7. A bond that is linked to natural gas is an example of a) a commodity-backed bond. b) a revenue bond. c) a deep discount bond. d) a junk bond. Answer: a Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

8. The rate of interest actually earned by bondholders is called the a) stated rate. b) coupon rate. c) dividend rate. d) effective yield or market rate. Answer: d Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

9. Mars Corp. issued ten-year bonds with a maturity value of $400,000. If the bonds were issued at a premium, this indicates that a) the market rate was higher than the stated rate. b) the stated rate was higher than the market rate. c) the market and stated rates were the same. d) no relationship exists between the two rates. 14-9 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

10 If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will be a) higher than it would have been had the effective-interest method of amortization been used. b) less than it would have been had the effective-interest method of amortization been used. c) the same as it would have been had the effective-interest method of amortization been used. d) less than the stated rate of interest. Answer: a Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

11 Using the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to the a) stated rate multiplied by the face value of the bonds. b) market rate multiplied by the beginning-of-period carrying value of the bonds. c) stated rate multiplied by the beginning-of-period carrying value of the bonds. d) market rate multiplied by the face value of the bonds. Answer: b Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

12. When the effective-interest method is used to amortize bond premium or discount, the periodic 14-10 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

amortization will a) increase if the bonds were issued at a discount. b) decrease if the bonds were issued at a premium. c) increase if the bonds were issued at a premium. d) increase if the bonds were issued at either a discount or a premium. Answer: d Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

13. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a a) debit to Interest Payable. b) credit to Interest Receivable. c) credit to Interest Expense. d) credit to Unearned Interest. Answer: c Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

14. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be a) decreased by accrued interest from June 1 to November 1. b) decreased by accrued interest from May 1 to June 1. c) increased by accrued interest from June 1 to November 1. d) increased by accrued interest from May 1 to June 1. Answer: d Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting 14-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

15. How should a long-term bond initially be valued? a) at the future value of the future cash flows b) at the present value of the future cash flows c) at the present value of the interest to be paid d) at the maturity value of the bond Answer: b Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

16. A bond’s face value is also called a) the par value or the present value. b) the principal amount or the present value. c) the amortized value or the maturity value. d) the par value or the maturity value. Answer: d Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

17. If a long-term note is issued with zero interest or for non-monetary consideration, a) the debtor must first try to value the non-monetary asset(s) involved in the transaction. b) a reasonable interest rate must be imputed. c) the debtor always tries to create a gain with such a transaction. d) the note is a non-monetary liability. Answer: b Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. 14-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

18. When valuing financial instruments at fair value (the fair value option), a) ASPE allows this option only for certain financial instruments. b) IFRS allows this for all financial instruments. c) IFRS requires that this option be used only where fair value does not result in more relevant information. d) IFRS requires that non-performance risk be included in the fair value measurement. Answer: d Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

19. When a note payable is issued for property, goods, or services, the present value of the note should preferably be measured by a) the present value of the property, goods or services. b) the fair value of the property, goods, or services. c) the fair value of the debt instrument. d) the present value of the debt instrument. Answer: d Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

20. On January 1, 2023, Cotton Corp. issued eight-year, 3% bonds with a face value of $600,000, with interest payable semi-annually on June 30 and December 31. The bonds were sold to yield 4%. Table values are: Present value of 1 for 8 periods at 3% .789 Present value of 1 for 8 periods at 4% .731 Present value of 1 for 16 periods at 1.5% .788 14-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Present value of 1 for 16 periods at 2% Present value of annuity for 8 periods at 3% Present value of annuity for 8 periods at 2% Present value of annuity for 16 periods at 1.5% Present value of annuity for 16 periods at 2% The present value of the principal is a) $436,800. b) $438,600. c) $472,800. d) $473,400.

.728 7.020 7.325 14.131 13.578

Answer: a Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $600,000 ×.728 = $436,800

21. On January 1, 2023, Cotton Corp. issued eight-year, 3% bonds with a face value of $600,000, with interest payable semi-annually on June 30 and December 31. The bonds were sold to yield 4%. Table values are: Present value of 1 for 8 periods at 3% .789 Present value of 1 for 8 periods at 4% .731 Present value of 1 for 16 periods at 1.5% .788 Present value of 1 for 16 periods at 2% .728 Present value of annuity for 8 periods at 3% 7.020 Present value of annuity for 8 periods at 2% 7.325 Present value of annuity for 16 periods at 1.5% 14.131 Present value of annuity for 16 periods at 2% 13.578 The present value of the interest is a) $122,202. b) $126,360. c) $127,179. d) $131,850. Answer: a Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application 14-14 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: ($600,000 ×.015) × 13.578 = $122,202

22. On January 1, 2023, Cotton Corp. issued eight-year, 3% bonds with a face value of $600,000, with interest payable semi-annually on June 30 and December 31. The bonds were sold to yield 4%. Table values are: Present value of 1 for 8 periods at 3% .789 Present value of 1 for 8 periods at 4% .731 Present value of 1 for 16 periods at 1.5% .788 Present value of 1 for 16 periods at 2% .728 Present value of annuity for 8 periods at 3% 7.020 Present value of annuity for 8 periods at 2% 7.325 Present value of annuity for 16 periods at 1.5% 14.131 Present value of annuity for 16 periods at 2% 13.578 The issue price of the bonds is a) $559,002. b) $599,760. c) $570,450. d) $599,979. Answer: a Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $600,000 ×.728 = $436,800; ($600,000 ×.015) × 13.578 = $122,202; $436,800 + $122,202 = $559,002

23. On January 1, 2023, Neisha Ltd. sold five year, 6% bonds with a face value of $400,000. Interest will be paid semi-annually on June 30 and December 31. The bonds were sold for $417,505 to yield 5%. Using the effective-interest method of amortization of bond discount or premium, interest expense for 2023 is a) $20,000. b) $20,837. c) $27,501. d) $24,000. Answer: b Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. 14-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Interest June 30: $417,505 x .025 = Amortization of premium $12,000 – $10,438 = $1,562 CV is now $417,505 – $1,562 = $415,943 Interest Dec 31: $415,943 × .025 = Total interest for 2023:

$10,438

$10,399 $20,837

24. On January 2, 2023, McIntosh Ltd. sold five year, 4% bonds with a face value of $500,000. Interest will be paid semi-annually on June 30 and December 31. The bonds were sold for $478,121 to yield 5%. Using the effective-interest method of amortization of bond discount or premium, interest expense for 2023 is a) $20,000. b) $11,953. c) $23,955. d) $25,000. Answer: c Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Interest June 30: $478,121 ×.025= $11,953 Amortization of discount $11,953 – $10,000 = $1,953 CV is now $478,121 + $1,953 = $480,074 Interest Dec 31: $480,074 ×.025 = 12,002 Total interest for 2023: $23,955

25. On January 1, 2023, Susan Hong lent $60,104 to Ben Bachu. A zero-interest-bearing note (face amount, $80,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2025. The market rate of interest for a loan of this type is 10%. To the nearest dollar, and using the effective-interest method, how much interest revenue should Ms. Hong recognize in 2023? a) $6,010 b) $8,000 c) $18,030 d) $24,000 Answer: a 14-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

26. On January 1, 2023, Alvin Corp. sold property to Marvin Ltd., for which Alvin had originally paid $570,000. There was no established exchange price for this property. Marvin gave Alvin a $900,000, zero-interest-bearing note, payable in three equal annual instalments of $300,000, with the first payment due December 31, 2023. The note also has no ready market. The market rate of interest for a note of this type is 10%. The present value of a $900,000 note payable in three equal annual instalments of $300,000 at 10% is $746,056. To the nearest dollar, and using the effective-interest method, how much interest revenue should Alvin recognize in 2023? a) $0 b) $30,000 c) $74,606 d) $90,000 Answer: c Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $746,056 ×.10 = $74,606

27. On January 1, 2023, Queen Ltd. sold property to King Company. There was no established exchange price for the property, and King gave Queen a $3,000,000, zero-interest-bearing note payable in five equal annual instalments of $600,000, with the first payment due December 31, 2023. The market rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,333,791 at January 1, 2023. What should be the balance of the Note Payable to Queen Ltd. account on King’s December 31, 2023 adjusted trial balance, assuming that the note is recorded at net and the effective-interest method is used? (Round to the nearest dollar, if necessary.) a) $1,943,832 b) $2,333,791 c) $2,400,000 d) $3,000,000 Answer: a 14-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Interest portion of Dec 31 payment = $2,333,791 x 9% = $210,041; therefore, principal reduction is $600,000 – $210,041 = $389,959, and carrying value of note is $2,333,791 – $389,959 = $1,943,832

28. On July 1, 2023, Markham Corp. issued $800,000, 4% bonds at 98 plus accrued interest. The bonds are dated April 1, 2023 and mature on April 1, 2030. Interest is payable semi-annually on April 1 and October 1. How much did Markham receive from the bond issuance? a) $776,000 b) $784,000 c) $792,000 d) $800,000 Answer: c Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($800,000 ×.98) + ($800,000 ×.04 × 3 ÷ 12) = $792,000

29. On January 1, 2023, Neeson Ltd. issued $2,000,000, 5% bonds, which mature on January 1, 2030. The bonds were issued for $2,120,045 to yield 4%. Neeson uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2023, the adjusted balance in the Bonds Payable account should be a) $2,120,045. b) $2,104,847. c) $2,135,243. d) $2,000,000. Answer: b Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting 14-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: Amortization of premium $100,000 – ($2,120,045 ×.04) = $15,198; CV is $2,120,045 – $15,198 = $2,104,847

30. On July 1, 2023, Pike Inc. issued $500,000, 9% bonds, which mature on July 1, 2030. The bonds were issued for $469,500 to yield 10%. Pike uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2025, the adjusted balance in the Bonds Payable account should be a) $500,000. b) $493,900. c) $473,595. d) $471,450. Answer: c Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 2023–2024: CV is $469,500 + [($469,500 ×.1) – $45,000] = $471,450; 2024–2025: CV is $471,450 + [($471,450 x.1) – $45,000)] = $473,595

31. On January 1, 2023, Helium Corp. sold $500,000, 4% bonds for $477,102 to yield 6%. Interest is payable semi-annually on January 1 and July 1. Helium uses the effective-interest method of amortizing bond discount. What amount should Helium report as interest expense for the six months ended June 30, 2023? a) $10,000 b) $14,313 c) $20,000 d) $28,626 Answer: b Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $477,102 ×.03 = $14,313

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

32. A $700,000 bond is issued on January 1, 2023. Assuming the bond was issued at “95”, the bondholder’s initial entry would include a) a debit of $700,000 to cash. b) a debit of $665,000 to cash. c) a debit of $735,000 to cash. d) a debit of $745,000 to cash. Answer: b Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $700,000 x .95 = $665,000

33. A bond with a five-year maturity and interest paid on a semi-annual basis has a discount of $5,000 upon issuance. Under the straight-line method, semi-annual amortization would be a) $1,000. b) $500. c) $250. d) $5,000. Answer: b Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $5,000 / 10 = $5,000

34. Which of the following statements is correct? a) IFRS requires the effective-interest method to be used to amortize bond premiums and discounts; ASPE permits either the effective-interest method or the straight-line method. b) ASPE requires the effective-interest method to be used to amortize bond premiums and discounts; IFRS permits either the effective-interest method or the straight-line method. c) Both IFRS and ASPE require the effective-interest method to be used to amortize bond premiums and discounts. d) Both IFRS and ASPE permit either the effective-interest method or the straight-line method to be used to amortize bond premiums and discounts. 14-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Easy Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Identify major differences in accounting standards between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

35. A ten-year bond was issued in 2023 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2025, the carrying value of the bond was less than the call price. The amount of bond liability removed from the accounts in 2025 would be the a) call price. b) maturity value. c) carrying value. d) face amount plus unamortized discount. Answer: c Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

36. Under ASPE, if a debt refunding is viewed as a modification or renegotiation, then a) a new effective-interest rate is calculated. b) a gain or loss is recorded. c) there is no change in the accounting for the debt. d) the old debt is derecognized. Answer: a Difficulty: Easy Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting 14-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

37. Under ASPE, in a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, a) an extraordinary gain should be recognized by the debtor. b) a gain should be recognized by the debtor. c) a new effective-interest rate must be calculated. d) no interest expense or revenue should be recognized in the future. Answer: c Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

38. A troubled debt restructuring will generally result in a a) loss by the debtor and a gain by the creditor. b) loss by both the debtor and the creditor. c) gain by both the debtor and the creditor. d) gain by the debtor and a loss by the creditor. Answer: d Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

39. In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less the carrying amount of the debt, the debtor would a) not recognize a gain or loss on the settlement. b) recognize a gain on the settlement. c) recognize a loss on the settlement. d) only record a memo in the general ledger.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

40. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should a) calculate a new effective-interest rate. b) not recognize a loss. c) calculate its loss using the historical effective rate of the loan. d) calculate its loss using the current effective rate of the loan. Answer: c Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

41. When the debtor sets aside money in a trust such that the investment and any return will be sufficient to pay the principal and the interest to the creditor, but the creditor does NOT release the company from the primary obligation to settle the debt, this type of arrangement is known as a) in substance defeasance. b) in substance refunding. c) substantive repayment. d) legal defeasance. Answer: a Difficulty: Easy Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 14-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

42. Which of the following arrangements would NOT represent a possible example of “off-balancesheet financing”? a) non-consolidated subsidiaries b) variable interest entities c) operating leases d) capital or financing leases Answer: d Difficulty: Easy Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

43. The December 31, 2023, statement of financial position of Cotton Corporation includes the following: 9% bonds payable due December 31, 2029 $718,000 The bonds have a face value of $700,000, and were issued on December 31, 2022, at 103, with interest payable on July 1 and December 31 of each year. Cotton uses straight-line amortization to amortize bond premium or discount. On March 1, 2024, Cotton retired $280,000 of these bonds at 98 plus accrued interest. Ignoring income taxes, what should Cotton record as a gain on retirement of these bonds? a) $7,560 b) $12,600 c) $12,800 d) $14,000 Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic $18,000 2 × 6)] ×.4 = $287,000 (CV of retired bonds); 12

Feedback: [$718,000 − (

$287,000 – ($280,000 ×.98) = $12,600

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

44. On January 1, 2023, Linen Corp. issued $450,000 (face value), 10%, ten-year bonds at 103. The bonds are callable at 105. Linen has recorded amortization of the bond premium by the straight-line method. On December 31, 2029, Linen repurchased $100,000 of the bonds in the open market at 96. Bond interest expense and premium amortization have been recorded for 2026. Ignoring income taxes, what is the loss or gain arising from this reacquisition? a) a gain of $4,900 b) a loss of $4,900 c) a gain of $6,100 d) a loss of $6,100 Answer: a Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: [($450,000 x 1.03) – ($13,500 × 7/10)] x 100/450 = $100,900 (CV of retired bonds); $100,900 – ($100,000 ×.96) = $4,900 gain

45. At December 31, 2023, the 10% bonds payable of Paisley Inc. had a carrying value of $760,000. The bonds, which had a face value of $800,000, were issued at a discount to yield 12%. The amortization of the bond discount had been recorded using the effective-interest method. Interest was being paid on January 1 and July 1 of each year. The July 1, 2024 interest payment and discount amortization had been correctly recorded. On July 2, 2024, Paisley retired the bonds at 102. Ignoring income taxes, what is the loss that should be recorded on the early retirement of the bonds? a) $16,000 b) $44,800 c) $50,400 d) $56,000 Answer: c Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($760,000 × 1.06) – ($800,000 ×.05) = $765,600 (CV of bonds); $765,600 – ($800,000 × 1.02) = $50,400 14-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

46. Hills Corp. called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $200,000. To extinguish this debt, Hills had to pay a call premium of $40,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes? a) Amortize $240,000 over four years. b) Record a $240,000 loss in the year of extinguishment. c) Record a $40,000 loss in the year of extinguishment and amortize $200,000 over four years. d) Either amortize $240,000 over four years or record a $240,000 loss immediately, whichever management selects. Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $200,000 + $40,000 = $240,000 loss

47. At December 31, 2023, the 12% bonds payable of Leather Corp. had a carrying value of $312,000. The bonds, which had a face value of $300,000, were issued at a premium to yield 10%. Leather uses the effective-interest method of amortization of bond premium. Interest is paid on June 30 and December 31. On June 30, 2024, Leather retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is a) $0. b) $2,400. c) $3,720. d) $12,000. Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($312,000 – [($300,000 x.06) – ($312,000 ×.05)] = $309,600 (CV of bonds); ($300,000 × 1.04) – $309,600 = $2,400

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

48. On December 31, 2023, Diaz Corp. is in financial difficulty and cannot pay a $900,000 note with $90,000 accrued interest payable to Cameron Ltd., which is now due. Cameron agrees to accept from Diaz equipment that has a fair value of $435,000, an original cost of $720,000, and accumulated depreciation of $345,000. Cameron also forgives the accrued interest, extends the maturity date to December 31, 2025, reduces the face amount of the note to $375,000, and reduces the market interest rate of 6%, with interest payable at the end of each year. Diaz should recognize a gain or loss on the transfer of the equipment of a) $0. b) $60,000 gain. c) $90,000 gain. d) $285,000 loss. Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $435,000 – ($720,000 – $345,000) = $60,000

49. On December 31, 2023, Diaz Corp. is in financial difficulty and cannot pay a $900,000 note with $90,000 accrued interest payable to Cameron Ltd., which is now due. Cameron agrees to accept from Diaz equipment that has a fair value of $435,000, an original cost of $720,000, and accumulated depreciation of $345,000. Cameron also forgives the accrued interest, extends the maturity date to December 31, 2025, reduces the face amount of the note to $375,000, and reduces the market interest rate of 6%, with interest payable at the end of each year. Diaz should recognize a gain on the partial settlement and restructure of the debt of a) $0. b) $22,500. c) $112,500. d) $180,000. Answer: d Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 14-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: ($900,000 + $90,000) – ($435,000 + $375,000) = $180,000; PV of future cash flows for new debt calculated as: (FV = $375,000; PMT = $22,500; N= 2 and I = 10%) $348,967 is more than 10% different from the PV of existing debt. ($990,000 – $435,000) = $555,000)

50. On December 31, 2023, Diaz Corp. is in financial difficulty and cannot pay a $900,000 note with $90,000 accrued interest payable to Cameron Ltd., which is now due. Cameron agrees to accept from Diaz equipment that has a fair value of $435,000, an original cost of $720,000, and accumulated depreciation of $345,000. Cameron also forgives the accrued interest, extends the maturity date to December 31, 2025, reduces the face amount of the note to $375,000, and reduces the market interest rate of 6%, with interest payable at the end of each year. Diaz should record interest expense for 2023 of a) $0. b) $22,500. c) $45,000. d) $67,500. Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $375,000 ×.06 = $22,500

51. On January 1, 2023, Siamese Inc. redeemed its 15-year, $600,000 par value bonds at 103. They were originally issued on January 1, 2011 at 98 with a maturity date of January 1, 2026. Siamese amortizes bond discounts and premiums using the straight-line method. Ignoring income taxes, what amount of loss should Siamese recognize on the redemption of these bonds? a) $18,000 b) $20,400 c) $9,600 d) $39,600 Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting 14-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: ($600,000 × 1.03) – [$588,000 + ($12,000 x 12 ÷ 15)] = $20,400

52. On its December 31, 2023 statement of financial position, Mackeral Ltd. reported bonds payable of $500,000. The bonds had been issued at par. On January 2, 2024, Mackeral retired one half of the outstanding bonds at 101 plus a call premium of $20,000. Ignoring income taxes, what amount should Mackeral report on its 2024 income statement as loss on extinguishment of debt? a) $22,500 b) $20,000 c) $2,500 d) $0 Answer: a Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: [($250,000 x 1.01) + $20,000)] – [$500,000 × ½] = $22,500

53. On January 1, 2023, Halibut Corp. issued $1,000,000, 10% bonds for $1,040,000. These bonds were to mature on January 1, 2033 but were callable at 101 any time after December 31, 2023. Interest was payable semi-annually on July 1 and January 1. On July 1, 2028, Halibut called all the bonds and retired them. Bond premium was amortized on a straight-line basis. Ignoring income taxes, Halibut's gain or loss in 2028 on this early extinguishment of debt was a) $8,000 loss. b) $8,000 gain. c) $10,000 loss. d) $12,000 gain. Answer: b Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: [$1,040,000 – ($40,000 x 11/20)] – ($1,000,000 × 1.01) = $8,000 14-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

54. On July 1, 2023, Tilapia Corp. had outstanding 8%, $1,000,000, 10-year bonds maturing on June 30, 2030. Interest is payable semi-annually on June 30 and December 31. Assume all appropriate entries had been prepared and posted at June 30, 2024. The carrying value of the bond at June 30, 2024 was $965,000. At this time, Tilapia purchased all the bonds at 94 and retired them. What is the gain or loss on this early extinguishment of debt? a) $60,000 gain b) $35,000 loss c) $25,000 gain d) $25,000 loss Answer: c Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $965,000 – ($1,000,000 x.94) = $25,000 gain

55. Pineapple owes Dole a $600,000, 12%, three-year note dated December 31, 2021. Pineapple has been experiencing financial difficulties, and still owes accrued interest of $72,000 on this note at December 31, 2023. Under a troubled debt restructuring, on December 31, 2023, Dole agrees to settle the note plus the accrued interest for land that Pineapple owns, which has a fair value of $540,000. Pineapple's original cost of the land is $435,000. Ignoring income taxes, on its 2023 income statement, what should Pineapple report as a result of the troubled debt restructuring? Gain on Gain on Disposition of Land Restructuring of Debt a) $237,000 $0 b) $165,000 $0 c) $105,000 $60,000 d) $105,000 $132,000 Answer: d Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 14-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: $540,000 – $435,000 = $105,000; ($600,000 + $72,000) – $540,000 = $132,000

56. In-substance defeasance is a term used to refer to an arrangement whereby a) the creditor of the original debt agrees to look to another company/trust for repayment and give up its claim on the company. b) a government unit agrees to make payments on behalf of the company to the creditor. c) a company legally settles its liability through the issuance of another bond. d) a company provides for the future payments of a long-term liability by placing purchased securities in an irrevocable trust. Answer: d Difficulty: Easy Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

57. Which of the following is NOT a form of off-balance-sheet financing? a) non-consolidated entities b) special purpose entities c) consolidated entities d) operating leases Answer: c Difficulty: Easy Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

58. How should long-term debt be reported if it matures within one year and the company has arranged, before its current year end, to convert the debt into shares? a) as non-current and accompanied with a note explaining the method to be used in its liquidation b) in a special section between liabilities and shareholders' equity c) as non-current d) as a current liability 14-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Easy Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Comprehension

AACSB: Analytic 59. Complex financial instruments make the distinction between debt and equity a) easier to define. b) harder to define. c) less important. d) irrelevant. Answer: b Difficulty: Easy Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

60. Note disclosures for long-term debt generally include all of the following EXCEPT a) assets pledged as security. b) names of specific creditors. c) restrictions imposed by creditors. d) call provisions and conversion privileges. Answer: b Difficulty: Easy Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

61. Which of the following is a required disclosure with respect to liabilities? a) who the creditors are and how much is owed to each b) payment terms for trade accounts payable 14-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) future payments and maturity amounts for each of the next ten years d) details of assets pledged as collateral Answer: d Difficulty: Easy Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

62. Which of the following is NOT a required disclosure with respect to liabilities? a) maturity dates and interest rates for each outstanding bond issue b) payment terms for trade accounts payable c) future payments and maturity amounts for each of the next five years d) details of assets pledged as collateral Answer: b Difficulty: Easy Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

63. The times interest earned ratio is calculated by dividing a) net income by interest expense. b) income before taxes by interest expense. c) income before income taxes and interest expense by interest expense. d) net income and interest expense by interest expense. Answer: c Difficulty: Easy Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) total liabilities by total assets. b) long-term liabilities by total assets. c) current liabilities by total assets. d) total assets by total liabilities. Answer: a Difficulty: Easy Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

65. The times interest earned ratio measures a) the amount of interest expense related to long-term debt. b) the percentage of total assets financed by creditors. c) the profitability of an enterprise. d) an enterprise’s ability to meet interest payments as they come due. Answer: d Difficulty: Medium Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

66. The debt to total assets earned ratio measures a) the amount of debt related to interest expense. b) the percentage of total assets financed by creditors. c) the likelihood an enterprise will default on its obligations. d) the profitability of an enterprise. Answer: b Difficulty: Medium Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

67. Continental Company’s 2023 financial statements contain the following selected data: Income tax expense ............................................................. $80,000 Interest expense .................................................................. 20,000 Net income........................................................................... 160,000 Continental’s times interest earned for 2023 is a) 8 times. b) 11 times. c) 12 times. d) 13 times. Answer: d Difficulty: Medium Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($160,000 + $80,000 + $20,000) ÷ $20,000 = 13 times

68. Granger Ltd. reported the following information on its most recent statement of financial position: Current assets ...................................................................... $200,000 Total assets .......................................................................... 797,000 Current liabilities ................................................................. 160,000 Total equity .......................................................................... 350,000 To the nearest percent, what is Granger’s debt to total assets? a) 20% b) 44% c) 56% d) 80% Answer: c Difficulty: Medium Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Total liabilities = $797,000 – $350,000 = $447,000; Debt to total assets = $447,000 ÷ $797,000 = 56%

69. Carly Corporation’s 2023 financial statements contain the following select data: 14-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Income before tax................................................................ Income tax expense ............................................................. Interest expense .................................................................. Carly’s times interest earned for 2023 is a) 8 times. b) 9 times. c) 12 times. d) 13 times.

$160,000 80,000 20,000

Answer: b Difficulty: Medium Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($160,000 + $20,000) ÷ $20,000 = 9 times

70. HUB Ltd. reported the following information on its most recent statement of financial position: Current assets ...................................................................... $200,000 Non-current assets .............................................................. 597,000 Total equity .......................................................................... 350,000 What percentage of the company is capitalized by equity? a) 20% b) 44% c) 56% d) 80% Answer: b Difficulty: Medium Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Total liabilities: ($200,000 + $597,000) – $350,000 = $447,000; Debt to total assets = $447,000 ÷ $797,000 = 56%. 100% - 56% = 44% of the company is financed by equity.

71. Which of the following statements is true? a) Refinanced long-term debt may be reported as long-term rather than current if the refinancing has been completed before the date of the financial statements, according to ASPE; and before the date of 14-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

the issue of the SFP, according to IFRS. b) Refinanced long-term debt may be reported as long-term rather than current if the refinancing has been completed before the date of the SFP, according to IFRS; and before the date of the issue of the financial statements, according to ASPE. c) Refinanced long-term debt may be reported as long-term rather than current if the refinancing has been completed before the date of the financial statements, according to IFRS and ASPE. d) Refinanced long-term debt may be reported as long-term rather than current if the refinancing has been completed before the issue of the financial statements, according to IFRS and ASPE. Answer: b Difficulty: Easy Learning Objective: Identify major differences in accounting standards between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

72. When restructuring has taken place with no substantial modification, a) the interest rate is adjusted under ASPE only. b) the interest rate is adjusted under IFRS only. c) gains/losses are recognized under ASPE only. d) gains/losses are not recognized under IFRS or ASPE. Answer: a Difficulty: Easy Learning Objective: Identify major differences in accounting standards between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 14-73 Underwriting for bond issues Explain the difference between firm underwriting and best efforts underwriting. Solution 14-73 With firm underwriting, an investment bank or brokerage will underwrite a bond issue by guaranteeing a specified amount to the bond issuer. Thus, the broker assumes the risk of selling the bonds for whatever they can get. On the other hand, with best efforts underwriting, the agent (broker) will sell the bond issue for a commission that will be deducted from the sale proceeds. Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. 14-74 Terms related to long-term debt Place the letter of the best matching phrase before each term.

a) b) c) d) e) f) g) h) i) j)

1. Debenture

6. Debt to total assets ratio

2. Bearer bonds

7. Term bonds

3. Income bonds

8. Leverage

4. Carrying value

9. Callable bonds

5. Stated rate

10. Market rate

Bonds that mature on a single date. Rate set by party issuing the bonds which appears on the bond indenture. Bonds that pay no interest unless the issuer is profitable. Rate of interest actually earned by the bondholders. Results when bonds are sold below par. The practice of using other peoples’ money to maximize returns to shareholders. Bonds not recorded in the holder’s name; can be easily transferred from one party to another. Give the issuer the right to call in and retire bonds before maturity. Maturity value of bonds less any discount or plus any premium at any given date. Ratio of current assets to current liabilities. 14-38

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

k) Unsecured debt instruments not backed by collateral. l) Measures the percentage of total assets provided by creditors. m) Indicates the company’s ability to meet interest payments as they come due. Solution 14-74 1. k 2.

10. d Difficulty: Easy Learning Objective: Understand the nature of long-term debt financing arrangements. Section Reference: Understanding Debt Instruments Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. 14-75 Amortization of Premium On May 1, 2023, Providex Industries Ltd. issued $2,000,000, 10% bonds and received cash proceeds of $2,243,313. The bonds pay interest semi-annually on May 1 and November 1. The maturity date on these bonds is November 1, 2031. Providex uses the effective-interest method of amortizing bond discounts and premiums. The bonds were sold to yield an effective-interest rate of 8%. Instructions a) Calculate the total dollar amount of discount or premium amortization during the first year that these bonds were outstanding. Show calculations and round values to the nearest dollar. 14-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CRITICAL THINKING: The CEO of Providex is does not understand why the interest expense that has been recognized is different from the amount of cash that has been paid. Explain to the CEO why this has occurred.

Solution 14-75 a) Interest Date Expense May 1/23 Nov 1/23 $89,733 May 1/24 89,322 Total b)

Cash Paid

Premium Amortization

$100,000 100,000

$10,268 10,678 $20,946

Carrying Value of Bonds $2,243,313 2,233,045 2,222,367

CRITICAL THINKING: While the bond is outstanding, its price is affected by several variables, but especially by the market rate of interest. There is an inverse relationship between the market interest rate and the bond price. That is, when interest rates increase, the bond’s price decreases, and vice versa. The cash paid is based on the stated interest rate, while the interest expense recognized is based on the effective interest rate.

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-76 Bond issue price and premium amortization On January 1, 2023, Blindo Corp. issued ten-year, 12% bonds with a face value of $500,000, with interest payable semi-annually on June 30 and December 31. At the time, the market rate was 10%. Instructions a) Use your calculator to calculate the issue price of the bonds. Round the answer to the nearest dollar. b) Independent of your solution to part a), assume that the issue price was $562,000. Prepare the amortization table for 2023 using the effective interest rate method Round values to the nearest dollar. Solution 14-76 a) N 20 %i 5 FV 500,000 PMT 30000 CPT PV => $562,311 b) Date Jan 1/23 Jun 30/23 Dec 31/23

Cash Paid

Interest Expense

Premium Amortized

$30,000 30,000

$28,100 28,005

$1,900 1,995

Carrying Value of Bonds $562,000 560,100 558,105 14-40

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-77 Amortization of discount On May 1, 2023, Salinas Industries Ltd. issued $2,000,000, 8% bonds and received cash proceeds of $1,774,519. The bonds pay interest semi-annually on May 1 and November 1. The maturity date on these bonds is November 1, 2031. Salinas uses the effective-interest method of amortizing bond discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%. Instructions Calculate the total dollar amount of discount or premium amortization during the first year that these bonds were outstanding. Show calculations and round values to the nearest dollar. Solution 14-77 Date May 1/23 Nov 1/23 May 1/24 Total

Interest Expense

Cash Paid

Discount Amortization

$88,726 89,162

$80,000 80,000

$8,726 9,162 $17,888

Carrying Value of Bonds $1,774,519 1,783,245 1,792,407

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-78 Bond issue price and discount amortization On January 1, 2023, Oxnard Corp. issued ten-year, 10% bonds with a face value of $500,000, with interest payable semi-annually on June 30 and December 31. At the time, the market rate was 12%. Instructions a) Use your calculator to calculate the issue price of the bonds. Round the answer to the nearest dollar. b) Independent of your solution to part a), assume that the issue price was $442,000. Prepare the amortization table for 2023. Round values to the nearest dollar. c) CRITICAL THINKING: Why would an investor agree to purchase a bond at a discount? How is the investor’s rate of return affected? 14-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 14-78 a) N 20 %i 6 FV 500,000 PMT 25000 CPT PV => $442,650 b) Date Jan 1/23 Jun 30/23 Dec 31/23 c)

Cash Paid

Interest Expense

Discount Amortized

$25,000 25,000

$26,520 26,611

$1,520 1,611

Carrying Value of Bonds $442,000 443,520 445,131

CRITICAL THINKING: When a bond sells below its face value, it means that investors are demanding a rate of interest that is higher than the stated rate. The investors are not satisfied with the stated rate because they can earn a greater rate on alternative investments of equal risk. Given that an investor cannot change the stated rate of the bond, they will refuse to pay face value for the bonds and instead achieve the effective rate of interest that they require by lowering the amount invested in the bonds (of the purchases price). The result is that the investors receive interest payments at the stated rate calculated on the face value, but they are essentially earning an effective rate that is higher than the stated rate because they paid less than face value for the bonds.

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-79 Note issued for cash and other rights Rebecca Land Corp. issued a 5-year, zero-interest-bearing note with a $1,000,000 face value to Lindsay Inc. for $1,000,000 cash. Rebecca also gave Lindsay the right to use a parcel of land for equipment storage for 5 years. Interest rates for notes of this type were 8% at issue. Instructions Prepare the journal entries to record the issuance of the note by (a) Rebecca and (b) Lindsay. Use your calculator and round values to the nearest dollar. Solution 14-79 a) Rebecca Cash........................................................................................................... Notes Payable ................................................................................... Unearned Revenue (Rent) ................................................................ b) Lindsay Notes Receivable ...................................................................................... Prepaid Rent .............................................................................................

1,000,000 *680,583 319,417

*680,583 319,417 14-42

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash ...................................................................................................

1,000,000

* N 5 %i 8 1000000 FV CPT PV => 680,583 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-80 Note issued for non-cash consideration On July 1, 2023, Modesto Holdings Ltd. issued a $50,000 face value note due June 30, 2026 with a stated interest rate of 4% to Modern Consultants in return for consulting services provided in 2023. The value of the consulting services is not readily determinable, and the note is not readily marketable. Based on a credit analysis, a reasonable imputed interest rate would be 12%. Instructions Prepare the journal entry to record the issuance of the note by Modesto. Use your calculator and round values to the nearest dollar. Solution 14-80 Operating (consulting) Expense............................................................... Notes Payable ...................................................................................

40,393 40,393

N 3 %i 12 FV 50000 PMT 2000 (50,000 x 4%) CPT PV => 40,393 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-81 Sale and subsequent buyback of bonds On July 1, 2023, Davis Corp. issued $800,000 par value, 10%, 10-year bonds, with interest payable semi-annually on January 1 and July 1. The bonds were issued for $908,722. On January 2, 2025, Davis offered to buy back the bonds at 103. Forty percent of the bondholders accepted the offer. Davis uses the effective-interest method of amortizing premium or discount. Instructions a) Prepare the journal entry to record the bond issuance. b) Prepare the adjusting entry at December 31, 2023, the end of the fiscal year. 14-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) d)

Prepare the entry for the interest payment on January 1, 2024. Prepare the entry to record the retirement of the bonds on January 2, 2025. Round all values to the nearest dollar.

Solution 14-81 First you need to solve for the yield, which is 8%. PV 908722 N 20 PMT (40000) FV (800000) CPT %i => 8%

Date Jul 1/23 Jan 1/24 Jul 1/25 Jan 1/27 a)

Interest Paymen t

Interest Expense

Premium Amortization

40,000 40,000 40,000

36,349 36,203 36,051

3,651 3,797 3,949

Carrying Value 908,722 905,071 901,274 897,325

Cash…………………………………………………… ............................... Bonds Payable ..................................................................................

908,722

Interest Expense ....................................................................................... Bonds Payable .......................................................................................... Interest Payable ................................................................................ (Interest expense: $908,722 × 8% × ½ = $36,349)

36,349 3,651

Interest Payable........................................................................................ Cash ...................................................................................................

40,000

Bonds Payable (897,325 x 40%)……. ....................................................... Cash ................................................................................................... Gain on Redemption of Bonds .........................................................

358,930

908,722

40,000

329,600 29,330

Bond retirement price = 800,000 x 1.03 x 40% = 329,600 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Prepare journal entries to record the following transactions related to Chico Ltd.’s long-term bonds: a) On April 1, 2023, Chico issued $600,000, 9% bonds (dated January 1, 2023) for $645,442 including accrued interest. Interest is payable annually on January 1, and the bonds mature on January 1, 2033. b) On July 1, 2025, Chico retired 30% of the bonds at 102 plus accrued interest. Chico uses straightline amortization. Solution 14-82 a) Cash........................................................................................................... Bonds Payable .................................................................................. Interest Expense ($600,000 × 9% × 3 ÷ 12) ....................................... b)

645,442 631,942 13,500

Interest Expense ....................................................................................... Bonds Payable ($31,942 × 30% × 6 ÷ 117) ................................................ Cash ($600,000 x 30% × 9% × 6 ÷ 12) ................................................

7,609 491

Bonds Payable .......................................................................................... Cash ($600,000 x 30% x 1.02) ............................................................ Gain on Redemption of Bonds .........................................................

*187,371

8,100

183,600 3,771

*$180,000 plus unamortized Premium of ($31,942 x 30% x 90 ÷ 117 = $7,371) = $187,371 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-83 Repayment of bond before maturity On January 1, 2023, Braveheart Corp. issued bonds with a par value of $1,000,000 at 98 (which is net of issue costs), due in 15 years. Six years after the issue date, the entire issue is called at 102 and cancelled. Instructions Prepare the journal entry to reflect the reacquisition of the bond assuming the straight-line amortization method. Solution 14-83 Reacquisition price ($1,000,000 × 1.02)

$1,020,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Face value

$1,000,000

Unamortized discount ($20,000 × /15) a

(amortized using straight-line basis)

_(12,000)

Loss on redemption

_ 988,000 $ 32,000

[$1,000,000 × (1 − 0.98)]

Bonds Payable

988,000

Loss on Redemption of Bonds

32,000

Cash

1,020,000

Ex. 14-84 Retirement of bonds On December 31, 2022, LaBrea Corp.’s statement of financial position included the following: 7.5% bonds payable, due December 31, 2030 $576,000 The bonds have a face value of $600,000, and were issued on December 31, 2020 at 95. Interest is payable semi-annually on June 30 and December 31. LaBrea uses straight-line amortization. On April 1, 2023, LaBrea retired 20% of these bonds at 101 plus accrued interest. Instructions Prepare journal entries to record the retirement. Show calculations and round values to the nearest dollar. Solution 14-84 Interest Expense ....................................................................................... Cash ($600,000 × 20% x 7.5% × 3 ÷ 12) ............................................. Bonds Payable ($30,000 × 20% × 3 ÷ 120) ........................................ Bonds Payable .......................................................................................... Loss on Redemption of Bonds ................................................................. Cash ...................................................................................................

2,400 2,250 150 *115,350 5,850 121,200

*$120,000 less unamortized discount of ($30,000 x 20% x 93 ÷ 120 = $4,650) = $115,350 Difficulty: Medium 14-46 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 14-85 Early extinguishment of debt and bond redemptions On August 1, 2021, Fresno Inc. sold 8%, five-year bonds with a maturity value of $2,000,000 for $1,964,000. Interest on the bonds is payable semi-annually on August 1 and February 1. The bonds are callable at 104 at any time after August 1, 2023. By October 1, 2023, the market rate of interest has declined, and the market price of Fresno's bonds has increased to 102. The company decides to refund the bonds by selling a new 6% bond issue to mature in five years. Fresno begins to reacquire its 8% bonds in the market and is able to purchase $600,000 worth at 102. The remainder of the outstanding bonds are acquired by exercising the bond call feature. Instructions a) Calculate Fresno’s total gain or loss in reacquiring the 8% bonds. Assume the company uses straight-line amortization. Show calculations. b) CRITICAL THINKING: Frezno’s CFO is reviewing your calculations for the bond redemption and has a few questions regarding your methodology. Explain the accounting procedures for the early redemption of bonds. Solution 14-85 a) Reacquisition price: $600,000 × 1.02 =.............................. $1,400,000 × 1.04 =........................... Less carrying value: Face value ........................................ Unamortized discount ($36,000 × 34 ÷ 60) = ........................ Loss on redemption ................................

$ 612,000 1,456,000

$2,068,000

2,000,000 20,400

1,979,600 $ 88,400

b) CRITICAL THINKING: At the time of redemption, any unamortized premium or discount must be amortized up to the reacquisition date. The amount paid on early redemption, including any call premium and expense of reacquisition, is the reacquisition price. Any excess of the carrying value over the reacquisition price is a gain from redemption, while any excess of the reacquisition price over the carrying value is a loss from redemption. Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application 14-47 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Ex. 14-86 Accounting for a troubled debt settlement At December 31, 2023, Oscar Ltd. owes Wilde Corp. for a $300,000 note payable, plus accrued interest of $27,000. Oscar is now in financial difficulty and cannot repay Wilde. To settle the debt, Wilde agrees to accept from Oscar equipment with a fair value of $285,000, an original cost of $420,000, and accumulated depreciation to date of $98,000. Instructions a) Calculate the gain or loss to Oscar on the settlement of the debt. b) Calculate the gain or loss to Oscar on the transfer of the equipment. c) Prepare the journal entry on Oscar's books to record the settlement of the debt. d) Prepare the journal entry on Wilde's books to record the settlement of the receivable. Solution 14-86 a) Note payable........................................................................ Interest payable ................................................................... Carrying value of debt ......................................................... Fair value of equipment ...................................................... Gain on settlement of debt .................................................

$300,000 27,000 327,000 285,000 $ 42,000

Cost ...................................................................................... Accumulated depreciation.................................................. Book value ........................................................................... Fair value of equipment ...................................................... Loss on disposal of equipment ...........................................

Notes Payable ........................................................................................... Interest Payable........................................................................................ Accumulated Depreciation ...................................................................... Loss on Disposal of Equipment ................................................................ Equipment......................................................................................... Gain on Settlement of Debt ..............................................................

300,000 27,000 98,000 37,000

Equipment ................................................................................................ Loss on Settlement of Debt ...................................................................... Notes Receivable .............................................................................. Interest Receivable ...........................................................................

285,000 42,000

$420,000 98,000 322,000 285,000 $ 37,000

420,000 42,000

300,000 27,000

Difficulty: Medium Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application 14-48 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Ex. 14-87 Accounting for a troubled debt restructuring On December 31, 2023, Riverside Inc. is in financial difficulty and cannot pay a $350,000 note (with $35,000 accrued interest payable) to Stockton Corp. Stockton agrees to forgive the accrued interest, extend the maturity date to December 31, 2025, and reduce the interest rate to 4%. The present value of the restructured cash flows is $299,500. Instructions Prepare entries for the following: a) the restructure on Riverside's books. b) the payment of interest on December 31, 2024. c) the restructure on Stockton’s books. Solution 14-87 a) Old debt: PV = $350,000 + $35,000 = $385,000 New debt: PV (given) = $299,500 The new debt differs by more than 10%: $85,500 ÷ $385,000 = 22.2% Notes Payable (old) .................................................................................. Interest Payable........................................................................................ Notes Payable (new) ......................................................................... Gain on Restructuring of Debt .......................................................... b)

350,000 35,000 299,500 85,500

Imputed interest rate FV (350000) PV 299500 PMT (14000) ($350,000 x 4%) N 2 CPT %i => 12.61% Interest Expense ($299,500 × 12.61%) ..................................................... Cash ................................................................................................... Notes Payable ...................................................................................

37,767

Loss on Restructuring of Debt .................................................................. Notes Receivable .............................................................................. Interest Receivable ...........................................................................

85,500

14,000 23,767

50,500 35,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) b)

What are the general rules for measuring and recognizing gain or loss by the debtor on a settlement of troubled debt, which includes the transfer of non-cash assets? What are the general rules for measuring and recognizing a gain and for recording future payments by the debtor in a troubled debt restructuring?

Solution 14-88 a) If the settlement of debt includes the transfer of non-cash assets, a gain or loss is measured by the debtor as the difference between the fair value of the assets transferred and the carrying amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on the disposal of assets as the difference between the fair value of the assets transferred and their book value. b)

If the carrying amount of the payable is greater than the discounted total future cash flows, based on currently prevailing interest rates, the gain is measured as the difference between the carrying amount and the discounted future cash flows. The gain is separately classified in the income statement and the nature of the restructuring is disclosed if the amount of the gain is material. The same treatment is given if a loss results. Future payments are used to reduce the principal and record interest expense.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 14-89 Bond interest and premium amortization On June 1, 20230, Yosemite Corp. sold 10-year, $500,000 (face value) bonds for $567,101. The bonds have a stated interest rate of 10% and a yield of 8% and pay interest annually on May 31 of each year. The bonds are to be accounted for using the effective-interest method. Instructions a) Construct a bond amortization table for this bond to indicate the amount of interest expense and premium amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labelled, and round to the nearest dollar. b) The sales price of $567,101 was determined from present value tables. Explain how one would determine the price using present value tables, or by using a calculator. c) Assuming that interest and premium amortization are recorded each May 31, prepare the adjusting entry at December 31, 2025 (fiscal year end). Round values to the nearest dollar. Solution 14-89 a) Date Cash Paid Jun 1/23 May 31/24 $50,000 May 31/25 50,000 May 31/26 50,000 May 31/27 50,000 b)

Interest Expense

Premium Amortization

$45,368 44,997 44,597 44,165

$4,632 5,002 5,403 5,835

Carrying Amount of Bonds $567,101 562,469 557,467 552,064 546,229

(1) Find the present value of $500,000 due in 10 years at 8%. (2) Find the present value of 10 annual payments of $50,000 at 8%. (3) Add (1) and (2) to obtain the present value of the principal and the interest payments. Calculator: N 10 %i 8 PMT 50000 FV 500000 CPT PV

*26,015 3,152 **29,167

*7 ÷ 12 × $44,597 (from Table) = $26,015 **7 ÷ 12 × 10% × $500,000 = $29,167 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 14-51 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pr. 14-90 Bond interest and premium amortization On October 1, 2023, Whitfield Corp. issued $400,000 10% bonds, due on October 1, 2028. Interest is to be paid semi-annually on April 1 and October 1. The bonds were sold to yield 8% effective annual interest. Whitfield has a calendar year end. Instructions a) Complete the following amortization schedule for the dates indicated. Round all answers to the nearest dollar. Use the effective-interest method. Premium Carrying Cash Paid Interest Expense Amortization Amount of Bonds Oct 1/23 $432,444 Apr 1/24 Oct 1/24 b) Prepare the adjusting entry required for these bonds at December 31, 2024. c) Calculate the interest expense to be reported in the income statement for the year ended December 31, 2024. Solution 14-90 a) Cash Paid Oct 1/23 Apr 1/24 Oct 1/24 b)

$20,000 20,000

Interest Expense $17,298 17,190

Premium Amortization $2,702 2,810

Interest Expense ($426,932 × 8% × 3 ÷ 12) ............................................... Bonds Payable ($10,000 – $8,539)............................................................ Interest Payable (1/2 × $20,000) ....................................................... $ 8,649 17,190 8,539 $34,378

Carrying Amount of Bonds $432,444 429,742 426,932 8,539 1,461 10,000

(1/2 of $17,298)

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-91 Bond interest and discount amortization On June 1, 2023, Santa Ana Corp. sold 10-year, $500,000 (face value) bonds for $438,554. The bonds 14-52 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

have a stated interest rate of 8% and a yield of 10% and pay interest annually on May 31 of each year. The bonds are to be accounted for using the effective-interest method. Instructions a) Construct a bond amortization table for this bond to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labelled, and round to the nearest dollar. b) The sales price of $438,554 was determined from present value tables. Explain how one would determine the price using present value tables, or by using a calculator. c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry at December 31, 2025 (fiscal year end). Round values to the nearest dollar. Solution 14-91 a) Date Jun 1/23 May 31/24 May 31/25 May 31/26 May 31/27 b)

Cash Paid

Interest Expense

Discount Amortization

$40,000 40,000 40,000 40,000

$43,855 44,241 44,665 45,132

$3,855 4,241 4,665 5,132

Carrying Amount of Bonds $438,554 442,409 446,650 451,315 456,447

(1) Find the present value of $500,000 due in 10 years at 10%. (2) Find the present value of 10 annual payments of $40,000 at 10%. (3) Add (1) and (2) to obtain the present value of the principal and the interest payments. Calculator: N 10 %i 10 PMT 40000 FV 500000 CPT PV

Interest Expense ....................................................................................... Interest Payable ................................................................................ Bonds Payable ..................................................................................

*26,055 **23,333 2,722

*7 ÷ 12 × $44,665 (from Table) = $26,055 **7 ÷ 12 × 8% × $500,000 = $23,333 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-92 Bond interest and discount amortization On October 1, 2023, Irvine Corp. issued $400,000 8% bonds, due on October 1, 2028. Interest is to be paid semi-annually on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Irvine has a calendar year end. 14-53 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions a) Complete the following amortization schedule for the dates indicated. Round all answers to the nearest dollar. Use the effective-interest method. Discount Carrying Cash Paid Interest Expense Amortization Amount of Bonds Oct 1/23 $369,113 Apr 1/24 Oct 1/24 b) Prepare the adjusting entry required for these bonds at December 31, 2024. c) Calculate the interest expense to be reported in the income statement for the year ended December 31, 2024. Solution 14-92 a) Cash Paid Oct 1/23 Apr 1/24 Oct 1/24 b)

$16,000 16,000

Interest Expense $18,456 18,579

Discount Amortization $2,456 2,579

Interest Expense ($374,148 × 10% × 3 ÷ 12) ............................................. Interest Payable (1/2 × $16,000) ....................................................... Bonds Payable ($9,354 – $8,000) ...................................................... $ 9,228 18,579 9,354 $37,161

Carrying Amount of Bonds $369,113 371,569 374,148 9,354 8,000 1,354

(1/2 of $18,456)

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-93 Fair value option and calculation World Vinyl Inc. currently has an outstanding bond liability of $1,250,000. The company’s credit risk has increased and by year end the fair value of the debt, based solely on a change in credit risk, is $1,100,000. World Vinyl is a privately held firm and uses ASPE. Instructions a) Record the required entry at year end of World Vinyl is using the fair value option to account for 14-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

its bond liability. CRITICAL THINKING: The controller is reviewing the year end entries. He has asked you to explain why you used the fair value option instead of the amortized cost model in accounting for long-term debt under ASPE and how this would differ under IFRS.

Solution 14-93 a) Bonds Payable……………….. ................................................................. Unrealized Gain or Loss………………….......................................... ($1,250,000 – $1,100,000 = $150,000) b)

150,000 150,000

CRITICAL THINKING: Long-term debt is usually accounted for at amortized cost. However, both ASPE and IFRS allow the use of the fair value option, whereby financial instruments are carried at fair (market) value, an option encouraged by standard setters, although the requirements differ. ASPE allows the use of the fair value option for all financial instruments, with all changes in fair value recognized in net income. IFRS explicitly requires that the option be used only where fair value results in more relevant information. As well, IFRS 13 requires that non-performance risk (including credit risk) be included in the fair value measurement. This gives rise to a peculiar situation, since, if the credit risk is deemed to be high, the carrying value of the debt should be reduced (e.g. Dr Bond Payable) and a gain recognized. Any such gain is booked to Other Comprehensive Income.

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement CPA: Communication CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-94 Entries for bonds payable Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds by Glendale Corp. Show calculations and round to the nearest dollar. March 1 Issued $200,000 (face value) 8% bonds for $218,040, including accrued interest. Interest is payable semi-annually on December 1 and June 1 with the bonds maturing 10 years from the previous December 1. The bonds are callable at 102. June 1 Paid semi-annual interest on the bonds. Use straight-line amortization for any premium or discount. December 1 Paid semi-annual interest on the bonds, and then purchased $100,000 face value bonds at the call price in accordance with the provisions of the bond indenture. Solution 14-94 14-55 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

March 1 Cash........................................................................................................... Bonds Payable .................................................................................. Interest Expense ($200,000 × 8% × 3 ÷ 12) .......................................

218,040 214,040 4,000

June 1 Interest Expense ....................................................................................... Bonds Payable ($14,040 × 3 ÷ 117) ........................................................... Cash ...................................................................................................

7,640 360

December 1 Interest Expense ....................................................................................... Bonds Payable ($14,040 × 6/117) ............................................................. Cash ...................................................................................................

7,280 720

Bonds Payable .......................................................................................... Gain on Redemption of Bonds ......................................................... Cash ...................................................................................................

8,000

8,000 *106,480 4,480 102,000

*$100,000 plus unamortized Premium ($14,040 x 108/117 x 50% = $6,480) = 106,480 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-95 Entries for bonds payable Prepare journal entries to record the following transactions relating to long-term bonds of Lancaster Inc. Show calculations and round to the nearest dollar. a) On June 1, 2023, Lancaster Inc. issued $400,000, 6% bonds for $391,760, including accrued interest. The bonds were dated February 1, 2023, and interest is payable semi-annually on February 1 and August 1 with the bonds maturing on February 1, 2033. The bonds are callable at 102. b) On August 1, 2023, Lancaster paid the semi-annual interest and recorded the amortization of the discount or premium, using straight-line amortization. c) On February 1, 2025, Lancaster paid the semi-annual interest and recorded amortization of the discount or premium. Assume that a reversing entry was made on January 1, 2025. d) The company then purchased $240,000 of the bonds at the call price. Solution 14-95 14-56 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash........................................................................................................... Bonds Payable .................................................................................. Interest Expense ($400,000 × 6% × 4 ÷ 12) .......................................

391,760

Interest Expense ($400,000 × 6% × 6 ÷ 12) + $280.................................... Cash ................................................................................................... Bonds Payable ($16,240 × 2 ÷ 116) ...................................................

12,280

Interest Expense ($12,000 + $840) ........................................................... Cash ................................................................................................... Bonds Payable ($16,240 × 6 ÷ 116) ...................................................

12,840

Bonds Payable .......................................................................................... Loss on Bond Redemption ....................................................................... Cash ...................................................................................................

*231,936 12,864

383,760 8,000

12,000 280

12,000 840

244,800

*$240,000 less unamortized Discount ($16,240 x 96 ÷ 116 x 60% = $8,064) = $231,936 Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-96 Accounting for bond issuance and gain on retirement Twilight Corp. desired to raise cash to fund its expansion by issuing long-term bonds. The corporation hired an investment banker to manage the issue (best efforts underwriting) and also hired the services of a lawyer, an audit firm, etc. On June 1, 2023, Twilight sold $500,000 in long-term bonds. The bonds will mature in 10 years and have a stated interest rate of 10%. Other bonds that Twilight has issued with identical terms are traded based on a market rate of 8%. The bonds pay interest semi-annually on May 31 and November 30. The bonds are to be accounted for using the effective-interest method. On June 1, 2025, Twilight decided to retire 20% of the bonds. At that time the bonds were selling at 102. Instructions (Round all values to the nearest dollar) a) Prepare the journal entry for the issuance of the bonds on June 1, 2023. b) What was the interest expense related to these bonds that would be reported on Twilight’s calendar 2023 income statement? c) Prepare all entries from after the issue of the bond until December 31, 2023. d) Calculate the gain or loss on the partial retirement of the bonds on June 1, 2025. 14-57 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Prepare the journal entries to record the partial retirement on June 1, 2025.

Solution 14-96 PV of bonds (i.e., selling price) N 20, I/Y 4, PMT 25,000 (500,000x 5%), FV 500,000 CPT PV => $567,952 a) Cash........................................................................................................... Bonds Payable ..................................................................................

567,952 567,952

Date Jun 1/23 Nov 30/23 May 31/24 Nov 30/24 May 31/25

Cash

Interest Expense

Discount Amortization

25,000 25,000 25,000 25,000

22,718 22,627 22,532 22,433

2,282 2,373 2,468 2,567

Carrying Value of Bonds 567,952 565,670 563,297 560,829 558,262

Interest expense for 2023 = $22,718 + (1 ÷ 6 x $22,627) = $26,489 c) Nov 30/23 Interest Expense ....................................................................................... Bonds Payable .......................................................................................... Cash ................................................................................................... Dec 31/23 Interest Expense (1 ÷ 6 x $22,627) ............................................................ Bonds Payable .......................................................................................... Interest Payable (1 ÷ 6 x $25,000) ..................................................... d)

22,718 2,282 25,000

3,771 396 4,167

Per the amortization table in part b), the carrying value of the bond as of May 31, 2025 is $558,262.

Cost to repurchase ($500,000 x 20% x 1.02) .................................................... Bond carrying value ($558,262 x 20%)............................................................. Gain on bond redemption................................................................................

$102,000 111,652 $ 9,652

e) Bonds Payable .......................................................................................... Gain on Redemption of Bonds ......................................................... Cash ...................................................................................................

111,652 9,652 102,000

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. 14-58 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Measurement Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-97 Accounting for bond issuance and loss on retirement Twilight Corp. desired to raise cash to fund its expansion by issuing long-term bonds. The corporation hired an investment banker to manage the issue (best efforts underwriting) and also hired the services of a lawyer, an audit firm, etc. On June 1, 2023, Twilight sold $500,000 in long-term bonds. The bonds will mature in 10 years and have a stated interest rate of 8%. Other bonds that Twilight has issued with identical terms are traded based on a market rate of 10%. The bonds pay interest semi-annually on May 31 and November 30. The bonds are to be accounted for using the effective-interest method. On June 1, 2025 Twilight decided to retire 20% of the bonds. At that time the bonds were selling at 98. Instructions (Round all values to the nearest dollar) a) Prepare the journal entry for the issuance of the bonds on June 1, 2023. b) What was the interest expense related to these bonds that would be reported on Twilight’s calendar 2023 income statement? c) Prepare all entries from after the issue of the bond until December 31, 2023. d) Calculate the gain or loss on the partial retirement of the bonds on June 1, 2025. e) Prepare the journal entries to record the partial retirement on June 1, 2025. Solution 14-97 PV of bonds (i.e., selling price) N 20 %i 5 PMT 20,000 (500,000x 4%) FV 500,000 CPT PV => $437,689 a) Cash........................................................................................................... Bonds Payable ..................................................................................

437,689 437,689

Date Jun 1/23 Nov 30/23 May 31/24 Nov 30/24 May 31/25

Cash

Interest Expense

Discount Amortization

20,000 20,000 20,000 20,000

21,885 21,979 22,078 22,182

1,885 1,979 2,078 2,182

Carrying Value of Bonds 437,689 439,574 441,553 443,631 445,813

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) Nov 30/23 Interest Expense ....................................................................................... Cash ................................................................................................... Bonds Payable .................................................................................. Dec 31/23 Interest Expense (1 ÷ 6 x $21,979) ............................................................ Interest Payable (1 ÷ 6 x $20,000) ..................................................... Bonds Payable .................................................................................. d)

21,885 20,000 1,885

3,663 3,333 330

Per the amortization table in part b), the carrying value of the bond as of May 31, 2025 is $445,811.

Cost to repurchase ($500,000 x 20% x.98) ....................................................... Bond carrying value ($445,813 x 20%)............................................................. Loss on bond redemption ................................................................................

$98,000 89,163 $(8,837)

e) Bonds Payable .......................................................................................... Loss on Redemption of Bonds ................................................................. Cash ...................................................................................................

89,163 8,837 98,000

Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Understand when long-term debt is recognized and derecognized, including how to account for troubled debt restructurings. Section Reference: Recognition and Derecognition CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 14-98 Bond accounting, ratios, debt covenants Superior Equipment Corporation is a public Canadian company manufacturing high-precision equipment. On January 1, 2020, Superior issued a 12%, $10,000,000 bond, maturing in ten years. At January 1, 2023, the bond had a carrying value of $9,300,000. Interest is payable semi-annually on June 30 and December 31. The company uses the straight-line method of amortizing any bond premium or discount. The bond carries covenants that call for the firm’s debt to total assets ratio to be no higher than 50% and their times interest earned ratio to be at least 2. You are the CEO of Superior. You have been on the job for a year after the previous CEO was fired for missing earnings targets. You are an MBA with a major in Accounting. 14-60 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Superior’s business is cyclical and the last two years have been tough. In recent months however, there have been signs of recovery in the industry, and many distributors have placed large orders for Superior’s equipment. Delivery of the equipment is expected in 2024 and 2025. You are under pressure from the board of directors to show improvement in the bottom line. It is now November 30, 2023, and you have just met with the company’s CFO, Ms. Grimm. In preparation for the coming year end on December 31, 2023, she has prepared forecasted financial statements, but has not included the effects of the $10,000,000 bond issue. Below is a summary of those statements: Income Statement Sales............................................................................................................. COGS ............................................................................................................ Gross profit .................................................................................................. Operating expenses .................................................................................... Operating income before interest expense................................................ Bond interest expense ................................................................................ Income before income tax .......................................................................... Income tax (35%)......................................................................................... Net income ..................................................................................................

$28,000,000 20,000,000 8,000,000 5,465,000 2,535,000 ? ? ? ?

Statement of financial position Current assets.............................................................................................. Non-current assets ...................................................................................... Total assets..................................................................................................

$14,700,000 22,000,000 36,700,000

Current liabilities ......................................................................................... Bonds payable ............................................................................................. Shareholders’ equity ................................................................................... Total liabilities and equity ..........................................................................

9,000,000 ? ? 36,700,000

Additional information: 1. Except for the bond, the company did not incur any other interest expense. 2. The last time entries were recorded for the bond was at the end of the third quarter (September 30, 2023), when adjusting entries were prepared. Instructions a) Prepare the journal entries related to the bond payable for the last quarter of 2023. The entries should reflect the payment of interest and related amortization of the premium or discount. b) Complete the forecasted financial statements for December 31, 2023 by including the effects of the bond payable. c) Using the financial statements from part b), calculate the times interest earned and debt to total 14-61 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

assets ratios. CRITICAL THINKING: The CEO has asked to you to provide a comprehensive written report with your recommendations based on your financial analysis. Is Superior forecasted to be in violation of the debt covenants? If yes, what action(s) would you recommend? Discuss the advantages/disadvantages of each recommendation.

Solution 14-98 a) The interest to be paid on December 31, 2023 is $600,000 ($10,000,000 x12% x 6 ÷ 12). Half of this is to be recorded as interest expense for this quarter. Amortization of the premium is $100,000 per year, $25,000 for the fourth quarter. On September 30, 2023, at the end of the third quarter, the following entry would have been posted: Interest expense ....................................................................................... 325,000 Bond interest payable ...................................................................... 300,000 Bond payable .................................................................................... 25,000 On December 31, 2023, Superior should post the following entry: Interest expense ....................................................................................... Bond interest payable .............................................................................. Cash ................................................................................................... Bond payable .................................................................................... b) Income Statement Sales .................................................................................................. COGS.................................................................................................. Gross profit ....................................................................................... Operating expenses .......................................................................... Operating income before interest expense ..................................... Bond interest expense ...................................................................... Income before income tax ................................................................ Income tax (35%) .............................................................................. Net Income ........................................................................................ 1 2

325,000 300,000 600,000 25,000

$28,000,000 20,000,000 8,000,000 5,465,000 2,535,000 1,300,0001 1,235,000 432,2502 $ 802,750

Interest expense = ($10,000,000 x 12%) + $100,000 = $1,300,000 Income tax = $1,235,000 x 35% = $432,250

Statement of financial position Current assets ................................................................................... Non-current assets............................................................................ Total assets ....................................................................................... Current Liabilities.............................................................................. Bonds payable .................................................................................. Shareholders’ equity......................................................................... Total liabilities and equity ................................................................

14,100,0003 22,000,000 36,100,000 8,700,000 9,400,0004 18,000,000 (plug number) 36,100,000 14-62

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

3 4

Current assets = $14,700,000 – $600,000 = $14,100,000 Bonds payable = carrying value Jan 1/20 + 2023 amortization = $9,300,000 +$100,000 = $9,400,000

Times Interest Earned = Income before income taxes and interest = 2,535,000 = 1.95 Interest Expense 1,300,000 Debt to Total Assets = Total debt = (8,700,000 + 9,400,000) = 18,100,000 = 0.5014 Total assets 36,100,000 36,100,000

CRITICAL THINKING: Superior is forecasted to be in violation of the debt covenant. However, the ratios are very close to the minimum requirements. Your report may recommend the following: 1. Do nothing and run the risk of a default on the bond, or possibly run the risk of a negative stock-market reaction for being in violation of the covenants. 2. Meet the creditors, present your case of expected economic recovery and ask them to wait one more quarter before acting or to waive the covenants for a short period. 3. Renegotiate with the creditors. The above options might be challenging given the need to convince many creditors and the possible market reaction. 4. 5.

If these are callable bonds or they can be purchased on the open market, buy some of them back to extinguish some of the debt, which will also reduce the related interest expense. Sell some operating assets that will yield a gain and use the proceeds to lower debt. For example, using the proceeds to pay your suppliers earlier may improve relations if a potential debt restructuring is to be negotiated. Apply earnings management techniques to increase earnings and total assets. For example, cut back on discretionary expenses such as advertising, repairs & maintenance, promotion, etc.

Option 4 might help to avoid the debt to total assets ratio violation, but might be too late to avoid interest expense and the violation of the times interest earned ratio violation. Difficulty: Medium Learning Objective: Understand how long-term debt is measured and accounted for. Section Reference: Measurement Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis Learning Objective: Explain how long-term debt is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pr. 14-99 Accounting for a troubled debt settlement Santa Ltd., who owes Claus Corp. $600,000 in notes payable, is in financial difficulty. To eliminate the debt, Claus agrees to accept from Santa land having a fair value of $455,000 and a recorded cost of $340,000. Instructions a) Calculate the amount of gain or loss to Santa on the transfer (disposition) of the land. b) Calculate the amount of gain or loss to Santa on the settlement of the debt. c) Prepare the journal entry on Santa's books to record the settlement of the debt. d) Calculate the gain or loss to Claus from settlement of the receivable from Santa. e) Prepare the journal entry on Claus's books to record the settlement of the receivable. Solution 14-99 a) Fair value of land ...................................................................................... Cost of land to Santa ................................................................................ Gain on disposition of land ......................................................................

$455,000 340,000 $115,000

Carrying amount of debt .......................................................................... Fair value of land given ............................................................................ Gain on settlement of debt ......................................................................

$600,000 455,000 $145,000

Notes Payable ........................................................................................... Land ................................................................................................... Gain on Disposal of Land .................................................................. Gain on Settlement of Debt ..............................................................

600,000

Carrying amount of receivable................................................................. Land received in settlement .................................................................... Loss on settlement of debt.......................................................................

$600,000 455,000 $145,000

Land .......................................................................................................... Loss on Settlement of Debt ...................................................................... Notes Receivable ..............................................................................

455,000 145,000

340,000 115,000 145,000

600,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 15 SHAREHOLDERS’ EQUITY CHAPTER STUDY OBJECTIVES 1. Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. The three main forms of organization are the proprietorship, partnership, and corporation. Incorporation gives shareholders protection against claims on their personal assets and allows greater access to capital markets. If there are no restrictive provisions, each share carries the following rights: (1) to share proportionately in profits and losses, (2) to share proportionately in management (the right to vote for directors), and (3) to share proportionately in corporate assets upon liquidation. An additional right to share proportionately in any new issues of shares of the same class (called the pre-emptive right) may also be attached to the share. Preferred shares are a special class of share that possess certain preferences or features that common shares do not have. Most often, these features are a preference over dividends and a preference over assets in the event of liquidation. Many other preferences may be attached to specific shares. Preferred shareholders give up some or all of the rights normally attached to common shares.

2. Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Shares are recognized and measured at net proceeds when issued. Shares may be issued on a subscription basis, in which case they are not considered legally issued until they are paid up. Shares may also be issued as a bundle with other securities, in which case the proceeds must be allocated between the securities. The residual or relative fair value methods (sometimes called the incremental or proportional methods) may be used for the allocation. If the reacquisition cost of the shares is greater than the original cost, the acquisition cost is allocated to share capital, then contributed surplus, and then retained earnings. If the cost is less, the cost is allocated to share capital (to stated or assigned cost) and to contributed surplus. Dividends paid to shareholders are affected by the dividend preferences of the preferred shares. Preferred shares can be cumulative or noncumulative, and fully participating, partially participating, or non-participating. A stock dividend is a capitalization of retained earnings that generally results in a reduction in retained earnings and a corresponding increase in certain contributed capital accounts. The total shareholders’ equity remains unchanged with a stock dividend. A stock split results in an increase or decrease in the number of shares outstanding. However, no accounting entry is required.

3. Understand how shareholders’ equity is presented, disclosed and analyzed. Contributed surplus is additional surplus coming from shareholder transactions. Accumulated other comprehensive income is accumulated non-shareholder income that has not been booked through net income. ASPE does not recognize this concept. The shareholders’ equity section of the SFP includes share capital,

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

contributed surplus, retained earnings, and accumulated other comprehensive income. A statement of changes in shareholders’ equity is required under IFRS. Basic disclosure requirements include authorized and issued share capital and changes during the period. Rights attached to shares should be presented, and where dividends are in arrears, this should also be disclosed. Where there are restrictions on retained earnings or dividends, this should be disclosed. Under IFRS, companies must also disclose information about their objectives, policies, and processes for managing capital and show summary quantitative information regarding what the company considers its capital. Common ratios used in this area are the rate of return on common shareholders’ equity, payout ratio, price earnings ratio, and book value per share.

4. Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. In several cases, ASPE provides more guidance, as noted in the comparison chart in Illustration 15.8. IFRS requires a statement of changes in shareholders’ equity, whereas ASPE requires a statement of changes in retained earnings (with additional note disclosure regarding the changes in equity). The IASB is continuing to work on the Primary Financial Statements Project, the Disclosure Initiative and the Financial Instruments with Characteristics of Equity Project.

5. Explain how to account for par value and treasury shares. Par value shares may only be valued at par value in the common or preferred share accounts. The excess goes to contributed surplus. On a repurchase or cancellation, the par value is removed from the common or preferred share accounts and any excess or deficit is booked to contributed surplus or retained earnings, as was discussed for no par shares. Treasury shares are created when a company repurchases its own shares and does not cancel or retire them at the same time; that is, they remain outstanding. The single-transaction method is used when treasury shares are purchased. This method treats the purchase and subsequent resale or cancellation as part of the same transaction.

6. Explain how to account for a financial reorganization. A corporation that has accumulated a large debit balance (deficit) in retained earnings may enter into a process known as a financial reorganization. During a reorganization, creditors and shareholders negotiate a deal to put the company on a new footing. This generally involves a change in control and a comprehensive revaluation of assets and liabilities. The procedure consists of the following steps: (1) The deficit is reclassified so that the ending balance in Retained Earnings is zero. (2) The change in control is recorded. (3) All assets and liabilities are comprehensively revalued at current values.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer c b a d b c b c b c b d d b a c d c b c b c b d b c a c d a b b d a b c b a b b a c c

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Residual interest REITs Pre-emptive right Shareholders’ liability Features of cumulative preferred shares Cumulative preferred shares dividend provisions Callable preferred shares Total shareholders' equity Reasons for issuing preferred shares Significance of par value Rights of common shareholders Common shares subscribed Classification of subscriptions receivable Allocation methods for a lump sum issuance Direct costs of issuing shares Reacquisition of shares Reacquisition of shares at less than average share value Reacquisition of shares at greater than original issue price Retirement of shares Retirement of shares Retirement of preferred shares Transactions causing a decrease in retained earnings Transactions causing an increase in retained earnings Legality of dividend distributions Timing of entry to record dividends Shares entitled to receive a cash dividend Definition of a property dividend Determine false statement regarding property dividends Fair value of a property dividend Effect of a stock dividend Knowledge of dividend declarations Knowledge of dividend declarations Effect of large stock dividend Accounting for stock split Accounting for stock dividend Large stock dividend Reporting of Common Stock Dividend Distributable Liquidating dividend Entry to record a liquidating dividend Effects of stock dividends and stock splits Effects of a stock split Valid reasons for stock splits Knowledge of what shares receive dividends

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b b d Answer b c a b c d d b c b a b a b a c c a c b a b d d b d b c b b b b c c c d a d d c b c

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.

Noncumulative preferred dividends in arrears Common shares issued in payment of services Accounting for share subscriptions Description Cash dividend dates Valuation of a property dividend Accounting effects of property dividends Effect of a liquidating dividend on equity accounts Effect of a stock dividend on equity accounts Effect of a stock dividend on total equity Effect of stock dividend and stock split Calculation of contributed surplus Calculation of contributed capital Calculation of share account balance Calculation of contributed surplus Entry to record share subscriptions Entry to record share subscriptions Share subscriptions Property dividend Entry to record stock dividend Calculation of share account after stock dividend Calculation of retained earnings after stock dividend Effect on equity accounts after dividend declarations Effect of stock dividend on retained earnings Effect of stock dividend on retained earnings Effect of share cancellation on equity accounts Effect of share cancellation on equity accounts Calculation of cash dividend allocation Calculation of cash dividend allocation Calculation of cash dividend allocation Calculation of cash dividend allocation Calculation of cash dividend allocation Calculation of cash dividend allocation Calculation of cash dividend allocation Calculation of cash dividend allocation Determine entry to incorporate a proprietorship. Calculate amount to credit preferred shares in lump sum issue. Calculate contributed surplus from retirement of shares. Allocation of cash dividend to common and preferred shares Entry to record declaration of property dividend Calculation of total equity Classification of shareholders' equity Cumulative preferred dividends in arrears Statement of Changes in Shareholders’ Equity (IFRS) Calculation of payout ratio Rate of return on common shareholders’ equity

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b d a a b c b Answer d b c b b c a a c c a c a c d c a c d c d b a b c a b d a b b c a b d

89. 90. 91. 92. 93. 94. 95. No. 96. 97. 98. 99. 100. 101. *102. *103. *104. *105. *106. *107. *108. *109. *110. *111. *112. *113. *114. *115. *116. *117. *118. *119. *120. *121. *122. *123. *124. *125. *126. *127. *128. *129. *130.

Calculation of price earnings ratio Book value per common shares Calculation of cash dividends paid (given payout ratio) Calculation of price earnings ratio Calculation of rate of return on common shareholders’ equity Calculation of rate of return on common shareholders’ equity Calculation of price earnings ratio Description Calculation of book value Calculation of basic EPS Calculation of price earnings ratio Share reacquisition Receivables for loans issued to buy shares Company financial re-organization Sale of treasury shares Reissuance of treasury shares at less than acquisition cost Reporting treasury shares in the balance sheet Common shares issued vs. outstanding Effect of reissuance of treasury shares Effect of treasury shares on number of shares outstanding Effect on income statement of sale of treasury shares Recording par value shares Retirement of par value shares Sale of treasury shares Cancellation of treasury shares Effect of treasury shares on equity Total equity with treasury shares exchange Calculation of contributed surplus with treasury shares transactions Recording retirement of shares Retained earnings balance with treasury shares transactions Retained earnings balance with cancelled shares Retained earnings balance with treasury shares transactions Effect of stock dividend on retained earnings (with treasury shares) Calculate balance in retained earnings Effect of reissuance of treasury shares Determining occurrence of financial reorganization Balance of retained earnings after a financial reorganization Financial reorganization requirements IFRS vs. ASPE guidance Determine false statement regarding financial reorganizations. Adjustment of common shares in a financial reorganization Effect on deficit from revaluation of assets in a financial reorganization Effect of financial reorganization on retained earnings

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Item E15-131 E15-132 E15-133 E15-134 E15-135 E15-136 E15-137 E15-138 E15-139 E15-140 E15-141 E15-142 E15-143 E15-144 E15-145 E15-146 *E15-147 *E15-148 *E15-149 *E15-150

Description Share subscriptions Lump sum issuance of shares Shareholders' equity Share subscriptions Shares issued in noncash transactions and trading on equity Reacquisition of shares Determination of dividend amount Stock dividends and retained earnings Stock dividends and stock splits Dividends on preferred shares Dividends on preferred shares Dividends on preferred shares Dividends on preferred shares Lump sum issuance of par value shares True or false questions Basis share rights and share capital Calculation of selected financial ratios Treasury shares Treasury shares Financial reorganization

*This topic is dealt with in an Appendix to the chapter.

PROBLEMS Item P15-151 P15-152 P15-153 P15-154 P15-155 P15-156 P15-157 P15-158 P15-159 P15-160 *P15-161 *P15-162

Description Reacquisition of shares Issuance of shares for cash, noncash consideration, and by subscription Issuance of shares for cash, noncash consideration, and by subscription Allocation of cash dividends Share retirement and stock dividends Dividend distribution Equity transactions Calculation of selected financial ratios Statement of Shareholders’ Equity Shareholders’ Equity Section and capital disclosures Treasury share transactions Financial reorganization

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. The residual interest in a corporation belongs to the a) management. b) creditors. c) common shareholders. d) preferred shareholders. Answer: c Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. Which statement is correct regarding real estate income or investment trusts? a) They are often set up as unlimited purpose trust funds. b) They are considered to be special purpose entities. c) The unitholders (investors) do not pay tax on the cash received from the trust. d) The unitholders have unlimited liability. Answer: b Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. The pre-emptive right enables a shareholder to a) share proportionately in any new issues of shares in the same class. b) receive cash dividends before other classes of shares without the pre-emptive right. c) sell shares back to the corporation at the option of the shareholder. d) receive the same amount of dividends on a percentage basis as the preferred shareholders. Answer: a Difficulty: Easy 15-8 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. The liability of shareholders is a) similar to the liability of the owners of a partnership. b) similar to the liability of the owner of a proprietorship. c) equal to an amount sufficient to satisfy all creditors. d) limited to their property or service invested in the corporation. Answer: d Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. The cumulative feature of preferred shares a) limits the amount of cumulative dividends to the par value of the preferred shares. b) requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. c) means that the shareholder can accumulate preferred shares until they are equal to the stated value of common shares, at which time they can be converted into common shares. d) enables a preferred shareholder to accumulate dividends until they equal the stated value of the shares and receive the shares in place of the cash dividends. Answer: b Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) must be paid each year. b) accumulate over the life of the shares and are paid on retirement. c) must be paid before dividends may be paid on common shares. d) if in arrears, must be calculated like compound interest. Answer: c Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

7. Callable preferred shares a) may be redeemed at any time at the shareholder’s option. b) may be called or redeemed at the option of the issuing corporation. c) usually have voting rights. d) have rights to participate in any new share issuance. Answer: b Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

8. Total shareholders' equity represents a) a claim to specific assets contributed by the owners. b) the maximum amount that can be borrowed by the corporation. c) a claim against a portion of the total assets of the corporation. d) only the amount of earnings that have been retained in the corporation. Answer: c Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting 15-10 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Knowledge AACSB: Analytic

9. Preferred shares are often issued instead of debt a) to avoid paying dividends to the common shareholders. b) because a corporation’s debt-to-equity ratio has become too high. c) to increase the market value of the shares. d) to decrease the market value of the shares. Answer: b Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. In jurisdictions where par value shares are legally allowed, the only real significance of par value is a) to enable the shares to be callable or convertible. b) to require the corporation to pay dividends. c) to establish the maximum responsibility of a shareholder in the event of insolvency. d) to establish the maximum price at which the shares can be sold. Answer: c Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

11. Which one of the following is NOT a right of common shareholders? a) to share proportionately in profits and losses b) to share proportionately in all management decisions c) to share proportionately in corporate assets upon liquidation d) to share proportionately in any new issues of stock of the same class Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

12. Aye Corp. sells common shares on a subscription basis. The Common Shares account should be credited when the a) shares are subscribed for. b) first payment is made. c) last payment is made. d) last payment is made and the shares are issued. Answer: d Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

13. Subscriptions Receivable are reported as a) a non-current asset. b) a current asset. c) a deduction from shareholders' equity. d) either a current asset or a deduction from shareholders' equity. Answer: d Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

14. The accounting problem in a lump sum sale of shares is the allocation of the proceeds between the classes of securities. One acceptable method of allocation is the 15-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) pro forma method. b) relative fair value method. c) direct method. d) indirect method. Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

15. Direct incremental costs incurred to sell shares such as underwriting costs should be accounted for as a) a reduction of share capital. b) an expense of the period in which the shares are issued. c) an intangible asset. d) a reduction of retained earnings. Answer: a Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

16. According to the CBCA, when a company purchases its own shares on the market a) the shares are recorded with a debit to Repurchased Shares. b) the amount paid is deducted from the share class to which they belong. c) the shares must be cancelled. d) the excess of purchase price over cost is a loss. Answer: c Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement 15-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

17. When shares are reacquired at a cost less than the average per share value, the difference is credited to a) the appropriate share capital account. b) Gain on Reacquisition of Shares. c) Retained Earnings. d) Contributed Surplus. Answer: d Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

18. Assuming a corporation has no contributed surplus booked, when shares are reacquired at a cost greater than their original issue price and cancelled, what account(s) should be debited? a) the share account for the total cost b) the share account for the original issue price and contributed surplus for the additional amount c) the share account for the average per share amount and retained earnings for the additional amount d) the share account for the average per share amount and a loss account for the additional amount Answer: c Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

19. When shares are purchased or redeemed and cancelled, guidelines have been established for the sequence of accounts to adjust when allocating the cost. Which of the following is the first account to be adjusted? a) a Contributed Surplus account created from a previous reacquisition of the same class of shares 15-14 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) the Share Capital account c) Retained Earnings d) Accumulated Other Comprehensive Income Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

20. A possible result of the reacquisition and cancellation of shares by a corporation is that this may a) directly increase but not decrease retained earnings. b) increase net income if a gain is recognized. c) directly decrease but not increase retained earnings. d) decrease but not increase net income. Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

21. When all outstanding preferred shares are purchased and retired by the issuing corporation for less than the original issue price, accounting for the retirement increases a) the amount of dividends available to common shareholders. b) the contributed capital of the common shareholders. c) reported income for the period. d) Accumulated Other Comprehensive Income. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting 15-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

22. Which of the following transactions would NOT result in a decrease to retained earnings? a) a declaration and issuance of a stock dividend b) the incurrence of a net loss for the period c) a reacquisition of shares for less than the original issue price d) the correction of an error in which depreciation expense was understated in a prior period Answer: c Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

23. Which of the following transactions would NOT result in an increase to retained earnings? a) correction of an error in which expenses were overstated in a previous year b) the issuance of a 3-for-1 stock split c) retrospective application of a new accounting policy that results in higher net income in the previous year. d) earning of net income for the period Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

24. Which of the following statements is NOT generally true about the legality of dividend distributions? a) No amounts may be distributed unless the corporate capital is left intact. b) The corporation must still be able to pay its liabilities when they become due. c) A corporation may not pay dividends that are higher than their legally available retained earnings. d) Dividends do not need to be formally approved by the Board of Directors.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

25. An entry for dividends is NOT made on the a) date of declaration. b) date of record. c) date of payment (cash dividends). d) date of distribution (stock dividends). Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

26. Cash dividends are paid on the basis of the number of shares a) authorized. b) issued. c) outstanding. d) outstanding less the number of treasury shares. Answer: c Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

27. Jesse Corp. owns 4,000,000 shares of James Corp. On December 31, 2023, Jesse distributed these 15-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

shares as a dividend to its shareholders. This is an example of a a) property dividend. b) stock dividend. c) liquidating dividend. d) cash dividend. Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

28. Which of the following statements about property dividends is NOT correct? a) A property dividend is a nonreciprocal transfer of nonmonetary assets. b) A property dividend is also called a dividend in kind. c) The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred. d) The accounting for a property dividend should be based on the fair value of the nonmonetary assets transferred. Answer: c Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

29. The fair value of a property dividend should NOT be determined by a) estimated realizable values in cash transactions involving similar assets. b) quoted market prices. c) independent appraisals. d) arbitrary values assigned by the Board of Directors. Answer: d Difficulty: Easy

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

30. Declaration and issuance of a stock dividend a) has no effect on total assets, liabilities, or shareholders' equity. b) decreases the amount of working capital. c) decreases total shareholders' equity. d) increases the current ratio. Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

31. If a corporation wishes to "capitalize" part of its earnings, it may issue a a) cash dividend. b) stock dividend. c) property dividend. d) liquidating dividend. Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

32. Which type of dividends do NOT reduce total shareholders' equity? a) cash dividends b) stock dividends c) property dividends 15-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) liquidating dividends Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

33. The declaration and issuance of a stock dividend larger than 25% generally a) increases common shares outstanding and increases total shareholders' equity. b) increases retained earnings and increases total shareholders' equity. c) may increase or decrease common shares but does not change total shareholders' equity. d) decreases retained earnings but does not change total shareholders' equity. Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

34. Pryor Corporation issued a 2-for-1 common stock split. The shares had been originally issued at $10 per share. At what amount should retained earnings be capitalized for the additional shares issued? a) There should be no capitalization of retained earnings. b) $10 per share c) market value on the declaration date d) market value on the payment date Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application 15-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

35. The issuer of a 5% common stock dividend to common shareholders should transfer from retained earnings to contributed capital an amount equal to the a) book value of the shares issued. b) market value of the shares issued. c) minimum legal requirements. d) par or stated value of the shares issued. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

36. At a minimum, how large in relation to total outstanding shares may a stock distribution be before it should be accounted for as a large stock dividend instead of as a small stock dividend? a) no less than 2% to 5% b) no less than 10% to 15% c) no less than 20% to 25% d) no less than 45% to 50% Answer: c Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

37. The balance in the Common Stock Dividend Distributable account should be reported as a(n) a) deduction from the Common Shares account. b) addition to contributed capital. c) current liability. d) contra-asset. Answer: b 15-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

38. A dividend which is a return to shareholders as a portion of their original capital investments is known as a a) liquidating dividend. b) property dividend. c) cash dividend. d) participating dividend. Answer: a Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

39. A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to a) Retained Earnings. b) Contributed Capital. c) Accumulated Other Comprehensive Income. d) Dividend Payable. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

40. A common feature of both stock splits and stock dividends is a) a transfer to earned capital of a corporation. b) that there is no effect on total shareholders' equity. c) an increase in total liabilities of a corporation. d) a reduction in the contributed capital of a corporation. Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

41. What effect does the issuance of a 2-for-1 stock split have on each of the following? Common Shares Retained Earnings a) no effect no effect b) increase no effect c) decrease no effect d) decrease decrease Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

42. Which of the following is NOT a valid reason for a stock split? a) to increase the shareholder base by increasing the number of shares outstanding and making them more marketable b) to reduce the market price of the shares so that more individuals can afford to invest in the shares c) to increase the market price of the shares to make the stock more attractive d) to reduce the market price of the shares to make the stock more attractive Answer: c Difficulty: Medium

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

43. Dividends are NOT paid on a) noncumulative preferred shares. b) non-participating preferred shares. c) treasury shares. d) non-voting common shares. Answer: c Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

44. Noncumulative preferred dividends in arrears a) must be paid before any other cash dividends can be distributed. b) are not paid or disclosed. c) are disclosed as a liability until paid. d) are paid to preferred shareholders if sufficient funds remain after payment of the current preferred dividend. Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

45. Aye Corp. was organized in January 2023 with authorized capital of 1,000,000 no par value common shares. On February 1, 20230, shares were issued at $10 per share. On March 1, 2023, the corporation's lawyer accepted 7,000 common shares with a fair value of $85,000 in settlement for 15-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

legal services. Total shareholders’ equity would increase on February 1, 2023 March 1, 2023 a) yes no b) yes yes c) no no d) no yes Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

46. On December 1, 2023, Dee Ltd. agreed to sell 40,000 of its no par common shares on a subscription basis. On that day, 25% of the subscription price was collected as a down payment, with the remaining 75% due in 2024. On the December 31, 2023 statement of financial position, the shareholders' equity section would report a) common shares issued for 25% of the subscription price. b) common shares issued for 100% of the subscription price less a subscription receivable for 75% of the subscription price. c) common shares subscribed for 75% of the subscription price. d) common shares subscribed for 100% of the subscription price less a subscription receivable for 75% of the subscription price. Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

47. The dollar amount of a cash dividend to be paid is determined on the date of a) record. b) declaration. c) declaration or date of record, whichever is earlier. d) payment.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

48. An investment in marketable securities was distributed to shareholders as a property dividend. The dividend should be recorded at the a) fair value of the asset transferred or the book value of the asset transferred, whichever is higher. b) fair value of the asset transferred or the book value of the asset transferred, whichever is lower. c) fair value of the asset transferred. d) book value of the asset transferred. Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

49. Emily Corp. owned shares in Carr Ltd. On December 1, 2023, Emily declared and distributed a property dividend of Carr shares when the fair value exceeded the carrying amount. As a consequence of the dividend declaration and distribution, the accounting effects would be Property Dividends Recorded At Retained Earnings a) fair value decreased b) fair value increased c) cost increased d) cost decreased Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting 15-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

50. A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following? Contributed Surplus Retained Earnings a) decrease no effect b) decrease decrease c) no effect decrease d) no effect no effect Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

51. How would the declaration of a 15% stock dividend affect each of the following? Total Retained Earnings Shareholders' Equity a) no effect no effect b) no effect decrease c) decrease no effect d) decrease decrease Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

52. On May 1, 2023, when the market value of Jay Ltd.'s common shares was $15 per share, the corporation had 100,000 no par value common shares issued and outstanding. On this day, Jay declared and issued a 15% common stock dividend. As a result of this stock dividend, Jay's total 15-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

shareholders' equity a) increased by $225,000. b) decreased by $225,000. c) decreased by $15,000. d) did not change. Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

53. How would total shareholders' equity be affected by the declaration of each of the following? Stock dividend Stock split a) no effect increase b) decrease decrease c) decrease no effect d) no effect no effect Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

54. Berlin Corporation was organized on January 1, 2023, with 400,000 no par value common shares authorized. During 2023, the corporation had the following share transactions: Jan 5 Issued 150,000 shares at $10 per share Apr 6 Issued 50,000 shares at $12 per share Jun 8 Issued 50,000 shares at $14 per share Jul 28 Purchased 20,000 shares at $11 per share and cancelled them Dec 31 Issued 20,000 shares at $18 per share What is the total amount of contributed surplus at December 31, 2023? a) $0 b) $4,000 c) $20,000 15-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) $220,000 Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: (150,000 × $10) + (50,000 × $12) + (50,000 × $14) = $2,800,000 $2,800,000 ÷ 250,000 = $11.20; $11.20 × 20,000 = $224,000 $11.00 × 20,000 = $220,000; $224,000 – $220,000 = $4,000.

55. Frieds Corp. was organized on January 1, 2023, with the following authorized share capital: 20,000 common shares, no par value 15,000, $.10, cumulative preferred shares, no par value During 2023, the corporation issued 10,000 common shares for $700,000 and 10,000 preferred shares at $28 per share. On December 20, 2023, subscriptions for 1,000 preferred shares were taken at a purchase price of $30. These subscribed shares were paid for on January 2, 2024. What should Frieds report as total contributed capital on its December 31, 2023, balance sheet? a) $280,000 b) $700,000 c) $980,000 d) $1,130,000 Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $700,000 + (10,000 × $28) = $980,000. (The Subscriptions Receivable and Common Shares Subscribed accounts should preferably both be in contributed capital, so they would cancel each other out.)

56. Berne Ltd. was organized on January 1, 2023, with 300,000 no par value common shares authorized. During 2023, the corporation had the following share transactions: Jan 4 Issued 120,000 shares at $10 per share Mar 8 Issued 40,000 shares at $11 per share 15-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

May 17 Purchased 15,000 shares at $12 per share and cancelled them Jul 6 Issued 30,000 shares at $13 per share Aug 27 Issued 10,000 shares at $14 per share The total amount in the Common Shares account at December 31, 2023 is a) $2,170,000. b) $2,016,250. c) $2,007,250. d) $1,990,000. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: [(120,000 × $10) + (40,000 × $11)] ÷ 160,000 = $10.25 (120,000 × $10) + (40,000 ×$11) – (15,000 × $10.25) + (30,000 × $13) +(10,000 ×$14) = $2,016,250

57. Berne Ltd. was organized on January 1, 2023, with 300,000 no par value common shares authorized. During 2023, the corporation had the following share transactions: Jan 4 Issued 120,000 shares at $10 per share Mar 8 Issued 40,000 shares at $11 per share May 17 Purchased 15,000 shares at $12 per share and cancelled them Jul 6 Issued 30,000 shares at $13 per share Aug 27 Issued 10,000 shares at $14 per share The total amount of contributed surplus at December 31, 2023 is a) $0. b) $26,250. c) $153,750. d) $180,000. Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $-0. Paid more than carrying value of the shares, therefore difference Dr. to Retained Earnings 15-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

58. Minosh Corp. is authorized to issue 400,000 no par value common shares. Subscribers agree to purchase shares at $12 per share with a 30% down payment. Assume that subscribers agree to purchase 75,000 shares and make the required down payment. The journal entry to record receipt of the subscriptions includes a a) debit to Common Shares Subscribed for $900,000. b) credit to Common Shares Subscribed for $900,000. c) credit to Common Shares for $270,000. d) credit to Subscriptions Receivable for $670,000. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 75,000 × $12 = $900,000

59. Minosh Corp. is authorized to issue 400,000 no par value common shares. Subscribers agree to purchase shares at $12 per share with a 30% down payment. The journal entry to record the issuance of the shares upon receipt of the final instalment includes a a) debit to Common Shares Subscribed for $900,000. b) credit to Common Shares for $670,000. c) credit to Common Shares for $270,000. d) debit to Subscriptions Receivable for $670,000. Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 75,000 × $12 = $900,000

60. Presented below is information related to Oistins Corporation: Subscriptions Receivable, Common Shares....................... $240,000 Common Shares, no par value ............................................ 7,620,000 15-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Common Shares Subscribed............................................... 480,000 $4 Preferred Shares, no par value ....................................... 2,880,000 Retained Earnings ............................................................... 1,800,000 The total amount that will be added to the Common Shares account when the final subscriptions are received will be a) $240,000. b) $480,000. c) $720,000. d) cannot be determined from the information given. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $480,000, the subscription price

61. Elves Ltd. owns 150,000 shares of Rogue Ltd. common shares, which are being accounting for by the equity method. On December 15, 2023, when Elves "Investment in Common Shares of Rogue Ltd." account has a carrying value of $7.50 per share, Elves declares all these shares to its shareholders as a property dividend, to be distributed on December 31, 2023. Elves had originally paid $12 for each share. Rogue has 1,500,000 shares issued and outstanding, for which the quoted market price was $10.50 per share on the declaration date and $13.50 per share on the distribution date. Ignoring income taxes, what would be the reduction in Elves’ shareholders' equity as a result of the above transactions? a) $1,125,000 b) $1,050,000 c) $1,200,000 d) $1,575,000 Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: (150,000 × $10.50) value of dividend – [150,000 x ($10.5 – $7.50)] gain on appreciation = $1,125,000 15-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

62. Minnick Corp. has 900,000 no par common shares authorized, of which 400,000 shares are outstanding. The average carrying value of the shares is $6 per share. When the market value was $10 per share, Miinick declared a 10% stock dividend. What entry, if any, should Minnick make to record this dividend declaration? a) No entry b) Retained Earnings ........................................................................................ 200,000 Common Stock Dividend Distributable ................................................ 200,000 c) Retained Earnings ........................................................................................ 400,000 Common Stock Dividend Distributable ................................................ 400,000 d) Stock Dividend Payable ............................................................................... 400,000 Common Stock Dividend Distributable ................................................ 400,000 Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 400,000 × $10 x 10% = $400,000

63. On June 30, 2023, when Wenn Inc.'s shares were selling at $32 per share, its capital accounts were as follows: Common Shares, no par, 40,000 shares issued and outstanding........................................................................... $1,500,000 Retained Earnings ............................................................................... 2,600,000 If a 5% stock dividend were declared and distributed, the Common Shares account balance would be a) $3,064,000. b) $1,500,000. c) $1,564,000. d) $2,600,000. Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 15-33 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: $1,500,000 + (40,000 x 5% x $32) = $1,564,000

64. The shareholders' equity section of Zagreb Corp. at December 31, 2022 was: Common shares, no par value; authorized 20,000 shares; issued and outstanding 10,000 shares ............................................. $50,000 Retained earnings..................................................................................... 200,000 $250,000 On February 28, 2023, when the market value of Zagreb’s shares was $12 per share, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. For the two months ended February 28, 2023, Zagreb reported a net loss of $20,000. What amount should Zagreb report as retained earnings at February 28, 2023? a) $162,000 b) $180,000 c) $182,000 d) $198,000 Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $200,000 – $20,000 – (1,500 × $12) = $162,000

65. Cash dividends declared on the no par value common shares of Athens Corp. were as follows: 1st quarter of 2023................................. $330,000 2nd quarter of 2023 ............................... 350,000 3rd quarter of 2023 ................................ 420,000 4th quarter of 2023 ................................ 450,000 The 4th quarter cash dividend was declared on December 20, 2023, to shareholders of record on December 31, 2023, to be paid on January 9, 2024. In addition, Athens declared a 10% common stock dividend on December 1, 2023, when there were 400,000 shares issued and outstanding, and the market value of the common shares was $16 per share. The shares were issued on December 21, 2023. What was the effect on Athens' shareholders' equity accounts during 2023 as a result of the above transactions? Common Shares Retained Earnings a) $-0$1,550,000 debit b) $540,000 credit $1,740,000 debit c) $640,000 credit $2,190,000 debit d) $300,000 credit $1,950,000 debit

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 400,000 x 10% x $16 = $640,000 Cr. (common shares, i.e. stock dividend) $330,000 + $350,000 + $420,000 + $450,000 + $640,000 = $2,190,000 Dr. (retained earnings)

66. The shareholders' equity of Tirana Ltd. at July 31, 2023 is presented below: Common shares, no par value, authorized 400,000 shares, issued and outstanding 200,000 shares ........................................... $4,160,000 Retained earnings..................................................................................... 2,650,000 Total shareholders’ equity ............................................................... $6,810,000 On August 1, 2023, the board of directors declared a 10% stock dividend, to be distributed on September 15. The market price of Tirana's common shares was $35 on August 1 and $38 on September 15. What is the debit to retained earnings as a result of the declaration and distribution of this stock dividend? a) $400,000 b) $700,000 c) $760,000 d) $1,400,000 Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 200,000 × 10% × $35 = $700,000

67. On January 1, 2023, when the market value of its common shares was $15 per share, Crooks Inc. declared a 10% common stock dividend. Shareholders' equity before the stock dividend was declared was: Common shares, no par value, authorized 300,000 shares, issued and outstanding 180,000 shares ........................................... $2,125,000 Retained earnings..................................................................................... 2,550,000 Total shareholders' equity ............................................................... $4,675,000 15-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

What was the effect on Crook’s retained earnings as a result of the stock dividend? a) $270,000 decrease b) $450,000 decrease c) $540,000 decrease d) $750,000 decrease Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 180,000 × 10% × $15 = $270,000 decrease

68. Kryer Ltd. has 50,000 no par value common shares authorized, issued, and outstanding. All 50,000 shares were issued at $4 per share. Retained earnings are $60,000. If 5,000 common shares were reacquired at $3 and cancelled, a) shareholders' equity would decrease $75,000. b) contributed surplus would increase $5,000. c) contributed surplus would decrease $5,000. d) retained earnings would decrease $15,000. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 5,000 × ($4 – $3) = $5,000

69. Helix Corporation has 150,000 no par value common shares authorized, issued and outstanding. All 150,000 shares were issued at $80 per share. Retained earnings are $325,000. If 3,000 shares were reacquired at $99 and cancelled, shareholders' equity would decrease by a) $0. b) $57,000. c) $240,000. d) $297,000.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 3,000 × $99 = $297,000

70. On December 31, 2023, Monaco Ltd. had outstanding 2,000 no par value, $6, cumulative preferred shares and 30,000 no par value common shares. At this time, dividends in arrears on the preferred shares were $6,000. Cash dividends declared in 20241 totalled $30,000. The amounts paid to each class of shares were Preferred Shares Common Shares a) $6,000 $24,000 b) $12,000 $18,000 c) $24,000 $6,000 d) $18,000 $12,000 Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $6,000 + (2,000 × $6) = $18,000 (preferred shares) $30,000 – $18,000 = $12,000 (common shares)

71. Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred shares issued at $5 each. The preferred shares are cumulative and non-participating. Dividends have been paid every year except the past two years and the current year. Assuming that $50,000 will be distributed as a dividend in the current year, how much will the common shareholders receive? a) $24,000 b) $26,000 c) $34,000 d) $42,000 Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $50,000 – (20,000 × $0.40 × 3) = $26,000

72. Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred shares issued at $5 each. The preferred shares are cumulative and non-participating. Dividends have been paid every year except the past two years and the current year. Assuming that $21,000 will be distributed as a dividend in the current year, how much will the preferred shareholders receive? a) $0 b) $8,000 c) $16,000 d) $21,000 Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 20,000 × $0.40 × 3 = $24,000 > $21,000

73. Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred shares issued at $5 each. The preferred shares are cumulative and non-participating. Dividends have been paid every year except the past two years and the current year. The Common Shares account currently shows a balance of $200,000. Assuming that $61,000 will be distributed as a dividend in the current year, and the preferred shares are also fully participating, how much will the common shareholders receive? a) $37,000 b) $30,000 c) $31,000 d) $16,000 Answer: b Difficulty: Medium

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: 8% × $200,000 = $16,000 (equivalent dividend) *2 ÷ 3 × $21,000 = 14,000_ (participation) $30,000 *20,000 × $0.40 × 3 = $24,000 (preferred dividends) $0.40 ÷ $5 = 8% dividend $200,000 × 8% = $16,000 (equivalent common dividend) Balance left = $61,000 – $24,000 – $16,000 = $21,000 Shared $200,000: $100,000 C:P i.e., 2:1

74. Sarajevo Ltd. currently has outstanding 20,000 no par value common shares with a carrying value of $200,000, and 10,000 no par value, $0.60, cumulative, fully participating preferred shares with a carrying value of $100,000. Dividends on the preferred shares are one year in arrears. Assuming that Sarajevo wishes to distribute $54,000 in dividends, the common shareholders will receive a) $12,000. b) $22,000. c) $32,000. d) $42,000. Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Common Shares $200,000 × 6% = $12,000 (current year) $200,000 × 10%* = 20,000 (participating) $32,000 *$54,000 – $12,000 – (10,000 × $0.60 × 2) = $30,000 $30,000 $300,000 = 10%

75. Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par value common shares. Dividends have been paid every year except last year and the current year. The 15-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

carrying value of the preferred shares is $200,000 and of the common shares is $300,000. If the preferred shares are cumulative and non-participating and $100,000 is distributed as a dividend, the common shareholders will receive a) $0. b) $68,000. c) $84,000. d) $100,000. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $100,000 – (20,000 × $0.80 × 2) = $68,000

76. Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par value common shares. Dividends have been paid every year except last year and the current year. The carrying value of the preferred shares is $200,000 and of the common shares is $300,000. If the preferred shares are noncumulative and fully participating and $70,000 is distributed as a dividend, the common shareholders will receive a) $0. b) $42,000. c) $46,000. d) $54,000. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Common Shares $300,000 × 8% = $24,000 (current year) $300,000 × 6%* = 18,000 (participating) $42,000 *$70,000 – $24,000 – (20,000 × $0.80) = $30,000 $30,000 15-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$500,000 = 6%

77. Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par value common shares. Dividends have been paid every year except last year and the current year. The carrying value of the preferred shares is $200,000 and of the common shares is $300,000. If the preferred shares are cumulative and fully participating and $101,000 is distributed as a dividend, the common shareholders will receive a) $0. b) $51,000. c) $61,000. d) $69,000. Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Common Shares $300,000 × 8% = $24,000 (current year) $300,000 × 9%* = 27,000 (participating) $51,000 *$101,000 – $24,000 – (20,000 ×.8 × 2) = $45,000 $45,000 ÷ $500,000 = 9%

78. The December 31, 2023 condensed balance sheet of Bee Services, a proprietorship, follows: Current assets ...................................................................... $140,000 Property, plant and equipment (net) ................................. 130,000 $270,000 Liabilities.............................................................................. $70,000 Betty Bee, Capital ................................................................ 200,000 $270,000 Fair values at December 31, 2023, are as follows: Current assets ...................................................................... $160,000 Equipment ........................................................................... 210,000 Liabilities.............................................................................. 70,000 On January 1, 2024, Bee Services was incorporated as Bee-Line Ltd., with 10,000 no par value common shares issued. How much should be credited to Common Shares? a) $370,000 b) $300,000 15-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) $270,000 d) $200,000 Answer: b Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $160,000 + $210,000 – $70,000 = $300,000

79. On July 1, 2023, Nehan Corp. issued 4,000 of its no par common shares and 8,000 of its no par preferred shares for a lump sum of $200,000. At this date Nehan’s common shares were selling for $24 per share and the preferred shares for $18 per share. Using the relative fair value method, the amount of the proceeds allocated to the preferred shares account should be a) $100,000. b) $110,000. c) $120,000. d) $72,000. Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($24 × 4,000) + ($18 × 8,000) = $240,000 $144,000 $240,000 × $200,000 = $120,000

80. Eff Ltd. was organized on January 2, 2023, with 100,000 no par value common shares authorized. During 2023, Eff had the following capital transactions: Jan 5 Issued 75,000 shares at $14 per share Jul 27 Purchased and retired 5,000 shares at $10 per share Nov 25 Issued 4,000 shares at $13 per share What would be the balance in the Contributed Surplus account at December 31, 2023? a) $0 b) $10,000 15-42 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) $20,000 d) $50,000 Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 5,000 × ($14 – $10) = $20,000

81. At December 31, 2022 and 2023, Gee Corp. had outstanding 3,000 no par value, $8, cumulative preferred shares and 10,000 no par value common shares. At December 31, 2022, dividends in arrears on the preferred shares were $12,000. Cash dividends declared in 2023 totalled $45,000. What amounts were payable on each class of shares? Preferred Shares Common Shares a) $24,000 $21,000 b) $33,000 $12,000 c) $36,000 $9,000 d) $45,000 $0 Answer: c Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: (3,000 × $8) + $12,000 = $36,000 $45,000 – $36,000 = $9,000

82. Eye Corp. owned 20,000 shares of Lash Corp., which had been purchased in 2019 for $300,000. On December 15, 2023, Eye declared a property dividend of all of its Lash Corp. shares. The property dividend was distributed on January 15, 2024. On the declaration date, the fair value of Eye’s investment in Lash was $400,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of a) $0. b) $100,000. c) $300,000. 15-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) $400,000. Answer: d Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $400,000 (market value)

83. Presented below is information related to Madrid Corporation: Subscriptions Receivable, Common Shares............................................ Common Shares, no par value ................................................................. Common Shares Subscribed.................................................................... $4 Preferred Shares, no par value ............................................................ Retained Earnings .................................................................................... The total shareholders' equity of Madrid Corporation is a) $6,270,000. b) $6,300,000. c) $6,390,000. d) $6,510,000.

$120,000 3,810,000 240,000 1,440,000 900,000

Answer: a Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $3,810,000 + $240,000 + $1,440,000 + $900,000 – $120,000 = $6,270,000

84. Shareholders' equity is generally classified into two major categories: a) contributed capital and donated capital. b) contributed surplus and retained earnings. c) retained earnings and accumulated other comprehensive income. d) earned capital and contributed capital.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

85. How should cumulative preferred dividends in arrears be shown on the balance sheet? a) as an increase in shareholders' equity b) as an increase in current liabilities c) as an increase in current liabilities for the amount expected to be declared within the next year, and as an increase in long-term liabilities for the balance d) by note disclosure only Answer: d Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

86. Under IFRS, the Statement of Changes in Shareholders’ Equity must include a) share capital and retained earnings only. b) share capital and contributed surplus only. c) share capital, accumulated other comprehensive income, contributed surplus, and retained earnings. d) retained earnings, share capital, and accumulated other comprehensive income. Answer: c Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

87. The payout ratio can be calculated by a) dividing cash dividends per share by earnings per share. 15-45 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) dividing cash dividends by net income less preferred dividends. c) dividing cash dividends by market price per share. d) dividing net income by cash dividends per share. Answer: b Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

88. The rate of return on common shareholders’ equity shows a) the amount of leverage the corporation employs. b) the amount that each common shareholder would receive if the company were liquidated. c) how many dollars of net income were earned for each dollar invested by the owners. d) how the market value of the shares relates to the current earnings per share. Answer: c Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

89. The price earnings (P/E) ratio is calculated by a) dividing dividends per share by earnings per share. b) dividing the market price of the share by earnings per share. c) dividing net income by cash dividends per share. d) dividing cash dividends paid by the market price per share. Answer: b Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

90. Hamilton Ltd. has both common shares and non-participating, noncumulative preferred shares outstanding. The book value per common share is NOT affected by a) the declaration of a preferred stock dividend. b) the declaration of a common stock dividend when the market price of the common is equal to its issue price. c) a 2-for-1 split of the common shares. d) the payment of a previously declared cash dividend on the common shares. Answer: d Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

91. Sofia Ltd. reported net income of $5,300,000 for 2023, and earnings per share of $5.00. Included in the net income was $750,000 of bond interest expense related to its long-term debt. The income tax rate for 2023 was 30%. Dividends paid on preferred shares was $1,000,000. The payout ratio on common shares was 25%. What were the dividends paid on common shares in 2023? a) $1,075,000 b) $1,325,000 c) $1,206,250 d) $1,612,500 Answer: a Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback:

X ($5,300,000 − $1,000,000)

=.25; X = $1,075,000

92. For calendar 2023, Budapest Corp. reported net income of $29,280 and earnings per share of $2.46. There were 12,000 common shares outstanding during 2023. On Dec 31, 2023, the market price for Budapest's common shares was $32. To the nearest whole number, what is Budapest's price earnings ratio at Dec 31, 2023? a) 13 b) 32 c) 375 15-47 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) 915 Answer: a Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $32 ÷ $2.46 = 13

93. Presented below is information reported by Kiev Ltd. for its last two fiscal years: Dec 31, 2024 Common shares.............................................................................. $75,000 6% preferred shares, no par value, cumulative ............................ 350,000 Retained earnings (post closing) ................................................... 90,000 Net income for year ........................................................................ 60,000 What is Kiev’s rate of return on common shareholders’ equity for 2024? a) 48.8% b) 26% c) 25% d) 22.4%

Dec 31, 2023 $60,000 350,000 75,000 32,000

Answer: b Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback:

$60,000− (.06  $350,000) = 26% [($60,000+ $75,000)+ ($75,000+ $90,000)] 2

Note: preferred shares are not included in denominator

94. The following data are provided for Croatia Corp.’s last two fiscal years: Dec 31, 2024 Cumulative preferred shares, $5, no par value, 4,000 shares outstanding ....................................................... $200,000 Common shares, no par, 24,000 shares outstanding .................... 400,000 Retained earnings (post closing) ................................................... 480,000 Net income...................................................................................... 180,000 Additional information:

Dec 31, 2023 $200,000 310,000 430,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

On May 1, 2024, 6,000 common shares were issued. Although dividends had been declared regularly up to December 31, 2023, preferred dividends were NOT declared during 2024. The market price of the common shares was $100 at December 31, 2024. To the nearest percent, the rate of return on common shareholders’ equity for 2024 is a) 23%. b) 22%. c) 20%. d) 18%. Answer: c Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $180,000 – (4,000 x $5) = 20% ($400,000 + $480,000 + $310,000 + $430,000) ÷ 2 Note: preferred shares are not included in denominator

95. The following data are provided for Croatia Corp.’s last two fiscal years: Dec 31, 2024 Dec 31, 2023 Cumulative preferred shares, $5, no par value, 4,000 shares outstanding ....................................................... $200,000 $200,000 Common shares, no par, 24,000 shares outstanding .................... 400,000 310,000 Retained earnings (post closing) ................................................... 480,000 430,000 Net income...................................................................................... 180,000 Additional information: On May 1, 2024, 6,000 common shares were issued. Although dividends had been declared regularly up to December 31, 2023, preferred dividends were NOT declared during 2024. The market price of the common shares was $100 at December 31, 2024. The price earnings ratio for 2024 is a) 12.22. b) 13.76. c) 14.99. d) 15.55. Answer: b Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting 15-49 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic  $180,000 − $20,000  Feedback: $100    = $100  ($160  22 ) = 13.76 18,000 + (6,000  8  12) 

96. The following data are provided for Croatia Corp.’s last two fiscal years: Dec 31, 2024 Dec 31, 2023 Cumulative preferred shares, $5, no par value, 4,000 shares outstanding ....................................................... $200,000 $200,000 Common shares, no par, 24,000 shares outstanding .................... 400,000 310,000 Retained earnings (post closing) ................................................... 480,000 430,000 Net income...................................................................................... 180,000 Additional information: On May 1, 2024, 6,000 common shares were issued. Although dividends had been declared regularly up to December 31, 2023, preferred dividends were NOT declared during 2024. The market price of the common shares was $100 at December 31, 2024. The book value per common share at December 31, 2024 is a) $16.67. b) $18.18. c) $27.50. d) $35.83. Answer: d Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($400,000 + $480,000 – $20,000 pfd div in arrears) ÷ 24,000 = $35.83

97. Presented below is information reported by Kiev Ltd. for its last two fiscal years: Dec 31, 2024 Dec 31, 2023 Common shares.............................................................................. $75,000 $60,000 6% preferred shares, no par value, non-cumulative ..................... 350,000 350,000 Retained earnings (post closing) ................................................... 90,000 75,000 Net income for year ........................................................................ 60,000 32,000 On December 31, 2024 there were 10,000 common shares outstanding and trading at $15/share. No common shares have been bought or sold during the year. What is the basic earnings per share in 2024? (Round to two decimal places.) a) $6.00 b) $3.90 c) $7.50 15-50 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d)$2.10 Answer: b Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: (($60,000 – ($350,000 x 6%)) = $39,000 / 10,000 = $3.90 EPS

98. Presented below is information reported by Kiev Ltd. for its last two fiscal years: Dec 31, 2024 Dec 31, 2023 Common shares.............................................................................. $75,000 $60,000 6% preferred shares, no par value, non-cumulative ..................... 350,000 350,000 Retained earnings (post closing) ................................................... 90,000 75,000 Net income for year ........................................................................ 60,000 32,000 On December 31, 2024 there were 10,000 common shares outstanding and trading at $15/share. No common shares have been bought or sold during the year. What is the price earnings ratio in 2024? (Round to two decimal places.) a) 2.50 b) 2.67 c) 3.85 d) 4.0 Answer: c Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: (($60,000 – ($350,000 x 6%)) = $39,000 / 10,000 = $3.90 EPS; $15/$3.90 = 3.85

99. Which of the following statements regarding share reacquisition is CORRECT? a) Under IFRS there is specific guidance that the cost of shares should be allocated first to share capital, then to contributed surplus and then to retained earnings. b) Under ASPE there is specific guidance that the cost of shares should be allocated first to share capital, then to contributed surplus and then to retained earnings. c) There is no specific guidance under either IFRS or ASPE, management should use its best judgement. d) There is specific guidance for both IFRS and ASPE, the same rules must be followed under either 15-51 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

standard. Answer: b Difficulty: Easy Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

100. Under ASPE, if a receivable for loans issued to buy shares is deemed uncollectible it should be a) written off to allowance for doubtful accounts. b) presented as a contra equity. c) presented as a current liability. d) a receivable for loans issued to buy shares is not allowed under ASPE. Answer: b Difficulty: Easy Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

101. When a financial reorganization of a company occurs a) there is no effect on the balance sheet. b) there is no specific guidance on how to account for this under IFRS or ASPE. c) ASPE requires assets to be revalued and debt and equity accounts to be readjusted to reflect the new capital structure. d) ASPE requires that the revaluation method be applied to all property, plant and equipment. Answer: c Difficulty: Easy Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic 15-52 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*102. A “gain" on the sale of treasury shares should be credited to a) contributed surplus. b) the share capital account. c) retained earnings. d) other income. Answer: a Difficulty: Easy Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*103. Gupta Corp. purchased its own shares on January 1, 2023 for $20,000 and debited Treasury Shares for the purchase price. The shares were subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a debit to a) Contributed Surplus to the extent that previous net "gains" from sales or retirements of the same class of shares are included therein; otherwise, to retained earnings. b) Contributed Surplus regardless of whether there have been previous net "gains" from sales or retirements of the same class of shares included therein. c) Retained Earnings. d) Loss from Sale of Treasury Shares. Answer: a Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*104. An acceptable method of reporting Treasury Shares in the balance sheet is a) as a contra to contributed surplus. b) as a contra to the share capital account. c) as an account with a debit balance after retained earnings. d) as a current asset. Answer: c

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*105. Common shares issued would exceed common shares outstanding as a result of the a) declaration of a cash dividend. b) declaration of a stock dividend. c) purchase of treasury shares. d) payment in full of subscribed shares. Answer: c Difficulty: Easy Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*106. At its date of incorporation, Emm Inc. sold 100,000 of its $10 par common shares at $11 per share. During the current year, Emm acquired 20,000 of these common shares at $16 per share to hold as treasury shares. Subsequently, these shares were sold at $12 per share. Emm has had no other sales or acquisitions of its common shares. What effect does the sale of the treasury shares have on the following accounts? Retained Earnings Contributed Surplus a) decrease decrease b) no effect decrease c) decrease no effect d) no effect no effect Answer: a Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*107. The reacquisition of issued and outstanding shares will cause the number of shares outstanding 15-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

to decrease if they are accounted for As Treasury Shares By Retirement a) yes no b) no no c) yes yes d) no yes Answer: c Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*108. Minsk Corporation's shareholders' equity section at December 31, 2022 was: Common shares, $5 par value, authorized 1,200,000 shares; issued 900,000 shares; outstanding 800,000 shares; .................. $ 4,500,000 Contributed surplus ............................................................................ 3,250,000 Retained earnings................................................................................ 5,240,000 12,990,000 Less treasury shares, at cost, 100,000 shares ..................................... 800,000 Total shareholders' equity .......................................................... $12,190,000 During 2023, Minsk sold 30,000 treasury shares at $10 per share. No other similar transactions occurred during 2023. What amount should be reported for this transaction on the 2023 income statement? a) $0 b) $60,000 gain from sale c) $60,000 comprehensive income d) $20,000 gain from sale and $40,000 contributed surplus Answer: a Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 30,000 × $2 = $60,000, recorded as contributed surplus (not an income statement item)

*109. Stockholm Corp. was organized on January 1, 2023, with 100,000 common shares authorized, par value $10. On January 2, 2023, the corporation issued 15,000 of these shares for $190,000 cash. 15-55 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

The entry to record this sale would be a) Cash .............................................................................................................. Common Shares..................................................................................... b) Cash .............................................................................................................. Common Shares..................................................................................... Retained Earnings .................................................................................. c) Cash .............................................................................................................. Common Shares..................................................................................... Contributed Surplus .............................................................................. d) Cash .............................................................................................................. Contributed Surplus.................................................................................... Common Shares.....................................................................................

190,000 190,000 190,000 150,000 40,000 190,000 150,000 40,000 100,000 90,000 190,000

Answer: c Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Common shares 15,000 x $10 par = $150,000, balance to contributed surplus

*110. Nicosia Corp. was organized on January 1, 2023, with 50,000 common shares authorized, par value $15, and immediately sold 10,000 shares for $20 each. Later, Nicosia bought back 1,000 of these shares at $23 each and cancelled them. The entry to record the purchase would be a) Common Shares ........................................................................................... 23,000 Cash ........................................................................................................ 23,000 b) Common Shares ........................................................................................... 15,000 Retained Earnings ....................................................................................... 8,000 Cash ........................................................................................................ 23,000 c) Common Shares ........................................................................................... 20,000 Contributed Surplus.................................................................................... 3,000 Cash ........................................................................................................ 23,000 d) Common Shares ........................................................................................... 15,000 Contributed Surplus.................................................................................... 8,000 Cash ........................................................................................................ 23,000 Answer: d Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application 15-56 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: Common shares 1,000 × $15 par = $15,000; balance to contributed surplus

*111. When Oslo Ltd. was organized last year, they issued 100,000 no par value common shares for $1,200,000. Earlier this year, the corporation purchased 4,000 of these shares at $15 per share, to be held in the treasury, and three months later, sold 2,000 treasury shares at $19 per share. There were no other treasury share transactions. To record the sale of the 2,000 treasury shares, Oslo should credit a) Treasury Shares for $38,000. b) Treasury Shares for $20,000 and Contributed Surplus for $18,000. c) Treasury Shares for $30,000 and Contributed Surplus for $8,000. d) Treasury Shares for $30,000 and Retained Earnings for $8,000. Answer: c Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 2000 × $15 = $30,000; 2,000 × $4 = $8,000

*112. When Oslo Ltd. was organized last year, they issued 100,000 no par value common shares for $1,200,000. Earlier this year, the corporation purchased 4,000 of these shares at $15 per share, to be held in the treasury, and three months later, sold 2,000 treasury shares at $19 per share. There were no other treasury share transactions. If, instead of holding the 4,000 shares as treasury shares, Oslo had decided to cancel them, Oslo should debit a) Common Shares for $48,000 and Retained Earnings for $12,000. b) Contributed Surplus for $48,000 and Retained Earnings for $12,000. c) Contributed Surplus for $60,000. d) Common Shares for $60,000. Answer: a Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Common shares 4,000 × $12 (average issue price) = $48,000; R/E 4,000 × $3 = $12,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*113. London Corporation has 50,000 no par value common shares authorized, issued and outstanding. All 50,000 shares were issued at $40 per share. Retained earnings are $40,000. If 3,000 of these shares were reacquired at $50 and were held as treasury shares, a) shareholders' equity would increase by $150,000. b) contributed surplus would decrease by at least $30,000. c) shareholders’ equity would decrease by $150,000. d) common shares would increase by $150,000. Answer: c Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 3,000 × $50 = $150,000 (cost of treasury shares)

*114. On December 1, 20230, Dublin Ltd. exchanged 10,000 of its no par value common shares (being held in the treasury) for a used machine. The treasury shares were acquired by Dublin for $35 per share. On the date of the exchange, the common shares, which had originally been issued at $30 per share, had a market value of $55 per share. As a result of this exchange, Dublin's total shareholders' equity will increase by a) $300,000. b) $350,000. c) $400,000. d) $550,000. Answer: d Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 10,000 × $55 = $550,000

*115. Galba Corp.'s shareholders' equity at January 1, 2023 was: Common shares, no par value; authorized 200,000 shares; outstanding 75,000 shares .......................................................... Retained earnings................................................................................ Total .............................................................................................

$1,050,000 730,000 $1,780,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

During 2023, Galba had the following share transactions: Acquired 2,000 treasury shares for $30,000 Sold 1,200 treasury shares at $19 a share Retired the remaining treasury shares No other share transactions occurred during 2023. The total contributed surplus at December 31, 2023 is a) $24,800. b) $4,800. c) $4,000. d) $0. Answer: c Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 1,200 × ($19 – $15) – 800 x ($15 – $14) = $4,800 – $800 = $4,000

*116. Galba Corp.'s shareholders' equity at January 1, 2023 was: Common shares, no par value; authorized 200,000 shares; outstanding 75,000 shares .......................................................... $1,050,000 Retained earnings................................................................................ 730,000 Total ............................................................................................. $1,780,000 During 2023, Galba had the following share transactions: Acquired 2,000 treasury shares for $30,000 Sold 1,200 treasury shares at $19 a share Retired the remaining treasury shares No other share transactions occurred during 2023. Instead, assume Galba cancelled the 2,000 shares when it acquired them for $30,000. The journal entry to record the retirement would be a) Dr. Common Shares, $30,000; Cr. Cash, $30,000. b) Dr. Treasury Shares, $30,000; Cr. Cash, $30,000. c) Dr. Common Shares, $28,000; Dr. Contributed Surplus, $2,000; Cr. Cash, $30,000. d) Dr. Common Shares, $28,000; Dr. Retained Earnings, $2,000; Cr. Cash, $30,000. Answer: d Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application 15-59 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: avg issue price $1,050,000 ÷ 75,000 = $14, Dr C/S 2,000 x $14 = $28,000

*117. At December 31, 2022, the balance in Helsinki Ltd.’s retained earnings account was $420,000. During 2023, Helsinki had the following transactions: Acquired 5,000 treasury shares at $27 a share. The shares are no par and had originally been issued for $24 per share. There had been no previous treasury shares transactions. Sold the 5,000 treasury shares at $32 a share. Reported net income of $150,000. The balance in retained earnings at December 31, 2023 would be a) $555,000. b) $570,000. c) $585,000. d) $610,000. Answer: b Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $420,000 + $150,000 = $570,000

*118. I At December 31, 2022, the balance in Helsinki Ltd.’s retained earnings account was $420,000. During 2023, Helsinki had the following transactions: Acquired 5,000 treasury shares at $27 a share. The shares are no par and had originally been issued for $24 per share. There had been no previous treasury shares transactions. Sold the 5,000 treasury shares at $32 a share. Reported net income of $150,000. Instead, assume Helsinki cancelled the 5,000 shares when it acquired them. The balance in retained earnings at December 31, 2023 would then be a) $555,000. b) $570,000. c) $585,000. d) $610,000. Answer: a Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting 15-60 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: $420,000 – (5,000 × ($27 – $24)) + $150,000 = $555,000

*119. At December 31, 2022, the balance of Glasgow Ltd.’s retained earnings account was $450,000. During 2023, the company had the following transactions: Acquired 5,000 treasury shares at $75 per share. The shares are no par value and had originally been issued for $65 per share. There had been no previous treasury share transactions. Net income for 2023 was $400,000. Sold the 5,000 treasury shares at $80 per share. What is the balance in retained earnings at December 31, 2023? a) $900,000 b) $850,000 c) $775,000 d) $762,500 Answer: b Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $450,000 + $400,000 = $850,000. Sale of treasury shares above cost has no effect on R/E.

*120. On January 1, 2023, Bratislava Corporation had 110,000 no par value common shares outstanding, which had been issued at $5 each. On June 1, the corporation acquired 10,000 shares to be held in the treasury. On December 1, when the market price of the shares was $4, the corporation declared a 10% stock dividend to be issued to shareholders of record on December 16. What was the impact of the 10% stock dividend on the retained earnings account? a) $50,000 decrease b) $44,000 decrease c) $40,000 decrease d) no effect Answer: c Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 15-61 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: (110,000 – 10,000) x 10% x $4 = $40,000 decrease

*121. On December 31, 2022, the shareholders' equity section of Kay Inc. was as follows: Common shares, no par value: authorized 30,000 shares; issued and outstanding 9,000 shares ............................................... $206,000 Retained earnings..................................................................................... 261,000 Total shareholders' equity ............................................................... $467,000 On March 31, 2023, when the market value of Kay’s shares was $27 per share, the corporation declared a 20% stock dividend, and accordingly 1,800 additional shares were issued. For the three months ended March 31, 2023, Kay reported a net loss of $48,000. The balance of Kay’s retained earnings at March 31, 2023, should be a) $164,400. b) $213,000. c) $216,600. d) $261,600. Answer: a Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $261,000 – $48,000 – 1,800 × $27 = $164,400

*122. In 2023, Elle Corp. acquired 9,000 of its own no par value common shares at $18 per share, to be held in the treasury. In 2024, Elle sold 6,000 of these shares at $25 per share. What accounts and what amounts should Elle credit in 2024 to record this sale? Treasury Contributed Retained Common Shares Surplus Earnings Shares a) $108,000 $42,000 b) $108,000 $42,000 c) $108,000 $42,000 d) $42,000 $108,000 Answer: b Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 15-62 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: (6,000 × $18) = $108,000; (6,000 × $7) = $42,000

*123. For a two-year period following a properly implemented financial reorganization, Grant Corporation operated profitably and paid dividends equal to 10% of its net income in each year. How could one determine that the financial reorganization had occurred? a) could not unless comparative statements of financial position were presented b) from the shareholders’ equity section c) by the conservative dividend policy d) from the disclosure of the reorganization in the notes to the financial statements Answer: d Difficulty: Medium Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*124. Immediately after a financial reorganization, the retained earnings account a) has a zero balance. b) remains the same as it was before the financial reorganization. c) is frozen and dated, and subsequent transactions will be shown separately. d) has a debit balance equal to the write down of the assets which were overstated. Answer: a Difficulty: Easy Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*125. Which of the following statements is FALSE concerning the requirements that must be fulfilled under a financial reorganization? a) The corporation’s shareholders must approve the financial reorganization. b) Immediately after the financial reorganization, the corporation must have a credit balance in retained earnings. c) New asset valuations should not deliberately over- or understate assets or liabilities. d) The corporation may have additional contributed surplus arising from the financial reorganization. Answer: b 15-63 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*126. Which of the following statements is correct? a) IFRS gives specific guidance for reacquisition of shares. b) IFRS does not give explicit guidance for accounting for financial reorganizations. c) IFRS requires that changes in retained earnings are presented in a retained earnings statement, and that changes in capital accounts are given in the notes. d) ASPE does not give guidelines for accounting for financial reorganizations. Answer: b Difficulty: Easy Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*127. Which statement is FALSE regarding financial reorganizations? a) The proposed reorganization should receive the approval of the corporation’s shareholders before it is put into effect. b) The new asset and liability valuations should be fair. c) Subsequent to the financial reorganization, no disclosures are required in subsequent periods. d) After the reorganization, the corporation must have a zero balance in the Retained Earnings account. Answer: c Difficulty: Easy Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*128. The balances in Belfast Inc.’s shareholders’ equity accounts at December 31, 20230 are: Common shares, no par, 50,000 authorized, 40,000 outstanding ............ $1,300,000 15-64 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Retained earnings (deficit) ......................................................................... (364,000) At this, time, a financial reorganization was approved. Equipment was written down $101,800, and inventory increased $5,800. As the first step of the reorganization, how much should the Common Shares account be adjusted by? a) $364,000 b) $400,000 c) $460,000 d) $1,000,000 Answer: a Difficulty: Medium Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $364,000, the amount of the deficit

*129. The balances in Belfast Inc.’s shareholders’ equity accounts at December 31, 20230 are: Common shares, no par, 50,000 authorized, 40,000 outstanding ............ $1,300,000 Retained earnings (deficit) ......................................................................... (364,000) At this, time, a financial reorganization was approved. Equipment was written down $101,800, and inventory increased $5,800. What is the net increase in the deficit from revaluation of assets? a) $0 b) $96,000 c) $101,800 d) $107,600 Answer: b Difficulty: Medium Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $101,800 – $5,800 = $96,000

*130. The balances in Belfast Inc.’s shareholders’ equity accounts at December 31, 20230 are: Common shares, no par, 50,000 authorized, 40,000 outstanding ............ $1,300,000 Retained earnings (deficit) ......................................................................... (364,000) At this, time, a financial reorganization was approved. Equipment was written down $101,800, and 15-65 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

inventory increased $5,800. What will the balance in retained earnings be after the reorganization? a) $936,000 b) $(460,000) c) $(268,000) d) $0 Answer: d Difficulty: Medium Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: RE should always have a $0 balance after reorganization

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 15-131 Share subscriptions Kanye Corp. offers shares on a subscription basis to selected individuals, giving them the right to purchase 25 common shares at a price of $20 per share. On March 1, one hundred individuals accept the company’s offer and agree to pay 50% down and the remaining 50% at the end of six months. Instructions a) Prepare the journal entries required on Mar 1 b) Prepare the journal entries required on September 1. Solution 15-131 a) Subscriptions Receivable (25 x $20 x 100) .................................................. Common Shares Subscribed .................................................................

50,000 50,000

Cash ($50,000 x 50%) .................................................................................. Subscriptions Receivable ......................................................................

25,000

b) Cash ............................................................................................................. Subscriptions Receivable ......................................................................

25,000

Common Shares Subscribed ...................................................................... Common Shares.....................................................................................

50,000

25,000

50,000

Ex. 15-132 Lump sum issuance of shares Bertram Corp. is authorized to issue 15,000 no par value common shares and 5,000 no par value preferred shares. On January 16, 2023, the corporation sold 50 common shares and 75 preferred shares for a lump sum of $9,000. The common were selling at $50 and the preferred at $100. Instructions Using the relative fair value method, prepare the entry to record the sale for cash. Show calculations. Solution 15-132 Cash .................................................................................................................. Common Shares..................................................................................... Preferred Shares ....................................................................................

9,000 2,250 6,750

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Calculations: Common ($2,500 ÷ $10,000) × $9,000 = $2,250 Preferred ($7,500 ÷ $10,000) × $9,000 = $6,750 Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Ex. 15-133 Shareholders’ equity Indicate the effect of each of the following transactions on total shareholders' equity by placing an "X" in the appropriate column. Increase Decrease No Effect 1. Declaration of a cash dividend.

_________

2. Operating loss for the period.

_________

3. Retirement of bonds at more than carrying value.

_________

4. Declaration of a stock dividend.

_________

5. Exchanging common shares for machinery.

_________

6. Conversion of bonds into common shares.

_________

7. Not declaring a dividend on cumulative preferred shares.

_________

8. Payment of a cash dividend.

_________

Increase

Decrease X

No Effect

1. Declaration of a cash dividend. 2. Operating loss for the period.

3. Retirement of bonds at more than carrying value.

Solution 15-133

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

4. Declaration of a stock dividend.

5. Exchanging common shares for machinery.

6. Conversion of bonds into common shares.

7. Not declaring a dividend on cumulative preferred shares.

8. Payment of a cash dividend.

Ex. 15-134 Share subscriptions On April 28, 2023, Sweden Inc. accepted subscriptions for 10,000 of its no par value common shares. At this time, the shares were selling for $45 each. A 40% down payment was received with the remainder due in six months. On October 28, 2023 the balance of the subscription price was received, and the shares were issued. Instructions a) Prepare the journal entries required on April 28, 2023. b) Prepare the journal entries required on October 28, 2023. Solution 15-134 a) Subscriptions Receivable (10,000 x $45) ................................................. Common Shares Subscribed ............................................................

450,000 450,000

Cash ($450,000 x 40%) .............................................................................. Subscriptions Receivable .................................................................

180,000

Cash........................................................................................................... Subscriptions Receivable .................................................................

270,000

Common Shares Subscribed.................................................................... Common Shares ...............................................................................

450,000

180,000

270,000

450,000

Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. 15-69 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 15-135 Shares issued in noncash transactions and trading on equity Clean Air Technologies Inc. is a new start-up company with limited available cash. The company is in desperate need of a controller, but currently cannot afford to pay one. The company knows that you are studying to be an accountant and approaches you to help them out in exchange for shares. Instructions a) Explain to Clean Air for the different options available for share valuation. b) CRITICAL THINKING: The management team at Clean Air has also hear something about “trading on equity” as a source of financing. Explain to the management team what trading on equity is and whether, as a new start-up company this would be an option for Clean Air Tech. Solution 15-135 a) The general rule to be applied when shares are issued for services or assets other than cash is that the shares be recorded at either their fair value or the fair value of the services or assets, whichever is more clearly determinable. If neither is readily determinable, the value to be assigned is generally established by the board of directors. b) CRITICAL THINKING: When the rate of return on total assets is lower than the rate of return on the common shareholders’ investment, the company is said to be trading on the equity at a gain. Trading on the equity is the practice of using borrowed money at fixed interest rates or issuing preferred shares with constant dividend rates in anticipation of obtaining a higher rate of return on the money used. (This is sometimes also referred to as leverage.) Since the company is brand new and there is currently not established, this would not be an option. Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Ex. 15-136 Reacquisition of shares Norway Corp. originally sold 1,000,000 of its no par common shares at $13 a share. Later, Norway bought back 6,000 shares of these shares at $17 a share. Norway is incorporated under the CBCA and retired these shares. Instructions a) Record the retirement of the shares. 15-70 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CRITICAL THINKING: Explain why Norway may wish to re-purchase its shares? In repurchasing its shares explain the effect on net income for Norway Corp. Explain how Norway Corp. would have recorded the entry if the purchase price was less than the carrying value of the shares?

Solution 15-136 a) Common Shares (6,000 x $13) .................................................................. Retained Earnings .................................................................................... Cash (6,000 x $17) .............................................................................

78,000 24,000 102,000

b) Critical Thinking: Norway Corp may wish to repurchase its shares for any one of the following reasons: 1. To increase earnings per share and return on equity. 2. To provide shares for employee share compensation contracts or to meet potential merger needs. 3. To stop takeover attempts or to reduce the number of shareholders. 4. To make a market in the share. By purchasing shares in the marketplace, management creates a demand that may stabilize the share price or, in fact, increase it. 5. To return cash to shareholders. There is no effect on net income as a result of the reacquisition and cancellation of shares. If the acquisition cost of the shares (purchase price) is less than the carrying value of the shares, the acquisition cost should be allocated (debited) to share capital, in an amount equal to the par, stated, or average value of the shares, with the difference allocated (credited) to contributed surplus. Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 15-137 Determination of dividend amount Describe some of the factors that a board of directors may consider when determining the amount of cash dividends to declare. Solution 15-137 Some factors are: 1. agreements (bond and loan covenants) with creditors that require the retention of retained earnings 2. desire to use profits to reinvest in and expand the business 3. desire to have a smooth dividend stream even if income stream is not smooth 4. desire to build up a safety margin for losses or errors 5. availability of cash to pay the dividend (liquidity) 15-71 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ex. 15-138 Stock dividends and retained earnings Describe the accounting treatment for the declaration of a common stock dividend. What effect would this have on retained earnings? What items increase / decrease retained earnings? Solution 15-138 If the issuing corporation is incorporated under the CBCA, the declaration would result in the transfer from retained earnings to contributed capital of an amount equal to the market value of each new share issued. Retained Earnings is debited for the total amount transferred; Common Stock Dividend Distributable is credited for the same amount. If the dividend is less than 20–25%, it is considered a small stock dividend, and would be treated this way. If, however, the stock dividend is greater than 20–25%, it is called a large stock dividend, and if the issuing corporation is not incorporated under the CBCA, it can choose to account for it like a small stock dividend, but measure at either the market value or the par or stated value of the shares, OR it can treat it as a stock split (memo entry only). In the U.S., the SEC supports treating a large stock dividend as a split. In Canada, there is no specific guidance, thus professional judgement must be used, although there may be legal constraints to consider. Items that increase retained earnings are net incomes, prior period adjustments (error corrections), financial reorganization, and certain changes in accounting principle. Items that decrease retained earnings are net losses, cash, property and most stock dividends, some treasury shares transactions, prior period adjustments (error corrections), and certain changes in accounting principle. Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 15-139 Stock dividends and stock splits Indicate the principal effects of a stock dividend versus a stock split as they affect the issuing 15-72 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

corporation. Respond in the spaces as follows: "C" for change; "NC" for no change. Stock dividend Stock split Legal capital _________ _________ Number of shares outstanding _________ _________ Total shareholders’ equity _________ _________ Retained earnings _________ _________ Composition of shareholders' equity _________ _________ Solution 15-139 Legal capital Number of shares outstanding Total shareholders’ equity Retained earnings Composition of shareholders' equity

Stock dividend C C NC C C

Stock split NC C NC NC NC

Ex. 15-140 Dividends on preferred shares On December 31, 2023, the shareholders' equity of Finland Corporation shows the following: Preferred shares—$6, no par, 8,000 shares outstanding ........................ $ 400,000 Common shares—no par, 60,000 shares outstanding ............................ 800,000 Retained earnings..................................................................................... 240,000 Total shareholders' equity ............................................................... $1,440,000 Assume that preferred dividends were last paid on December 31, 2021, and that all the company's retained earnings are to be paid out in dividends on December 31, 2023. Instructions If the preferred shares are cumulative and fully participating, how much should each class of shares receive? Solution 15-140 Dividends in arrears ($6 × 8,000) ..................... Current year's dividends (1:2) ......................... Participating dividend (1:2) .............................

Preferred $ 48,000 48,000 16,000 $112,000

Common $ — 96,000 32,000 $128,000

Total $ 48,000 144,000 48,000 $240,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ex. 15-141 Dividends on preferred shares In each of the following independent cases, it is assumed that the corporation has outstanding 20,000, $0.80, preferred shares, with a carrying value of $200,000, and 80,000 common shares, with a carrying value of $800,000. Although dividends have been paid regularly up to 2020, no dividends were declared in 2021 or 2022. 1. At December 31, 2023, the board of directors wants to distribute $125,000 in dividends. How much will the preferred shareholders receive if their shares are cumulative and nonparticipating? 2. At December 31, 2023, the board of directors wants to distribute $200,000 in dividends. How much will the preferred shareholders receive if their shares are cumulative and participating up to 15% in total? 3. On December 31, 2023, the preferred shareholders received an $80,000 dividend on their shares, which are cumulative and fully participating. How much money was distributed in total for dividends? Solution 15-141 1. $48,000 (0.80 x 20,000 x 2) + (0.80 x 20,000 x1) 2.

$62,000 Dividends in arrears.............................................. Current year's dividends ...................................... Participating dividend 1:4 ....................................

Preferred $32,000 16,000 14,000 $62,000

$272,000 ($192,000 to common and $80,000 to preferred) Preferred Dividends in arrears.............................................. $32,000 Current year's dividends ...................................... 16,000 Participating dividend 1:4 .................................... 32,000 $80,000

Common $ — 64,000 74,000 $136,000

Total $32,000 80,000 88,000 $200,000

Common Total $ —$32,000 64,000 80,000 128,000 160,000 $192,000 $272,000

Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement 15-74 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 15-142 Dividends on preferred shares At December 31, 2023, Russia Inc. has outstanding the following shares: 5,000, $3.20, no par value preferred shares with a carrying value of $200,000, and 40,000 no par value common shares with a carrying value of $600,000. No dividends have been paid since December 31, 2020. The corporation now desires to distribute $120,000 in dividends. Instructions Calculate how much the preferred and common shareholders will receive if the preferred shares are cumulative and fully participating. Solution 15-142 Preferred Dividends in arrears (5,000 × $3.20 × 2) ............... $32,000 Current year's dividends (5,000 × $3.20) 1:3 ratio16,000 48,000 Participating dividend (1:3) .................................. 6,000 $54,000

Common $ — 64,000 18,000 $66,000

Total $ 32,000 24,000 $120,000

Ex. 15-143 Dividends on preferred shares Lithuania Corp. has been authorized to issue 20,000 no par value, $6, cumulative and fully participating preferred shares and 100,000 no par value common shares. The account balances at December 31, 2023 are: $6 Preferred shares, 4,000 shares outstanding ....................................... $ 400,000 Common shares, 60,000 shares outstanding .......................................... 1,600,000 No dividends have been paid since December 31, 2019. The corporation now desires to pay $280,000 in dividends. Instructions Calculate how much the preferred and common shareholders will receive. Solution 15-143 15-75 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Dividends in arrears (4,000 × $6 x 3)..................... Current year's dividends (1:4) .............................. Participating dividend (1:4) ..................................

Preferred $ 72,000 24,000 17,600 $113,600

Common $ — 96,000 70,400 $166,400

Total $ 72,000 120,000 88,000 $280,000

Ex. 15-144 Lump sum issuance of par value shares Chile Corp. issued 2,000 common shares and 400 preferred shares to an investor for $72,000 cash. Instructions a) Prepare the journal entry for the issuance, assuming the par value of the common shares was $5 and the market value was $30, and the par value of the preferred shares was $40 and the market value was $50. b) Prepare the journal entry for the issuance, assuming the same facts as a), except the preferred shares have no ready market and the common shares have a market value of $24. Solution 15-144 a) Use the relative fair value method. Cash........................................................................................................... Common Shares (2,000 x $5) ............................................................ Contributed Surplus—Common ($54,000 – $10,000) ...................... Preferred Shares (400 x $40) ............................................................. Contributed Surplus—Preferred ($18,000 – $16,000) ...................... Common $30 × 2,000 = Preferred $50 × 400 =

60 ÷ 80 × $72,000 = 20 ÷ 80 × $72,000 =

$60,000 20,000 $80,000 $54,000 18,000 $72,000

72,000 10,000 44,000 16,000 2,000

market value Common Preferred

Use the residual method. Cash........................................................................................................... Common Shares (2,000 x $5) ............................................................ Contributed Surplus—Common ($48,000 – $10,000) ......................

72,000 10,000 38,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Preferred Shares (400 x $40) ............................................................. Contributed Surplus—Preferred (balance) ......................................

16,000 8,000

Ex. 15-145 True or false questions Indicate True or False by writing T or F in the space provided. ___

a) Common Shares Subscribed is a current asset.

___

b) A stock split does not require a formal journal entry.

___

c) Bad debt expense is recognized on defaulted subscriptions.

___

d) The date of declaration for a dividend precedes the date of payment, but follows the date of record.

___

e). Retained earnings is part of contributed capital.

___

g) Stock dividends always involve the transfer of some per share amount of retained earnings to share capital.

___

h) At one time a nationally known distillery annually distributed a bottle of "its finest" to its shareholders for every 10 shares outstanding; this was a property dividend.

Stock dividends distributable should be classified as a current liability.

Solution 15-145 a) F b)

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. 15-146 Basis share rights and share capital What are the three basic or inherent rights, if there are no restrictive provisions, each share provides? What is the fourth right allowed by the CBCA for a corporation? What is the capital provided by share purchases called? Identify and explain any other types of capital the company may accumulate. Compare and contrast the two. Solution 15-146 If there are no restrictive provisions, each share gives the following three basic or inherent rights: 1. To share proportionately in profits and losses 2. To share proportionately in management (that is, the share gives the right to vote for directors) 3. To share proportionately in the corporate assets upon liquidation of the corporation The CBCA allows a corporation to assign a fourth right: the right to share proportionately in any new issues of shares of the same class. This right is known as a pre-emptive right. Contributed (paid-in) capital is the total amount that shareholders provide to the corporation for it to use in the business. Earned capital is the capital that is created by the business operating profitably. It consists of all undistributed income that remains invested in the enterprise. The distinction between paid-in capital and earned capital is important from both legal and economic points of view. Legally, there are restrictions on dividend payouts. These were discussed earlier in the chapter. Economically, management, shareholders, and others want to see earnings for the corporation’s continued existence and growth. Difficulty: Easy Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure and Analysis. CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication 15-78 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*Ex. 15-147 Calculation of selected financial ratios Cuba Corp. provides the following information for 2023: Preferred shares, 8%, par value $100, cumulative, callable: Call price per share ........................................................................... Shares outstanding........................................................................... Dividends in arrears .......................................................................... Common shares, no par value: Shares issued .................................................................................... Dividends paid per share .................................................................. Market price per share ...................................................................... Carrying value ................................................................................... Retained earnings (after closing) ............................................................. Treasury shares (common) ...................................................................... Number of treasury shares held ....................................................... Net income for 2023 .................................................................................

$105 5,000 none 60,000 $1.60 $36.00 $800,000 $175,000 $125,000 5,000 $260,000

Instructions Calculate the following (assume no changes in share account balances during 2023): a) Total amount of shareholders’ equity on the December 31, 2023 statement of financial position b) Earnings per share c) Price earnings ratio of common shares d) Payout ratio of common shares e) Book value per common share *Solution 15-147 a) (5,000 × $100) + $800,000 + $175,000 – $125,000 = $1,350,000 b)

[$260,000 – (5,000 × $100 × 8%)] ÷ (60,000 – 5,000) = $220,000 ÷ 55,000 = $4.00

$36 ÷ $4 = 9

[($1.60 × 55,000) ÷ ($260,000 – $40,000)] = 40% OR dividend per share divided by EPS $1.60 ÷ $4 = 40%

[($1,350,000 – 5,000 x $105) ÷ (60,000 – 5,000)] = $825,000 ÷ 55,000 = $15

Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application 15-79 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

*Ex. 15-148 Treasury shares At December 31, 2022, Ukraine Ltd.’s statement of financial position reported the following: Common shares, no par value, 5,000 shares outstanding ...................... $115,000 Retained earnings..................................................................................... 200,000 The following transactions occurred during 2023: 1. Purchased 140 common shares at $30 per share, to be held as treasury shares 2. Sold 120 treasury shares at $32 per share 3. Retired the remaining treasury shares Instructions Prepare journal entries for these transactions. *Solution 15-148 1. Treasury Shares (140 x $30) ..................................................................... Cash ...................................................................................................

4,200

Cash (120 x $32) ........................................................................................ Treasury Shares (120 x $30) .............................................................. Contributed Surplus .........................................................................

3,840

Common Shares 20 x ($115,000 ÷ 5,000) ................................................. Contributed Surplus ................................................................................. Treasury Shares (20 x $30) ................................................................

460 140

4,200

3,600 240

600

Difficulty: Medium Learning Objective: Explain how to account for par value and treasury shares. Section Reference: Par Value and Treasury Shares (Appendix 15A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Ex. 15-149 Treasury shares Zambia Ltd. currently has 150,000 no par value common shares outstanding, with a carrying value of $3,900,000. Instructions Record the following transactions: a) Purchased 1,500 common shares at $29 per share, to be held as treasury shares b) Sold 800 treasury shares at $30 a share c) Retired the rest of the treasury shares 15-80 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*Solution 15-149 a) Treasury Shares (1,500 x $29)................................................................... Cash ...................................................................................................

43,500

Cash (800 x $30) ........................................................................................ Treasury Shares (800 x $29) .............................................................. Contributed Surplus .........................................................................

24,000

Common Shares [(700 x ($3,900,000 ÷ 150,000)] ..................................... Contributed Surplus (maximum) ............................................................. Retained Earnings (difference) ................................................................ Treasury Shares (700 x $29) ..............................................................

18,200 800 1,300

43,500

23,200 800

20,300

*Ex. 15-150 Financial reorganization The following shareholders’ equity accounts were reported by India Inc. at December 31, 2023. Common shares, no par value, 10,000 shares outstanding .................... $720,000 Retained earnings (deficit) ....................................................................... (247,000) A financial reorganization was approved by the management team. Equipment is to be written down by $68,000, and inventory increased by $5,200. Instructions Prepare the required journal entries for the financial reorganization. *Solution 15-150 Common Shares ............................................................................................... Inventory .......................................................................................................... Equipment ................................................................................................ Common Shares ............................................................................................... Retained Earnings (Deficit).......................................................................

62,800 5,200 68,000 247,000 247,000

Difficulty: Medium Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 15-81 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 15-151 Reacquisition of shares Transfixed Corporation has 300,000 no par value common shares authorized, issued and outstanding which were all issued at $40 per share. On February 28, 2023, Transfixed reacquired 6,000 shares at a cost of $38 per share. On October 20, 2023, the company purchased and cancelled an additional 4,000 shares. The purchase cost was $44 per share. Instructions Prepare the journal entries to record the reacquisition of shares. Solution 15-151 Feb 28 Common Shares ............................................................................... Cash ........................................................................................... Contributed Surplus..................................................................

240,000 228,000 12,000

Common shares = $40 x 6,000 = $240,000; Cash = $38 x 6,000 = $228,000; Contributed surplus = $240,000 – $228,000 = $12,000 Oct 20

Common Shares ............................................................................... Contributed Surplus ......................................................................... Retained Earnings ............................................................................. Cash ...........................................................................................

160,000 12,000 4,000 176,000

Common shares = $40 x 4,000 = $160,000; Cash = $44 x 4,000 = $176,000; Retained earnings = $176,000 – $160,000 – $12,000 = $4,000 Contributed surplus = $176,000 – $160,000 – $4,000 = $12,000 Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 15-152 Issuance of shares for cash, noncash consideration, and by subscription Presented below is information related to Rhodesia Corp.: 1. Rhodesia is granted a charter that authorizes issuance of 100,000 no par value preferred shares and an unlimited number of no par value common shares. 2. 10,000 common shares are issued for land with a fair value of $400,000. 3. 3,000 preferred shares are sold for cash at $110 per share. 4. Rhodesia issues 100 common shares to its lawyer for costs associated with legal services when starting the company. At this time, the common shares are selling at $60 per share. 5. Rhodesia issues shares on a subscription basis, giving each subscriber the right to purchase 300 15-83 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

common shares at a price of $65 per share. Fifty individuals accept the company's offer and agree to pay 10% down and the remainder in three equal instalments. The final instalment payment (for the subscriptions) is received and the shares are issued.

Instructions Prepare the required general journal entries to record these transactions. Solution 15-152 1. No entry necessary. 2.

Land .......................................................................................................... Common Shares ...............................................................................

400,000

Cash (3,000 x $110) ................................................................................... Preferred Shares ...............................................................................

330,000

Legal Expense (100 x $60)......................................................................... Common Shares ...............................................................................

6,000

Subscriptions Receivable (50 x 300 x $65) ............................................... Common Shares Subscribed ............................................................

975,000

Cash (10% x $975,000) .............................................................................. Subscriptions Receivable .................................................................

97,500

Cash ($975,000 – 97,500)/ 3 ...................................................................... Subscriptions Receivable ................................................................. First instalment

292,500

Cash [($975,000 – $97,500) x 1 ÷ 3] ........................................................... Subscriptions Receivable ................................................................. Third and final instalment

292,500

Common Shares Subscribed.................................................................... Common Shares ...............................................................................

975,000

400,000

330,000

6,000

975,000

97,500

292,500

975,000

Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application 15-84 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Pr. 15-153 Issuance of shares for cash, noncash consideration, and by subscription Dahomey Corp. is authorized to issue an unlimited number of no par common shares. Prepare the journal entries for the following transactions: 1. Sold 600,000 shares for $10 cash each, which was the fair market value of the shares. 2. Issued 80,000 shares and paid $140,000 cash in total payment for a piece of land. The market value of the shares had not changed. 3. Received subscriptions for 40,000 shares at $18 per share; received 60% of the subscription price in cash. 4. Received the balance of the subscriptions receivable. Solution 15-153 1. Cash (600,000 x $10) ................................................................................. Common Shares ................................................................................ 2.

6,000,000 6,000,000

Land .......................................................................................................... Cash .................................................................................................... Common Shares (80,000 x $10) .........................................................

940,000

Subscriptions Receivable (40,000 x $18) ................................................. Common Shares Subscribed .............................................................

720,000

Cash ($720,000 x 60%) .............................................................................. Subscriptions Receivable ..................................................................

432,000

Cash ($720,000 x 40%) .............................................................................. Subscriptions Receivable ..................................................................

288,000

Common Shares Subscribed.................................................................... Common Shares ................................................................................

720,000

140,000 800,000

720,000

432,000

288,000

720,000

Pr. 15-154 Allocation of cash dividends Togo Inc. has the following shares outstanding: 40,000, $0.80, no par value preferred shares...................... 60,000 no par value common shares ..................................

$400,000 $600,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

All shares were sold for $10 each. No dividends have been declared since December 31, 2020. It is now December 31, 2023, and the board of directors wants to distribute $204,000 in dividends. Instructions Calculate how much the preferred and common shareholders will receive under each of the following assumptions: a) The preferred is noncumulative and non-participating. b) The preferred is cumulative and non-participating. c) The preferred is cumulative and fully participating. d) The preferred is cumulative and participating to 12% total. Solution 15-154 a) Current year's dividend $.80 × 40,000.................. Remainder to common ........................................

Preferred $32,000

Common $ — 172,000 $172,000

Total $ 32,000 172,000 $204,000

$96,000

Common $ — — 108,000 $108,000

Total $ 64,000 32,000 108,000 $204,000 Total $ 64,000 80,000 60,000 $204,000

$32,000 b)

.............................................................................. Dividends in arrears, $.80 × 40,000 x 2 ................. Current year's dividend ........................................ Remainder to common ........................................

Preferred $64,000 32,000

............................................................................... Dividends in arrears, $.80 × 40,000 x 2 ................. Current year's dividend 2:3 ratio ......................... Participating dividend 6% ($60,000 ÷ $1,000,000)

Preferred $ 64,000 32,000 24,000 $120,000

Common $ — 48,000 36,000 $84,000

Preferred $ 64,000 32,000 16,000 — $112,000

Common Total $ —$ 64,000 48,000 80,000 24,000 40,000 20,000 20,000 $92,000 $204,000

* basic PFD dividend is $.80 ÷ $100 = 8% Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application 15-86 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Pr. 15-155 Share retirement and stock dividends Sudan Enterprises Inc. reported the following shareholder’s equity at December 31, 2022: Contributed Capital Preferred shares, $1, no par value, 100,000 shares authorized, cumulative, callable at $107 plus dividends in arrears; issued and outstanding, 20,000 shares ................................................................ $2,040,000 Common shares, no par, 100,000 shares authorized, 80,000 issued and outstanding ............................................................................ 640,000 Contributed surplus (retirement of common shares) ................................................. 120,000 Retained earnings......................................................................................................... 1,600,000 The following transactions took place in 2023: Jan 20 Redeemed 1,000 preferred shares at the call price. There were no dividends in arrears. Jan 28 Declared $100,000 in dividends. Use separate accounts for each class of dividends. Feb 28 Retired 8,000 common shares at $12 per share. Mar 2 Declared and distributed a 3% common stock dividend. The market value of the shares at that time was $11.50. Instructions Prepare journal entries for the 2023 transactions. Solution 15-155 Jan 20: Preferred Shares ($2,040,000 ÷ 20,000) × 1,000 ....................................... Retained Earnings .................................................................................... Cash ($107 × 1,000) ........................................................................... Jan 28: Retained Earnings .................................................................................... Preferred Dividends Payable (19,000 × $1) ...................................... Common Dividends Payable ($100,000 – $19,000) ..........................

102,000 5,000 107,000

100,000 19,000 81,000

Feb 28: Common Shares (8,000 × ($640,000 ÷ 80,000)) ........................................ Contributed Surplus (retirement of common shares) ............................ Cash (8,000 × $12) .............................................................................

64,000 32,000

Mar 2: Retained Earnings (72,000 × 3% × $11.50) ............................................... Common Shares ...............................................................................

24,840

96,000

24,840

Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. 15-87 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 15-156 Dividend distribution You have recently been appointed CEO of Dumbledore Ltd., a wholesale distributor of magic supplies. One day your CFO reminds you that next week you will have to make recommendations to the board of directors regarding this year’s annual dividend. This catches you totally by surprise. Luckily, the CFO was kind enough to provide you with some additional information. He shows you the projected income statement and balance sheet, without the effect of any dividend declaration. Income Statement: Sales ..................................................................................................... 44,000,000 COGS .................................................................................................... 29,400,000 Gross profit .......................................................................................... 14,600,000 Operating expenses ............................................................................. 6,000,000 Operating income before interest ...................................................... 8,600,000 Interest expense .................................................................................. 1,000,000 Income before tax................................................................................ 7,600,000 Income tax (30%) ................................................................................. 2,300,000 Net income........................................................................................... 5,300,000 Statement of Financial Position: Current Assets Cash...................................................................................................... Accounts receivable ............................................................................ Inventory .............................................................................................. Other .................................................................................................... Total Current Assets ............................................................................

4,000,000 5,000,000 2,000,000 3,700,000 14,700,000

Long-term investments .......................................................................

7,000,000

Property, plant, and equipment (net)................................................. Total Assets ..........................................................................................

17,000,000 38,700,000

Current Liabilities Accounts payable ................................................................................ Accrued liabilities ................................................................................ Other .................................................................................................... Total Current Liabilities .......................................................................

2,000,000 3,000,000 4,000,000 9,000,000

Non-current liabilities .........................................................................

16,000,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Shareholders’ Equity Common shares................................................................................... Contributed surplus ............................................................................ Retained earnings (includes this year’s net income) ......................... Total Shareholders’ Equity..................................................................

1,000,000 4,900,000 7,800,000 13,700,000

Total Liabilities and Equity .........................................................................

38,700,000

Other information: 1) Last year, the net income was $3,500,000, and $3,300,000 cash dividends were paid. 2) Dumbledore has two debt agreements that call for the corporation to maintain at least $2,500,000 in retained earnings, as well as maintain a debt-to-total-assets ratio of no more than 70%. 3) There has been no change in the number of shares outstanding during the year. You start to think about the recommendations you are going to make. It is the end of November, and historically the corporation has declared dividends five days before the end of the year. Instructions a) What factors will limit the amount to be distributed as dividends? b) CRITICAL THINKING: What are important considerations in your decision? What would you recommend? Provide any journal entry that is related to your decision. Solution 15-156 a) You need to determine how much can be distributed in dividends. Look at all your constraints. i) Retained earnings constraint. The debt covenant requires that Dumbledore must maintain $2,500,000 in retained earnings. The balance in retained earnings is currently $7,800,000, so the maximum dividend is $5,300,000. ii) Cash on hand constraint. As long as you do not decide to borrow additional cash, theoretically you could distribute all your cash on hand, so the dividend would be a maximum of $4,000,000. However, for practical purposes, the firm must maintain a certain level of cash for its day-to-day operations, so the actual dividend you can pay is lower. iii) Debt-to-total assets constraint. You can distribute dividends only to the point that this ratio does not exceed 70%. Currently, the ratio is 64.6% as total debt is $25,000,000 and total assets are $38,700,000. You are limited to distributing at most $3,000,000. This will bring the ratio to 70% = 25 ÷ 35.7. b)

CRITICAL THINKING: There are many considerations involved in this decision, and there is no single correct answer. Some of the main considerations are: i) Since Dumbledore distributed $3,300,000 in dividends last year, a dividend of “only” $3,000,000 will imply a dividend reduction. Firms are usually reluctant to lower dividends, so distributing $3,000,000 may not be good for shareholder relations or your image in the marketplace. ii) Even if you are not constrained, you might not want to make the dividend too large. True, this year the firm fared well, but if you distribute all the income as a dividend, and next year’s 15-89 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

income is lower, you would have to lower your dividend, which again is not desirable. iii) Another reason to not distribute a high dividend is that it might suggest the firm does not have future growth opportunities. A business should limit dividends if the retained capital can be invested in projects with high returns. If the business does not have such projects, it is better off to distribute the earnings. If the business still has good investment opportunities, then you do not want to send the wrong message. iv) Last year’s payout ratio was very high - 94.3% (3.3 ÷ 3.5). However, maintaining a high payout ratio might create the problems already mentioned. v) You need to make sure that after you distribute cash dividends, enough resources are available to pay current liabilities. Current ratio excluding cash = 10,700,000 ÷ 9,000,000 = 1.19, so the firm does seem to be able to meet its short-term obligations even if it distributes all its cash. vi) Another solution would be to distribute a cash dividend of $3,000,000 and then a stock dividend (e.g. for $1,000,000). This will allow Dumbledore to increase the overall dividends and not violate any of the constraints. However, since the stock dividend does not give cash to the shareholders, they might not appreciate it. vii) To be able to pay more cash dividends, you need to take some action. You could sell some non-current assets and use some of the proceeds to pay down on debt, and some to distribute as dividends. Suppose you sell a $4,000,000 asset at no gain and use $2,000,000 of the proceeds to reduce debt. The change to the balance sheet amounts is: Cash plus $2,000,000 Non-current assets minus $4,000,000 Liabilities minus $2,000,000 Debt is down to $23,000,000, total assets are down to $36,700,000, and cash is increased to $6,000,000. The-debt-to-total-assets constraint allows you to distribute dividends of up to $3,840,000 and you will have plenty of cash to do so. So if you declare a cash dividend of $3,800,000, you are able to increase the dividend but still satisfy all constraints. viii) Since Dumbledore has $7,000,000 in investments, given other constraints are satisfied, another consideration is a property dividend. ix) If time allows, the corporation could issue more shares, which will relax the debt-to-totalassets ratio and the cash constraint. Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. 15-157 Equity transactions Congo Corp. has the following capital structure at the beginning of this year: Preferred shares, $3, no par value, cumulative, 20,000 shares authorized, 15-90 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

6,000 shares issued and outstanding .............................................................. Common shares, no par value, 60,000 shares authorized, 40,000 shares issued and outstanding ............................................................ Total contributed capital................................................................................. Retained earnings.................................................................................................... Total shareholders' equity ..............................................................................

$ 300,000 510,000 810,000 340,000 $1,150,000

Instructions a) Record the following transactions which occurred consecutively this year. Show all calculations. i. There are no dividends in arrears. A total cash dividend of $90,000 was declared. The preferred shares are participating to a maximum of 10%. Record dividends payable to common and preferred shares in separate accounts. ii. A 10% common stock dividend was declared. The current market value of the common shares is $16 a share. iii. Net income for the year was $180,000. Record the closing entry. b) Incorporating all the above information, construct the shareholders' equity. Solution 15-157 a) i. Current year's dividend, $3 × 6,000* Participating dividend 4% Remainder to common

Preferred $18,000 12,000 $30,000

Common $30,600** 20,400 9,000 $60,000

Total $48,600 32,400 9,000 $90,000

*basic div is $3 ÷ $50 = 6% **6% x $510,000 Retained Earnings .................................................................................... Dividends Payable—Common .......................................................... Dividends Payable—Preferred ......................................................... ii.

90,000 60,000 30,000

40,000 x 10% x $16 = $64,000 Retained Earnings ............................................................................. Common Stock Dividend Distributable.................................

64,000

iii. Income Summary.............................................................................. Retained Earnings ..................................................................

180,000

64,000

Shareholders' equity Preferred shares, $3, no par value, cumulative, 20,000 shares authorized, 6,000 shares issued and outstanding .............................................................. Common shares, no par value, 60,000 shares authorized, 40,000 shares issued and outstanding ............................................................ Common stock dividend distributable ...................................................................

180,000

$ 300,000 510,000 64,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Total contributed capital................................................................................. Retained earnings***............................................................................................... Total shareholders' equity ..............................................................................

874,000 366,000 $1,240,000

***$340,000 – $90,000 – $64,000 + $180,000 = $366,000 Difficulty: Medium Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Section Reference: Recognition, Derecognition, and Measurement Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 15-158 Calculation of selected financial ratios Cuba Corp. provides the following information for 2023: Preferred shares, 8%, par value $100, cumulative, callable: Call price per share ........................................................................... Shares outstanding........................................................................... Dividends in arrears .......................................................................... Common shares, no par value: Shares issued .................................................................................... Dividends paid per share .................................................................. Market price per share ...................................................................... Carrying value ................................................................................... Retained earnings (after closing) ............................................................. Treasury shares (common) ...................................................................... Number of treasury shares held ....................................................... Shareholders’ equity, Dec 31 ................................................................... Net income for 2023 ................................................................................. Earnings per share .................................................................................... Price earnings ratio of common shares ................................................... Payout ratio .............................................................................................. Book value per common share ................................................................

$105 5,000 none 60,000 (a) (b) $800,000 $175,000 $125,000 5,000 (c) (d) $4.00 9 40% (e)

Instructions Complete the missing information. Solution 15-158 a) 40% x $4 = $1.60 b) 9 x $4 = $36 15-92 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) (5,000 × $100) + $800,000 + $175,000 – $125,000 = $1,350,000 d) [$X – (5,000 × $100 × 8%)] = $4.00 x (60,000 – 5,000) $X – $40,000 = $220,000 $X = $260,000 e) [($1,350,000 – 5,000 x $105) ÷ (60,000 – 5,000)] = $825,000 ÷ 55,000 = $15 Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure and Analysis. CPA: Communication CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. 15-159 Statement of Shareholders’ Equity Following is information provided by Timbuktu Inc. for its last two year ends:

Common Shares, no par value Common shares sold during year Accumulated Other Comprehensive Income Other Comprehensive Income for year (unrealized holding gain, after tax) Retained Earnings Net income for year

Balances at Dec 31, 2022 $300,000 60,000

Balances at Dec 31, 2023 ?? $ 50,000 ?? 30,000

50,000

?? 110,000

Instructions In good format, prepare a Statement of Shareholder’s Equity for the year ended December 31, 2023. Solution 15-159 TIMBUKTU INC. Statement of Shareholders’ Equity For the year ended December 31, 2023

Beginning balances Common shares sold Net income

Common Shares

Retained Earnings

$300,000 50,000

$ 50,000 110,000

Accumulated Other Comprehensive Income $60,000

Total Shareholders’ Equity $410,000 50,000 110,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Other comprehensive income Comprehensive income Ending balances

$350,000

$160,000

30,000

$90,000

$600,000

Pr. 15-160 Shareholders’ Equity Section and capital disclosures Mackenzie Corporation’s post-closing trial balance at December 31, 2023 was as follows: MACKENZIE CORPORATION Post-Closing Trial Balance December 31, 2023

Buildings Accounts receivable Land Inventories FV-NI investments Cash Treasury shares (15,000 common shares) Prepaid expenses Contributed surplus—Common Preferred shares Accounts payable Bonds payable Retained earnings Common shares Accumulated depreciation—Buildings Accumulated other comprehensive income Allowance for doubtful accounts Dividends payable on preferred shares Totals

Dr. $2,175,000 720,000 600,000 540,000 300,000 285,000 255,000 60,000

$4,935,000

Cr.

$2,190,000 750,000 465,000 450,000 301,500 300,000 277,500 150,000 45,000 6,000 $4,935,000

At December 31, 2023, Mackenzie had the following numbers for its common and preferred shares: Common

Preferred

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Authorized Issued Outstanding

900,000 300,000 285,000

90,000 15,000 15,000

The dividends on preferred shares are $7.50 cumulative and participating. Instructions a) Prepare the shareholders’ equity section of Mackenzie’s statement of financial position at December 31, 2023. The company follows IFRS. b) If the company followed ASPE, what types of disclosures would be required? Solution 15-160 a) Shareholders' equity: Preferred shares, no par value, $7.50, cumulative and participating, authorized, 90,000 shares; issued and outstanding 15,000 shares Common shares, no par value, authorized 900,000 shares; issued 300,000 shares, of which 15,000 are in treasury Contributed surplus—Common Retained earnings Accumulated other comprehensive income Less: Cost of treasury shares Total shareholders' equity

$ 750,000 300,000 2,190,000 301,500 150,000 3,691,500 (255,000) $3,436,500

b) ASPE disclosures include: 1. The authorized number of shares or a statement noting that this is unlimited. 2. The existence of unique rights (such as dividend preferences and the amounts of such dividends, redemption and/or retroaction privileges, conversation rights, and whether or not the dividends are cumulative). 3. The number of shares issued and amount received including those held by the entity or its subsidiaries or associates. 4. Whether the shares are par value or no par value. 5. The amount of any dividends in arrears for cumulative preferred shares. 6. Details of changes during the year. 7. Restrictions on retained earnings. 8. Any shares reserved for future issue including terms and amounts. Difficulty: Medium Learning Objective: Understand how shareholders’ equity is presented, disclosed and analyzed. Section Reference: Presentation, Disclosure, and Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*Pr. 15-161 Treasury share transactions Algeria Corp. currently has 5,000 no par value common shares outstanding, with a book value of $150,000. Instructions Record the share transactions given below: a) Bought 300 common shares at $31 each, to be held as treasury shares b) Sold 80 treasury shares at $30 c) Sold 40 treasury shares at $34 d) Retired the rest of the treasury shares *Solution 15-161 a) Treasury Shares (300 x $31) ................................................ Cash .............................................................................. b)

9,300 9,300

Cash (80 x $30) ..................................................................... Retained Earnings ............................................................... Treasury Shares (80 x $31) ...........................................

2,400 80

Cash (40 x $34) ..................................................................... Treasury Shares (40 x $31) ........................................... Contributed Surplus ....................................................

1,360

Common Shares [($150,000 ÷ 5,000) x (300 – 80 – 40)]....... Contributed Surplus (maximum) ........................................ Retained Earnings (balance) ............................................... Treasury Shares (180 x $31) .........................................

5,400 120 60

2,480

1,240 120

5,580

*Pr. 15-162 Financial reorganization Petroleum Products Inc. has the following account balances on March 31, 2023: Inventory. .................................................................................................. $375,000 Buildings (net) .......................................................................................... 675,000 Patents (net) ............................................................................................. 550,000 Bank Loan Payable ................................................................................... 325,000 Common shares, no par value, 10,000 shares outstanding .................... 850,000 Retained earnings (deficit) ....................................................................... (1,250,000)

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

In April 2023, management agrees to a financial reorganization. As part of the reorganization creditors are willing to forgive the debt in exchange for 100% of the outstanding shares. It is determined that assets have the following fair values: inventory $150,000, patent $250,000 and buildings $1,100,000. Instructions a) Prepare the required journal entries for the financial reorganization. b) The CEO is reviewing the journal entries and does not understand how these figures have been arrived at. Explain the steps used in the reorganization process. *Solution 15-162 Retained Earnings (deficit) .............................................................................. Inventory ($375,000 – $150,000) .............................................................. Patents ($550,000 – $250,000) .................................................................

525,000 225,000 300,000

Common shares ............................................................................................... Retained Earnings ($525,000+$1,250,000)...............................................

1,775,000

Buildings ($1,100,000 – $675,000) ................................................................... Bank Loan Payable ........................................................................................... Common Shares .......................................................................................

425,000 325,000

1,775,000

750,000

b) A financial reorganization consists of the following steps: 1. Any asset writedowns or impairments that existed prior to the reorganization should be recorded first. 2. The changes in debt and equity as negotiated are recorded. Often debt is exchanged for equity, resulting in a change in control. 3. The assets and liabilities are comprehensively revalued. This step assigns appropriate fair values to all assets and liabilities as per the negotiations. The difference between the carrying values prior to the reorganization and the new values after is known as a revaluation adjustment. The revaluation adjustment and any costs incurred to carry out the financial reorganization are accounted for as capital transactions and are closed to Share Capital, Contributed Surplus or a separately identified account within Shareholders’ Equity. The new costs of the identifiable assets and liabilities must not exceed the fair value of the entity if known. 4. The deficit balance (retained earnings) is brought to zero. The deficit is reclassified to Common Shares, Contributed Surplus or a separately identified account within Shareholders’ Equity. Difficulty: Medium Learning Objective: Explain how to account for a financial reorganization. Section Reference: Financial Reorganization (Appendix 15B) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 16 COMPLEX FINANCIAL INSTRUMENTS CHAPTER STUDY OBJECTIVES 1. Understand what derivatives are, how they are used to manage risks, and how to account for them. Derivatives are financial instruments that derive (get) their value from an underlying instrument. They are attractive because they transfer risks and rewards without having to necessarily invest directly in the underlying instrument. They are used for both speculative purposes (to expose a company to increased risks in the hope of increased returns) and for hedging purposes (to reduce existing risk). Financial risks include credit, currency, interest rate, liquidity, market, and other price risks. Credit risk is the risk that the other party to a financial instrument contract will fail to deliver. Currency and interest rate risk are the risk of a change in value and cash flows due to currency or interest rate changes. Liquidity risk is the risk that the company itself will not be able to honour a contract due to cash problems. Finally, market risk is the risk of a change in value and/or cash flows related to market forces. Derivatives are recognized on the SFP on the date the contract is initiated. They are remeasured, on each SFP date, to their fair value. The related gains and losses are recorded through net income. Written options create liabilities. Futures contracts require the company to deposit a portion of the contracts’ value with the broker/exchange. The contracts are marked to market by the broker/exchange daily and the company may have to deposit additional funds to cover deficiencies in the margin account. Purchase commitments that are net settleable and are not “expected use” contracts are accounted for as derivatives under IFRS. Under ASPE, purchase commitments are never accounted for as derivatives because they are not exchange-traded futures contracts. Exchangetraded derivatives relating to commodities are generally accounted for as derivatives under ASPE. Special hedge accounting may affect how derivatives are accounted for. Under IFRS, derivatives that are settleable in the entity’s own equity instruments are accounted for as equity (or contra equity) if they will be settled by exchanging a fixed number of equity instruments for a fixed amount of cash or other assets and they do not create an obligation to deliver cash or other assets. Otherwise, they are financial assets/liabilities. In general, if the instruments are net settleable or have settlement options, they most often do not meet the criteria for equity presentation and are therefore financial assets/liabilities. IFRS provides significantly more guidance with respect to the accounting for these instruments.

2. Analyze and account for hybrid/compound instruments from an issuer perspective. Complex instruments include compound and hybrid instruments where the legal form may differ from the economic substance. The economic substance dictates the accounting. The main issue is that of presentation: should the instrument be presented as debt or equity? The definitions of debt and equity are useful in analyzing this. It is also important to understand what gives the instruments their value from a finance or economic perspective. If an instrument has both debt and equity components, IFRS requires use of the residual value method in allocating the carrying value between the two 16-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

components. There are differences in measuring compound financial instruments under IFRS versus ASPE. Related interest, dividends, gains, and losses are treated in a way that is consistent with the SFP presentation. The method for recording convertible bonds at the date of issuance is different from the method that is used to record straight debt issues. As the instrument is a compound instrument and contains both debt and equity components, these must be measured separately and presented as debt and equity, respectively. Any discount or premium that results from the issuance of convertible bonds is amortized, assuming the bonds will be held to maturity. If bonds are converted into other securities, the principal accounting problem is to determine the amount at which to record the securities that have been exchanged for the bond. The book value method is often used in practice. ASPE allows an entity to value the equity portion of compound instruments at $0.

3. Describe and account for share-based compensation. Stock compensation includes direct awards of stock (when a company gives the shares to an employee as compensation), compensatory stock option plans whereby an employee is given stock options in lieu of salary, share appreciation rights (SARs), and performance-type plans. SARs and performance-type plans are discussed in Appendix 16B. Employee stock option plans are meant to motivate employees and raise capital for the company. They are therefore capital transactions. Compensatory stock option plans are operating transactions since they are meant to compensate the employee for service provided. CSOPs and direct awards of stock are measured at fair value (using an options pricing model) at the grant date. The cost is then allocated to expense over the period that the employee provides service.

4. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. The differences are noted in the comparison chart in Illustration 16.11. The stock-based compensation standards are largely converged and stable; however, the IASB has been working on several projects relating to financial instruments, including macro hedging.

5. Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Any company or individual that wants to protect itself against different types of business risk often uses derivative contracts to achieve this objective. In general, where the intent is to manage and reduce risk, these transactions involve some type of hedge. Derivatives are useful tools for this since they have the effect of transferring risks and rewards between the parties to the contract. Derivatives can be used to hedge a company’s exposure to fluctuations in interest rates, foreign currency exchange rates, equity, or commodity prices. Hedge accounting is optional accounting that ensures that properly hedged positions will reduce volatility in net income created by hedging with derivatives. It seeks to match gains and losses from hedged positions with those of the hedging items so that they may be offset. Since this is special accounting, companies must ensure that there is in fact a real hedge (that the contract insulates the company from economic loss or undesirable consequences) and that the hedge remains effective. Proper documentation of the risks and risk management strategy is important. Under IFRS, there are fair value hedges and cash flow hedges. A fair value hedge reduces risks relating to fair value changes of recorded assets and liabilities as well as purchase commitments. Cash flow 16-2 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

hedges protect against future losses due to future cash flow changes relating to exposures that are not captured on the SFP. ASPE does not discuss fair value or cash flow hedges but rather stipulates the accounting for certain types of specific hedge transactions. Properly hedged positions reduce income fluctuations because gains and losses are offset. Under IFRS, for cash flow hedges, the gains and losses on the hedging items are booked through other comprehensive income and are brought into net income in the same (future) period that the hedged items are booked to net income. For fair value hedges, hedge accounting adjusts the hedged asset to ensure that it is recognized and measured at fair value and that related gains/losses are booked through net income. Both types of hedges ensure that the gains/losses of the hedged and hedging positions offset. Under ASPE hedge accounting, the hedging item (which is generally a derivative) is not recognized on the balance sheet until the hedging item is settled. Thus both the hedged item (usually a future transaction) and the hedging item (the derivative) are off–balance sheet and there is no mismatch (Appendix 16A).

6. Account for share appreciation rights plans and performance-type plans. SARs are popular because the employee can share in increases in value of the company’s shares without having to purchase them. The increases in value over a certain amount are paid to the employee as cash or shares. Obligations to pay cash represent a liability that must be remeasured. The cost is therefore continually adjusted, with the measurement date being the exercise date. The related expense is spread over the service period. If the SARs are not exercised at the end of the service period, the liability must continue to be remeasured. Cash-settled SARs are measured using intrinsic values under ASPE and fair value (using options pricing models) under IFRS. Some SARs are settled using equity instruments. These are treated as equity and measured at fair value. ASPE allows an accounting policy choice as to how to measure equity-settled SARs. Performance-type plans are tied to performance (of the entity, the individual, or a group of individuals). There is therefore more measurement uncertainty (Appendix 16B).

7. Understand how options pricing models are used to measure financial instruments. Fair value is most readily determined where there is an active market with published prices. Where this is not the case, a valuation technique is used. More basic techniques included discounted cash flows. More complex techniques include options pricing models such as the Black-Scholes and binomial tree models. Where possible, valuation techniques should use available external inputs to ensure that they are more objective. Having said this, significant judgement goes into determining fair values using options pricing models (Appendix 16C).

8. Describe and analyze required fair value disclosures for financial instruments. Additional disclosures relating to fair values of financial instruments provide useful information about the reliability of fair value estimates. As discussed in earlier chapters, including chapters 2 and 3, the IASB has established a fair value hierarchy that ranks the reliability of the fair value measures. Note disclosures under IFRS require information about which financial instruments are classified as levels 1, 2, or 3 in the fair value hierarchy. Additional information is required to be disclosed where the financial instruments are Level 3 instruments because Level 3 measurements are less reliable.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer b d c c d a c b b d c a b c d b b a a a d b a b b d c b b c b a d a c a d a b c c b d

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Characteristics of derivatives Purpose of derivatives Definition of credit risk Types of market risks Speculator’s objective Arbitrageur’s objective Valuation of derivatives Recording gains on derivatives Meaning of writing an option Definition of a call option Definition of a put option Intrinsic value of an option Time value of an option Characteristics of a forward contract Characteristics of a futures contract Call/put options Liquidity risk Market risk Recording a call option Settlement of a call option Recording a forward contract Settlement of a forward contract Calculating the intrinsic value of an option Calculating the time value of an option Recording the adjusting entry for a call option Recording expiry of a call option Recording the adjusting entry for a forward contract Advantages of issuing debt Measurement of hybrid/compound instruments Classification of hybrid/compound instruments Presentation of high/low preferred shares under ASPE Classification of term preferred shares under IFRS Characteristics of convertible bonds Reasons for issuing convertible bonds Recording of convertible debt Recording conversion of bonds Classification of options on convertible securities Recording dividends on term preferred shares Bond issue inducements Convertible debt under IFRS Allocation of proceeds from issuance of convertible bonds Recognition of gains/losses on bond conversion Bond issue with detachable stock warrants 16-4

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a b a Answer b b c c d a d c d a d c d b d d c a c b d d c c b a b c d b c a d c a c b c b a b c

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. *73. *74. *75. *76. *77. *78. *79. *80. *81. *82. *83. *84. *85. *86. 87. 88.

Conversion of convertible bonds Conversion of convertible bonds Conversion of convertible bonds Description Conversion of convertible bonds Effective interest rate on convertible bonds Calculating interest expense on bonds sold at a discount Calculating unamortized bond discount on converted bonds Conversion of preferred shares Bonds issued with detachable stock warrants Bonds issued with detachable stock warrants Bonds issued with detachable stock warrants Bonds issued with detachable stock warrants Bonds issued with detachable stock warrants Bonds issued with detachable stock warrants Bonds issued with detachable stock warrants Convertible preferred shares Preferred shares with detachable stock warrants Valuation of convertible bonds (IFRS) Characteristics of a non-compensatory stock option plan Accounting for a non-compensatory stock option plan Measurement date for a compensatory stock option plan Recognition of compensation expense for a stock option plan Calculation of compensation expense Stock compensation plans Issuance of warrants Compensation expense in a stock option plan Determine compensation expense in a stock option plan Determine compensation expense in a stock option plan Determine compensation expense in a stock option plan Definition of hedging Fair value hedge Hedge accounting Hedge accounting Swap contract Performance-type plan Executive compensation plans Compensation expense in a SAR plan Basis of performance-type plan Compensation expense recognized in first year of a SAR plan Compensation expense recognized in second year of a SAR plan Compensation expense recognized in third year of a SAR plan Compensation expense recognized in a SAR plan SAR and timing of valuation Option pricing models Fair value hierarchy inputs 16-5

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b d

89. 90.

Fair value hierarchy inputs Compensation plan disclosures under IFRS

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Item E16-91 E16-92 E16-93 E16-94 E16-95 E16-96 E16-97 E16-98 E16-99 E16-100 E16-101 E16-102 E16-103 *E16-104 *E16-105 E16-106

Description Put options Purchased call options Purchased call options Forward contract Convertible debt and debt with warrants Convertible bonds Convertible bonds Convertible bonds Redeemable preferred shares and succession planning Stock options Stock options Employee share ownership plans Employee share ownership plans Stock appreciation rights Options pricing models Fair value disclosure for financial instruments – IASB standards

*This topic is dealt with in an Appendix to the chapter.

PROBLEMS Item P16-107 P16-108 P16-109 P16-110 P16-111 P16-112 P16-113 *P16-114 *P16-115 *P16-116 *P16-117 P16-118

Description Forward contract Employee stock options Employee stock options Convertible bonds and warrants Convertible debt Convertible debt Stock options Hedging Interest rate swap Hedging (forward contract) Share appreciation rights plans Fair value hierarchy

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. Derivative instruments a) require significant investments. b) transfer financial risks. c) transfer primary instruments. d) are settled at the date of issuance. Answer: b Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. Derivatives exist to help companies a) hide financial irregularities. b) reduce interest expense. c) manage cash flows. d) manage risks. Answer: d Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. Credit risk is the risk that a) an instrument’s price or value will change. b) the company itself will not be able to fulfill its obligation. c) one of the parties to the contract will fail to fulfill its obligation and cause the other party loss. d) cash flow will change over time. Answer: c Difficulty: Easy 16-8 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. The three types of market risk are a) currency, interest rate, and liquidity risks. b) interest rate, other price, and credit risks. c) currency, interest rate, and other price risks. d) liquidity, currency, and other price risks. Answer: c Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

5. A speculator’s objective is to a) reduce pre-existing risks. b) take delivery of the underlying. c) take advantage of information asymmetry. d) maximize potential returns by being exposed to greater risks. Answer: d Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

6. An arbitrageur depends on a) information asymmetry between markets. b) hedging opportunities between markets. c) differing credit risks. 16-9 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) differing liquidity risks. Answer: a Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

7. Derivatives should be valued at a) historical cost. b) fair value or historical cost. c) fair value. d) discounted cost. Answer: c Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

8. Gains on derivatives should a) be booked through other comprehensive income. b) be booked through net income. c) be recorded as deferred revenue. d) not be recorded. Answer: b Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

9. If a company writes an option, it a) pays a fee and gains a right. b) charges a fee and gives the holder a right. c) charges a fee for handling option transactions. d) endorses an option over to another party. Answer: b Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. A call option is a right to a) force another party to buy the underlying security. b) repurchase a previously sold underlying security. c) sell the underlying security. d) buy the underlying security. Answer: d Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

11. A put option is a right to a) force another party to buy the underlying security. b) repurchase a previously sold underlying security. c) sell the underlying security. d) buy the underlying security. Answer: c Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. 16-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

12. The intrinsic value of an option is the a) difference between the price of the underlying security and the strike price. b) value due to expectations that the price of the underlying security will rise above the strike price. c) minimum value of the option. d) option premium value. Answer: a Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

13. The time value of an option is the a) difference between the price of the underlying security and the strike price. b) value due to expectations that the price of the underlying security will rise above the strike price. c) minimum value of the option. d) option premium value. Answer: b Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

14. A forward contract a) is generally exchange traded, and therefore has a ready market value. b) creates a right but not an obligation. c) commits the contracting parties upfront to do something in the future. d) has no locked-in time period.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Easy Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

15. A futures contract a) is not exchange traded, and therefore does not have a ready market value. b) exposes the contracting party to credit risk. c) does not require a margin account to be established. d) is standardized as to amounts and dates. Answer: d Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

16. An option (call or put) contract a) commits the parties to the contract upfront to do something in the future. b) creates a right, but not an obligation to do something in the future. c) are standardized and trade on stock markets and exchanges. d) are settled through clearing houses, thus removing credit risk. Answer: b Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. b) the risk that an entity will have difficulty meeting obligations associated with financial liabilities. c) the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge (respect) an obligation. d) the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Answer: b Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

18. Market risk is a) the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. b) the risk that an entity will have difficulty meeting obligations associated with financial liabilities. c) the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge (respect) an obligation. d) the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Answer: a Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

19. On April 1, 2023, Gamma Corp. purchases a call option for $500, which gives Gamma the right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2023. Delta Inc. shares are currently trading for $30. At June 30, 2023, the options are trading at $4,800 and the shares at $32 each. At December 1, 2023, the options expire with no value. The entry to record the purchase of the call option is a) Derivatives—Financial Assets ...................................................................... 500 Cash ........................................................................................................ 500 16-14 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) Cash .............................................................................................................. Derivatives—Financial Assets ................................................................ c) FV-NI Investments ........................................................................................ Cash ........................................................................................................ d) No entry required.

500 500 500 500

Answer: a Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

20. On July 5, 2023, Alpha Corp. purchased a call option for $2,400, giving it the right to buy 2,000 shares of Omega Corp. for $20 per share. On August 18, 2023, when the option value is $12,000, Omega settles the option for cash. The entry on Alpha’s books to record the settlement is a) Cash .............................................................................................................. 12,000 Derivatives—Financial Assets/Liabilities............................................... 2,400 Gain or Loss on Derivatives.................................................................... 9,600 b) Cash .............................................................................................................. 12,000 Gain or Loss on Derivatives.................................................................... 12,000 c) Cash or Loss on Derivatives ......................................................................... 12,000 Derivatives—Financial Assets/Liabilities............................................... 12,000 d) Derivatives—Financial Assets/Liabilities..................................................... 2,400 Cash ............................................................................................................. 9,600 Gain or Loss on Derivatives.................................................................... 12,000 Answer: a Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $12,000 – $2,400 = $9,600 gain

21. On August 25, 2023, Beta Inc. entered into a forward contract to buy 25,000 Krubles (KRB) for $3,800 Canadian (CAD) on September 5, 2023. On August 31, 2023, 25,000 KRB can be purchased for $3,500 CAD. On September 5, Beta settles the contract but does NOT take delivery of the KRB. 16-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

The entry to record the change in value of the contract on August 31, 2023, is a) no entry. b) Other Comprehensive Loss.......................................................................... Derivatives—Financial Assets/Liabilities............................................... c) Derivatives—Financial Assets/Liabilities ..................................................... Gain or Loss on Derivatives.................................................................... d) Gain or Loss on Derivatives.......................................................................... Derivatives—Financial Assets/Liabilities...............................................

300 300 300 300 300 300

Answer: d Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Agreed payment $3,800 – $3,500 current cost = $300 loss

22. On August 25, 2023, Beta Inc. entered into a forward contract to buy 25,000 Krubles (KRB) for $3,800 Canadian (CAD) on September 5, 2023. On August 31, 2023, 25,000 KRB can be purchased for $3,500 CAD. On September 5, Beta settles the contract but does NOT take delivery of the KRB. On September 5, 2023, the KRB is trading at $0.15 CAD. The entry to record the settlement of the contract is a) Derivatives—Financial Assets/Liabilities ..................................................... 250 Cash ............................................................................................................. 50 Gain or Loss on Derivatives.................................................................... 300 b) Derivatives—Financial Assets/Liabilities..................................................... 300 Cash ........................................................................................................ 50 Gain or Loss on Derivatives.................................................................... 250 c) Derivatives—Financial Assets/Liabilities ..................................................... 300 Cash ........................................................................................................ 200 Gain or Loss on Derivatives.................................................................... 100 d) Cash .............................................................................................................. 450 Derivatives—Financial Assets/Liabilities............................................... 250 Gain or Loss on Derivatives.................................................................... 200 Answer: b Difficulty: Hard Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting 16-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: 25,000 KRB @ $15 = $3,750 $3,750 – $3,800 settlement amount = $50 loss overall $50 loss – $300 loss previously recorded = $250 gain (recovery of loss)

23. On April 1, 2023, Gamma Corp. purchases a call option for $500, which gives Gamma the right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2023. Delta Inc. shares are currently trading for $30. At June 30, 2023, the options are trading at $4,800 and the shares at $32 each. At December 1, 2023, the options expire with no value. The intrinsic value of the option at April 1, 2023, is a) $0. b) $500. c) $1,000. d) $4,800. Answer: a Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $30 – $30 = $0

24. On April 1, 2023, Gamma Corp. purchases a call option for $500, which gives Gamma the right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2023. Delta Inc. shares are currently trading for $30. At June 30, 2023, the options are trading at $4,800 and the shares at $32 each. At December 1, 2023, the options expire with no value. The time value of the option at April 1, 2023 is a) $0. b) $500. c) $4,800. d) $30,000. Answer: b Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting 16-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: $500 – $0 = $500

25. On April 1, 2023, Gamma Corp. purchases a call option for $500, which gives Gamma the right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2023. Delta Inc. shares are currently trading for $30. At June 30, 2023, the options are trading at $4,800 and the shares at $32 each. At December 1, 2023, the options expire with no value. At June 30, 2023, Gamma’s quarter end, the adjusting entry would be a) No entry required. b) Derivatives—Financial Assets ...................................................................... 4,300 Gain or Loss on Derivatives.................................................................... 4,300 c) Derivatives—Financial Assets ...................................................................... 4,300 Other Comprehensive Income .............................................................. 4,300 d) Derivatives—Financial Assets ...................................................................... 4,800 Gain or Loss on Derivatives.................................................................... 4,800 Answer: b Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 4,800 fair value less $ 500 recorded cost = $ 4,300 gain

26. On April 1, 2023, Gamma Corp. purchases a call option for $500, which gives Gamma the right to buy 1,000 shares of Delta Inc. for $30 each until December 1, 2023. Delta Inc. shares are currently trading for $30. At June 30, 2023, the options are trading at $4,800 and the shares at $32 each. At December 1, 2023, the options expire with no value. At December 1, 2023, Gamma’s entry would be a) No entry required. b) Gain or Loss on Derivatives.......................................................................... 2,000 Derivatives—Financial Assets ................................................................ 2,000 c) Gain or Loss on Derivatives .......................................................................... 4,300 Derivatives—Financial Assets ................................................................ 4,300 d) Gain or Loss on Derivatives.......................................................................... 4,800 Derivatives—Financial Assets ................................................................ 4,800 Answer: d Difficulty: Medium 16-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

27. On October 5, 2023, Kappa Cloth Ltd. enters into a forward contract to purchase 10,000 metres of cotton fabric at $1 per metre, good until February 1, 2024. At December 31, 2023, the forward price for February 2024 delivery of cotton fabric has increased to $1.06 per metre. The adjusting entry at December 31, 2023, would be a) No entry required. b) Derivatives—Financial Assets/Liabilities..................................................... 600 Unrealized Gain or Loss (OCI) ................................................................ 600 c) Derivatives—Financial Assets/Liabilities ..................................................... 600 Gain or Loss on Derivatives.................................................................... 600 d) Gain or Loss on Derivatives.......................................................................... 600 Derivatives—Financial Assets/Liabilities............................................... 600 Answer: c Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($1.06 – $1.00) × 10,000 = $600 gain

28. An advantage of issuing debt instead of equity is that a) interest must be paid, regardless of earnings. b) the interest is tax deductible. c) it increases solvency or liquidity risks. d) no leverage is possible. Answer: b Difficulty: Easy Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting 16-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

29. With regard to the measurement of hybrid/compound instruments, a) IFRS requires the use of the relative fair value method. b) IFRS requires the use of the residual method. c) ASPE does not allow the equity component to be valued at zero. d) after the initial measurement, the debt portion is always measured at fair value. Answer: b Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

30. Which of the following would be classified as a hybrid/compound financial instrument resulting in two elements being reported on the SFP? a) perpetual debt b) mandatorily redeemable preferred shares c) debt with detachable warrants d) puttable shares Answer: c Difficulty: Easy Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

31. ASPE requires that high/low (redeemable) preferred shares be presented as a) long-term debt. b) equity. c) either equity or long-term debt. d) a contra-asset. Answer: b 16-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

32. Under IFRS, mandatorily redeemable preferred shares (term preferred shares) are treated as a) a liability. b) equity. c) a contra-asset. d) either a liability or a contra-asset. Answer: a Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

33. Convertible bonds a) have priority over all other types of bonds. b) are usually secured by a first or second mortgage. c) pay interest only in the event earnings are sufficient to cover the interest. d) may be exchanged for common shares. Answer: d Difficulty: Easy Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

34. A common reason for issuing convertible bonds is a) to obtain debt financing at cheaper rates. 16-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) to avoid paying dividends on common shares. c) to give the purchaser the option of buying preferred shares. d) to reduce the debt-to-total assets ratio. Answer: a Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

35. Under IFRS, a convertible debt security is recorded as a debt instrument a) with the equity feature ignored. b) with the equity feature described in a note. c) and an equity component. d) with the conversion component credited to the Common Shares account. Answer: c Difficulty: Easy Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

36. When convertible debt is converted to common shares, IFRS requires that this is recorded by the a) book value method. b) relative fair value method. c) market value method. d) residual method. Answer: a Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Comprehension 16-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

37. For convertible securities, the portion relating to the option should be classified as a(n) a) liability. b) asset. c) reduction of contributed surplus. d) addition to contributed surplus. Answer: d Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

38. Dividends on term preferred shares, where the shares have been recorded as a liability, should be debited to a) interest expense. b) retained earnings. c) contributed surplus. d) other comprehensive income. Answer: a Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

39. When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, this is a) accounted for as an extraordinary item. b) allocated between the debt and equity components of this instrument. c) accounted for as a loss. d) accounted for as a gain. Answer: b 16-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

40. Under IFRS, when convertible debt is retired, a) only losses on retirement are recognized. b) only gains on retirement are recognized. c) either a gain or a loss on retirement is recognized. d) neither gains nor losses are recognized. Answer: c Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

41. On January 2, 2023, Perseus Corp. issued 10-year convertible bonds at 105. During 2024, all the bonds were converted into common shares having a total value equal to the total face amount of the bonds. At conversion, the market price of Perseus's common shares was 50% above its average carrying value. Perseus adheres to IFRS. At issuance, the cash proceeds from the issuance of these bonds should be reported as a) contributed surplus for the entire proceeds. b) contributed surplus for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. c) a liability for the present value of the bonds and contributed surplus for the balance. d) a liability for the entire proceeds. Answer: c Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application 16-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

42. On January 2, 2023, Perseus Corp. issued 10-year convertible bonds at 105. During 2024, all the bonds were converted into common shares having a total value equal to the total face amount of the bonds. At conversion, the market price of Perseus's common shares was 50% above its average carrying value. Perseus adheres to IFRS. On conversion, Perseus would credit the Common Shares account with a) the par value of the bonds plus the balance in the Contributed Surplus account. b) the carrying value of the bonds plus the balance in the Contributed Surplus account. c) the carrying value of the bonds minus the balance in the Contributed Surplus account. d) the market value of the bonds plus the balance in the Contributed Surplus account. Answer: b Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

43. Antigone Corp. issued bonds with detachable common stock warrants. Only the bonds had a known market value. Using the residual method, the value attributable to the warrants is reported as a) Stock Warrants Distributable. b) Other Comprehensive Income. c) Common Shares Subscribed. d) Contributed Surplus—Stock Warrants. Answer: d Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

44. Wang Inc. has $3,000,000 (par value), 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 no par value common shares. The bonds pay interest on January 31 and July 31. On July 31, 2023, the holders of $900,000 worth of bonds exercised the conversion privilege. On that date the market price of the bonds was 105, the market price of the common shares was $36, the 16-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

carrying value of the common shares was $18 and the Contributed Surplus—Conversion Rights account balance was $450,000. The total unamortized bond premium at the date of conversion was $210,000. Using the book value method, Wang should record, as a result of this conversion, a) no gain or loss. b) a loss of $9,000. c) other comprehensive income of $9,000. d) a gain of $18,000. Answer: a Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

45. Wang Inc. has $3,000,000 (par value), 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 no par value common shares. The bonds pay interest on January 31 and July 31. On July 31, 2023, the holders of $900,000 worth of bonds exercised the conversion privilege. On that date the market price of the bonds was 105, the market price of the common shares was $36, the carrying value of the common shares was $18 and the Contributed Surplus—Conversion Rights account balance was $450,000. The total unamortized bond premium at the date of conversion was $210,000. Using the book value method, what would Wang record as a result of this conversion? a) a credit of $ 135,000 to Contributed Surplus—Conversion Rights b) a debit of $ 135,000 to Contributed Surplus—Conversion Rights c) a credit of $63,000 to Bonds Payable d) a debit of $210,000 to Bonds Payable Answer: b Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $450,000 x 900 ÷ 3,000 = $135,000

46. On July 1, 2023, an interest payment date, $180,000 (par value) of Lusaka Corp. bonds were converted into 3,600 of its no par common shares. At this time, the unamortized discount on the bonds was $7,200. When the bonds were originally issued, the equity portion of the bond was valued 16-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

at $1,700. Using the book value method, Lusaka would record a) an $174,500 increase in Common Shares. b) an $172,800 increase in Common Shares. c) an $171,100 increase in Common Shares. d) no change to Contributed Surplus. Answer: a Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $180,000 – $7,200 + $1,700 = $174,500

47. Johannesburg Corp. has two issues of securities outstanding: no par value common shares and 8% convertible bonds with a par value of $8,000,000. Bond interest payment dates are June 30 and December 31. The conversion clause in the bond indenture entitles the bondholders to receive 40 common shares in exchange for each $1,000 bond. The value of the equity portion of the bond issue is $60,000. On June 30, 2023, the holders of $1,200,000 par value bonds exercise the conversion privilege. The market price of the bonds on that date is $1,100 per bond and the market price of the common shares is $35. The total unamortized bond discount at the date of conversion is $500,000. In applying the book value method, what amount should Johannesburg credit to Common Shares as a result of this conversion? a) $1,284,000 b) $1,134,000 c) $1,125,000 d) $1,116,000 Answer: b Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($1,200,000 ÷ $8,000,000) × $500,000 = $75,000 (unamortized discount) ($1,200,000 ÷ $8,000,000) × $60,000 = $9,000 (cont. surplus) $1,200,000 – $75,000 + $9,000 = $1,134,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

48. On July 2, 2023, Martineau Ltd. issued $6,000,000 (par value), 9%, ten-year convertible bonds at 98. The bonds were dated April 1, 2023 with interest payable quarterly on July 1, October 1, January 1 and April 1. If the bonds had NOT been convertible, they would have sold for 96.1. The bond discount is amortized on a straight-line basis. On April 1, 2024, $1,200,000 of these bonds were converted into 500 no par common shares. Accrued interest was paid in cash at the time of conversion. What was the effective interest rate on the bonds when they were issued? a) 9% b) above 9% c) below 9% d) Cannot determine from the information given. Answer: b Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Bonds issued at a discount, therefore effective (market) rate > stated rate

49. On July 2, 2023, Martineau Ltd. issued $6,000,000 (par value), 9%, ten-year convertible bonds at 98. The bonds were dated April 1, 2023 with interest payable quarterly on July 1, October 1, January 1, and April 1. If the bonds had NOT been convertible, they would have sold for 96.1. The bond discount is amortized on a straight-line basis. On April 1, 2024, $1,200,000 of these bonds were converted into 500 no par common shares. Accrued interest was paid in cash at the time of conversion. What is the debit to Interest Expense on Oct. 1, 2023? a) $129,000 b) $135,000 c) $141,000 d) $143,923 Answer: c Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $6,000,000 × 96.1% = $5,766,000 $6,000,000 × 98% = $5,880,000 $ 5,880,000 – $5,766,000 = $114,000 (contributed surplus) 16-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$6,000,000 – $5,766,000 = $234,000 (bond discount) ($6,000,000 × .09 × 3 ÷ 12) + ($234,000 × 3 ÷ 117) = $141,000

50. On July 2, 2023, Martineau Ltd. issued $6,000,000 (par value), 9%, ten-year convertible bonds at 98. The bonds were dated April 1, 2023 with interest payable quarterly on July 1, October 1, January 1 and April 1. If the bonds had NOT been convertible, they would have sold for 96.1. The bond discount is amortized on a straight-line basis. On April 1, 2024, $1,200,000 of these bonds were converted into 500 no par common shares. Accrued interest was paid in cash at the time of conversion. What is the amount of the unamortized bond discount on April 1, 2024 relating to the bonds that were converted? a) $64,246 b) $46,800 c) $43,200 d) $44,400 Answer: c Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $234,000 × ($1,200,000 ÷ $6,000,000) × (108 ÷ 117) = $43,200

51. In 2022, Algiers Inc. issued 10,000 no par value convertible preferred shares for $103 each. One preferred share can be converted into three shares of Algiers' no par value common shares at the option of the shareholder. In August 2023, all of the preferred shares were converted into common shares. The market value of the common shares at the date of the conversion was $30 per share. What amount should be credited to Common Shares as a result of this conversion? a) $300,000 b) $500,000 c) $900,000 d) $1,030,000 Answer: d Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 16-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: $103 × 10,000 = $1,030,000

52. On December 1, 2023, Cairo Ltd. issued 500 of its 9%, $1,000 bonds at 103. Attached to each bond was one detachable warrant entitling the holder to purchase ten of Cairo's common shares. Currently the market value of the bonds, without the warrants is 95, and the market value of each warrant is $50. Using the residual method, the amount of the proceeds from the issuance that should be credited to Bonds Payable is a) $475,000. b) $489,250. c) $500,000. d) $515,000. Answer: a Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 500 x $1,000 x .95 = $475,000, balance to contributed surplus

53. On March 1, 2023, Rabat Corp. sold $300,000 (par value), 20 year, 8% bonds at 104. Each $1,000 bond was issued with 25 detachable warrants, each of which entitled the bondholder to purchase for $50 one of Rabat’s no par value common shares. The bonds without the warrants would normally sell at 95. At this time, the market value of Rabat’s common shares was $40 per share and the market value of each warrant was $2. Using the relative fair value method, what amount should Rabat record on March 1, 2023 as Contributed Surplus—Stock Warrants? a) $10,800 b) $12,600 c) $15,000 d) $15,600 Answer: d Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($ 300,000 ×.95) + (300 × 25 × $2) = $300,000; $300,000 × 1.04 = $312,000 16-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$15,000 × $312,000 = $15,600 $300,000

54. During 2023, Khartoum Corp. issued 400 $1,000 bonds at 104. One detachable warrant, entitling the holder to purchase 15 of Khartoum’s common shares, was attached to each bond. At the date of issuance, the market value of the bonds, without the warrants, was 96. The market value of each warrant was $40. Using the relative fair value method, what amount should Khartoum credit to Bonds Payable from the proceeds? a) $416,000 b) $400,000 c) $399,360 d) $384,000 Answer: c Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($400,000 × .96) + (400 × $40) = $400,000; $400,000 × 1.04 = $416,000 $384,000 x $416,000 = $399,360 $400,000

55. On April 7, 2023, Soweto Corp. sold a $1,000,000 (par value), 20-year, 8% bond issue for $1,060,000. Each $1,000 bond has two detachable warrants. Each warrant permits the purchase one of Soweto's no par value common shares for $30. At the time of the sale, Soweto's securities had the following market values: Each $1,000 bond without warrants $1,006 Warrants 21 Common shares 27 Assuming that Soweto adheres to IFRS, what entry should the corporation make to record the sale of the bonds? a) Cash .............................................................................................................. 1,060,000 Bonds Payable ....................................................................................... 1,000,000 Contributed Surplus—Stock Warrants .................................................. 60,000 b) Cash .............................................................................................................. 1,060,000 Bonds Payable ....................................................................................... 1,018,000 Contributed Surplus—Stock Warrants .................................................. 42,000 c) Cash .............................................................................................................. 1,060,000 Bonds Payable ....................................................................................... 1,060,000 d) Cash .............................................................................................................. 1,060,000 16-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bonds Payable ....................................................................................... Contributed Surplus—Stock Warrants ..................................................

1,006,000 54,000

Answer: d Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: IFRS requires residual method $1,000,000 ÷ $1,000 = 1,000 bonds sold; 1,000 x $1,006 = $1,006,000; balance to cont. surplus

56. On May 1, 2023, Wong Ltd. issued $500,000, 10 year, 7% bonds at 103. Twenty detachable warrants were attached to each $1,000 bond, which entitled the holder to purchase one of Wong’s no par value common shares for $40. At this time, similar bonds without warrants were selling at 96. It was determined that the fair value of Wong’s common shares was $35, but the value of the warrants was NOT determinable. Wong is a private corporation that follows ASPE, but does NOT use the residual method. On May 1, 2023, Wong should credit Bonds Payable for a) $515,000. b) $500,000. c) $480,000. d) Cannot be determined from the information given. Answer: a Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Under ASPE, if not using residual method, can assign zero to equity component; therefore, the entire proceeds of $500,000 x 1.03 = $515,000 credited to Bonds Payable

57. On May 1, 2023, Wong Ltd. issued $500,000, 10 year, 7% bonds at 103. Twenty detachable warrants were attached to each $1,000 bond, which entitled the holder to purchase one of Wong’s no par value common shares for $40. At this time, similar bonds without warrants were selling at 96. It was determined that the fair value of Wong’s common shares was $35, but the value of the warrants was NOT determinable. Wong is a private corporation that follows ASPE, but does NOT use the residual method. On May 1, 2023, Wong should credit Contributed Surplus—Stock Warrants for 16-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) $35,000. b) $20,000. c) $15,000. d) $0. Answer: d Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

58. Lagos Inc. issued bonds with detachable warrants for $5,000,000 (par value). The bonds have a present value of $4,934,400. The fair value of the warrants is determined to be $220,000. Using the relative fair value method, how much of the issue price should be allocated to the warrants? a) $65,600 b) $211,200 c) $213,500 d) $220,000 Answer: c Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Bonds $4,934,400 95.73% Warrants 220,000 4.27% Total $5,154,400 100% $5,000,000 issue price × 4.27% = $213,500

59. Under IFRS, when convertible preferred shares is converted into common stock, a) the par value of the preferred is recorded in Common Shares. b) the market value of the preferred is recorded in Common Shares. c) a gain or loss is recognized. d) the par value of the preferred shares and any additional paid-in capital is transferred to Common Shares and Additional Paid-in Capital.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

60. On July 1, 2023, Juba Inc. issued 10,000, $7 non-cumulative, no par value preferred shares for $1,050,000. Attached to each share was one detachable warrant, giving the holder the right to purchase one of Juba’s no par value common shares for $30. At this time, the shares without the warrants would normally sell for $1,025,000, while the market price of the warrants was $2.50 each. On October 31, 2023, when the market price of the common shares was $33.50 and the market value of the warrants was $3, 4,000 warrants were exercised. Juba adheres to IFRS. As a result of the exercise of the warrants and the issuance of the related common shares, what journal entry would Juba make? a) Cash .............................................................................................................. 120,000 Common Shares..................................................................................... 120,000 b) Cash .............................................................................................................. 120,000 Contributed Surplus—Stock Warrants ....................................................... 10,000 Common Shares..................................................................................... 130,000 c) Cash .............................................................................................................. 120,000 Contributed Surplus—Stock Warrants ....................................................... 25,000 Common Shares..................................................................................... 145,000 d) Cash .............................................................................................................. 120,000 Contributed Surplus—Stock Warrants ....................................................... 15,000 Common Shares..................................................................................... 135,000 Answer: b Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Dr. Cash: 4,000 × $30 = $120,000 Dr. Contributed Surplus—Stock Warrants: $25,000 × 4 ÷ 10 = $10,000 Cr. Common Shares: $120,000 + $10,000 = $130,000

61. Bissau Ltd. issued $4,000,000, 5-year, 8% convertible bonds at par. Bonds pay interest annually. 16-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Each $1,000 bond is convertible to 200 of Bissau’s no par value common shares, which are currently trading at $25 each. The current market rate for similar non-convertible bonds is 10%. Assuming Bissau adheres to IFRS, the value to be recorded for the conversion option is a) $0. b) $5,000. c) $100,000. d) $303,267. Answer: d Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: PV $4,000,000, 5 years, 10% = $2,483,680 PV $320,000/year, 5 years, 10% = 1,213,053 Total $3,696,733 Issue price of $4,000,000 – $3,696,733 = $303,267 value of option

62. Which of the following is NOT a characteristic of a non-compensatory employee stock option plan (ESOP)? a) The plan is generally available to all employees. b) There is only a small discount from the market price. c) The plan requires the employee to pay an upfront premium. d) The plan is accounted for as compensation expense. Answer: d Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

63. Under a (non-compensatory) employee stock option plan (ESOP), when an option is sold to an employee, the employer debits Cash and credits a) Common Shares. b) Stock Option Payable. c) Contributed Surplus—Stock Options. d) Stock Option Revenue. 16-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

64. The date on which to measure the compensation element in a compensatory stock option plan (CSOP) is normally the date on which the employee a) is granted the option. b) has fulfilled all the conditions required to exercise the option. c) may first exercise the option. d) exercises the option. Answer: a Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

65. Compensation expense resulting from a compensatory stock option plan (CSOP) is generally recognized a) in the period of exercise. b) at the grant date. c) in the periods in which the employee performs the service. d) over the periods of the employee's service life to retirement. Answer: c Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

66. Under a compensatory stock option plan, compensation expense is calculated based on the fair 16-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

value of the options and is expected to vest on which of the following dates? a) the vesting date b) the grant date c) the exercise date d) the expiry date Answer: b Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

67. Which of the following is NOT one of the commonly used stock compensation plans? a) stock option plans b) stock appreciation rights plans c) restricted-stock plans d) stock conversion plans Answer: d Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

68. The issuance of warrants arises under all of the following situations, except to a) make different types of securities more attractive to new investors. b) give existing shareholders a pre-emptive right to purchase shares. c) provide compensation to executives. d) give bondholders the pre-emptive right to purchase additional shares. Answer: d Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic 16-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

69. On January 1, 2023, Orion Corp. granted an employee an option to purchase 5,000 of Orion's no par value common shares at $50 per share. The Black-Scholes option pricing model determined total compensation expense to be $220,000. The option became exercisable on December 31, 2024, after the employee completed two years of service. The market prices of Orion's shares were as follows: January 1, 2023 $40 December 31, 2024 $52 For calendar 2024, Orion should recognize compensation expense of a) $0. b) $50,000. c) $110,000. d) $250,000. Answer: c Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $220,000 ÷ 2 = $110,000

70. On January 1, 2021, Tunis Inc. granted stock options for 50,000 of its no par value common shares to key employees, at an option price of $25. On that date, the market price of the common shares was $23. The Black-Scholes option pricing model determined total compensation expense to be $375,000. The options are exercisable beginning January 1, 2024, provided the key employees are still employed by Tunis at the time the options are exercised. The options expire on January 1, 2025. On January 2, 2024, when the market price of the shares was $29 per share, all 50,000 options were exercised. The amount of compensation expense Tunis should have recorded for calendar 2023 is a) $0. b) $50,000. c) $125,000. d) $187,500. Answer: c Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $375,000 ÷ 3 = $125,000/year 16-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

71. On June 30, 2021, Kinshasa Corp. granted stock options for 30,000 of its no par value common shares to key employees, at an option price of $36. On that date, the market price of the common shares was $32. The Black-Scholes option pricing model determined total compensation expense to be $720,000. The options are exercisable beginning January 1, 2024, provided the key employees are still employed by Kinshasa at the time the options are exercised. The options expire on June 30, 2025. On January 2, 2024, when the market price of the shares was $42, all 30,000 options were exercised. The amount of compensation expense Kinshasa should have recorded for calendar 2023 is a) $120,000. b) $288,000. c) $360,000. d) $720,000. Answer: b Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $720,000 x 12 ÷ 30 = $288,000

72. On December 31, 2021, in order to retain certain key executives, Entebbe Corporation granted them stock options. 25,000 options were granted at an option price of $40 per share. Market prices of the shares were as follows: December 31, 2022 $35 per share December 31, 2023 $39 per share The options were granted as compensation for services to be rendered over a two-year period beginning January 1, 2022. The Black-Scholes option pricing model determined total compensation expense to be $500,000. The amount of compensation expense Entebbe should have recorded for calendar 2023 is a) $250,000. b) $500,000. c) $875,000. d) $1,000,000. Answer: a Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application 16-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: $500,000 ÷ 2 = $250,000

*73. Hedging is the use of a) derivatives or other instruments to increase returns. b) derivatives or other instruments to offset risks. c) debt to offset risks. d) forward contracts. Answer: b Difficulty: Easy Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*74. A fair value hedge protects the company against a) errors in valuation of derivative instruments. b) a future transaction that has not yet been recognized. c) an existing exposure related to an existing asset or liability. d) fluctuations in exchange rates. Answer: c Difficulty: Medium Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*75. Hedge accounting is a) mandatory. b) mandatory if specified criteria are met. c) optional until December 2024 and mandatory thereafter. d) optional. Answer: d

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*76. Using IFRS, hedge accounting allows the gain or loss on the hedge transaction to a) be booked through net income. b) be booked through other comprehensive income. c) not be booked. d) not be booked until the hedge closes. Answer: b Difficulty: Medium Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*77. If a company enters into a hedging contract to swap a floating interest rate for a fixed rate, by the end of the contract the interest rate incurred by the company will equal a) the difference between the fixed and the floating rate. b) the floating rate. c) the fixed rate. d) whichever rate is highest. Answer: c Difficulty: Medium Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*78. Compensation expense resulting from a performance-type plan is generally a) determined at the measurement date. 16-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) recognized in the period of the grant. c) allocated to the periods subsequent to the measurement date. d) recognized in the period of exercise. Answer: a Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*79. An executive compensation plan in which the executive may receive compensation in cash, shares, or a combination of both, is known as a) a nonqualified shares option plan. b) a performance-type plan. c) a stock appreciation rights plan. d) both a performance-type and a stock appreciation rights plan. Answer: d Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*80. The date on which to measure the compensation in a stock appreciation rights plan is the a) date of grant. b) date of exercise. c) end of each interim period up to the date of exercise. d) date that the market price exceeds the option price. Answer: c Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*81. The payment to executives from a performance-type plan is NEVER based on the a) market price of the common shares. b) return on assets (investment). c) return on common shareholders' equity. d) sales. Answer: a Difficulty: Hard Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*82. On January 1, 2022, Luanda Ltd. established a stock appreciation rights plan for its executives. This plan entitles them to receive cash at any time during the next four years for the difference between the market price of its common shares and a pre-established price of $20, on 50,000 SARs. Market prices of the shares are as follows: January 1, 2022 $35 per share December 31, 2022 $38 per share December 31, 2023 $30 per share December 31, 2024 $33 per share Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2022. What amount of compensation expense should Luanda recognize for calendar 2022? a) $150,000 b) $187,500 c) $225,000 d) $900,000 Answer: c Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($38 – $20) × 50,000 × .25 = $ 225,000

*83. On January 1, 2022, Luanda Ltd. established a stock appreciation rights plan for its executives. This plan entitles them to receive cash at any time during the next four years for the difference between the market price of its common shares and a pre-established price of $20, on 50,000 SARs. 16-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Market prices of the shares are as follows: January 1, 2022 $35 per share December 31, 2022 $38 per share December 31, 2023 $30 per share December 31, 2024 $33 per share Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2022. What amount of compensation expense should Luanda recognize for calendar 2023? a) $0 b) $25,000 c) $125,000 d) $250,000 Answer: b Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($30 – $20) × 50,000 × .5 = $250,000; $250,000 – $225,000 = $25,000

*84. On January 1, 2022, Luanda Ltd. established a stock appreciation rights plan for its executives. This plan entitles them to receive cash at any time during the next four years for the difference between the market price of its common shares and a pre-established price of $20, on 50,000 SARs. Market prices of the shares are as follows: January 1, 2022 $35 per share December 31, 2022 $38 per share December 31, 2023 $30 per share December 31, 2024 $33 per share Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2022. On December 31, 2024, 8,000 SARs are exercised by executives. What amount of compensation expense should Luanda recognize for calendar 2024? a) $65,000 b) $162,500 c) $237,500 d) $487,500 Answer: c Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Application 16-44 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: ($33 – $20) × 50,000 × .75 = $487,500; $487,500 – $250,000 = $237,500

*85. On January 2, 2023, for past services rendered, Zeus Corp. granted Joanna Wood, its president, 18,000 stock appreciation rights that are exercisable immediately and expire on January 30, 2024. Upon exercise, Wood is entitled to receive cash for the excess of the market price of the shares on the exercise date over the market price on the grant date. Wood did NOT exercise any of the rights during 2023. The market price of Zeus's shares was $35 on January 2, 2023, and $45 on December 31, 2023. As a result of the stock appreciation rights, Zeus should recognize compensation expense for 2023 of a) $0. b) $180,000. c) $630,000. d) $810,000. Answer: b Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($45 – $35) × 18,000 = $180,000

*86. If a SAR is determined to be an equity instrument, it would be valued at a) the grant date and not revised at subsequent interim dates. b) each interim date. c) the exercise date. d) the grant date and revalued at the exercise date. Answer: a Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

87. Pricing models incorporate numerous inputs, including a measurement of the volatility of the underlying stock. This is measured by a) expected dividends. b) how specific stock prices vary in relation to the market. 16-45 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) the current market price of the underlying stock. d) the expected life of the option. Answer: b Difficulty: Medium Learning Objective: Understand how option pricing models are used to measure financial instruments Section Reference: Options Pricing Models CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

88. The International Accounting Standards Board established a fair value hierarchy with three broad levels. This hierarchy describes the types of inputs (organized by categories) that management uses to determine fair value of items such as derivatives. Which of the following is NOT reflective of the categories with respect to inputs related to derivatives? a) quotes from an active market like the TSX B) the value of similar options that the company may already own C) observable inputs from the market that confirm management’s assumptions D) unobservable inputs that reflect management’s assumptions Answer: c Difficulty: Medium Learning Objective: Describe and analyze required fair value disclosures for financial instruments Section Reference: Fair Value Disclosure for Financial Instruments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

89. The International Accounting Standards Board established a fair value hierarchy with three broad levels. Which of the following would NOT be considered an input in the Level 1 (most reliable) category? a) call option price as quoted on the TSX b) call option price estimated by a subsidiary c) put option price as quoted on the DOW d) put option price as quoted on the TSX Answer: b Difficulty: Medium Learning Objective: Describe and analyze required fair value disclosures for financial instruments Section Reference: Fair Value Disclosure for Financial Instruments CPA: Financial Reporting 16-46 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

90. Under IFRS, disclosure for compensation plans should include all of the following, except the a) number of shares under option. b) description of the plan. c) assumptions and methods used to estimate the fair values of the stock options. d) All of these options are required disclosures. Answer: d Difficulty: Medium Learning Objective: Describe and analyze required fair value disclosures for financial instruments Section Reference: Fair Value Disclosure for Financial Instruments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 16-91 Put options On November 15, 2023, Marvel Inc. purchased a trading investment for $150,000. Marvel also entered into a put option to sell the shares for $150,000. At December 31, 2023, the investment is valued at $155,000. Instructions a) Record any adjusting entries required at December 31, 2023, in connection with the above transactions. b) CRITICAL THINKING — What type of instrument is a put option? Define and explain this type of instrument and why it is used. Solution 16-91 a) FV-NI Investments ($155,000 – $150,000) ................................................ Gain or Loss on Derivatives .............................................................. Gain or Loss on Derivatives ...................................................................... Derivatives—Financial Assets/Liabilities .........................................

5,000 5,000 5,000 5,000

b) CRITICAL THINKING – Put options are known as derivatives. Derivatives are financial instruments that create rights and obligations that have the effect of transferring, between parties to the instrument, one or more of the financial risks inherent in an underlying primary instrument without having to transfer the underlying instrument. Derivatives require little or no initial investment, the values change in response to the underlying instrument, and the instruments are settled at a future date. Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 16-92 Puchased call options On September 15, 2023, Marvel Inc. purchased a call option for $500 from RDC Investments to purchase 1,500 MBO shares at $75 per share and the option expires on December 31, 2023. On November 30, 2023, the shares are valued at $95, and the options are trading at $30,200. Marvel chooses to settle the option on December 1, 2023. Instructions a) Record all of Marvel’s entries associated with this call option purchase and subsequent settlement. 16-48 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

What is the effect on Marvel’s net income resulting from the call option?

Solution 16-92 September 15, 2023 Derivatives—Financial Assets/Liabilities ................................................. Cash ................................................................................................... November 30, 2023 Derivatives—Financial Assets/Liabilities ................................................. Gain or Loss on Derivatives .............................................................. ($30,200 – $500) December 1, 2023 Cash........................................................................................................... Gain or Loss on Derivatives ...................................................................... Derivatives—Financial Assets/Liabilities ......................................... b)

Net increase in the value of the call option ............................................. Settle call option ...................................................................................... Total net income effect ............................................................................

500 500

29,700 29,700

30,000 200 30,200 $29,700 (200) $29,500

Difficulty: Medium Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 16-93 Purchased call options On April 1, 2024, Petty Ltd. purchased a call option from Fidelity Investments Corporation. The option gave Petty the right to buy 5,000 shares in Monahan Ltd. at a price of $50 per share. On the day Petty purchased the option, Monahan shares were trading at $50. Petty paid $1,000 for the options. On April 30, 2024, the Monahan shares were trading at $53.50 each, and the options for Monahan shares were trading at $18,000. On May 15, Petty settled the options in cash when the Monahan shares were trading at $56 and the options were trading at $30,000. Instructions a) Prepare the journal entries to record the above transactions. b) Prepare the May 15 journal entries assuming Petty accepted the shares in Monahan instead. Solution 16-93 a) April 1, 2024 Derivatives—Financial Assets/Liabilities .................................................

1,000 16-49

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash ...................................................................................................

1,000

April 30, 2024 Derivatives—Financial Assets/Liabilities ................................................. Gain or Loss on Derivatives ($18,000 – $1,000) ................................

17,000

May 15, 2024 Derivatives—Financial Assets/Liabilities ................................................. Gain or Loss on Derivatives ($30,000 – $18,000) ..............................

12,000

17,000

12,000

Cash........................................................................................................... Derivatives—Financial Assets/Liabilities .........................................

30,000

Derivatives—Financial Assets/Liabilities ................................................. Gain or Loss on Derivatives ..............................................................

12,000

FV-NI Investments (5,000 x $56) ............................................................... Cash (5,000 x $50) ............................................................................. Derivatives—Financial Assets/Liabilities .........................................

280,000

30,000

b) 12,000

250,000 30,000

Ex. 16-94 Forward contract Fire Protection Ltd. is a fire suppression company that installs sprinkler systems in commercial buildings. It is currently working on a large project and relies completely on US suppliers for its components. The company is worried about the volatility for the CDN/US currency exchange rate. Fire Protection agrees to buy $50,000 in US currency for $65,000 Canadian from MBO bank in 30 days from now. The contract is priced so that it has a $500 fair value on the issue date. On the settlement date the exchange rate is $1.25 CDN = $1 US. Instructions a) Record the entries related to this forward contract assuming that the contract is settled on a gross basis. b) Record the entries related to this forward contract assuming that the contract is settled on a net basis. Solution 16-94 a) 16-50 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Issue Date: Derivatives—Financial Assets/Liabilities ......................................................... Gain or Loss on Derivatives ...................................................................... Settlement Date: Cash ($50,000 x $1.25)) ............................................................................. Gain or Loss on Derivatives ...................................................................... Cash ................................................................................................... Derivatives—Financial Assets/Liabilities ......................................... b) Issue Date: Derivatives—Financial Assets/Liabilities ................................................. Gain or Loss on Derivatives .............................................................. Settlement Date: Gain or Loss on Derivatives ...................................................................... Cash (($1.30 – $ 1.25) x $50,000) ....................................................... Derivatives—Financial Assets/Liabilities .........................................

500 500

62,500 3,000 65,000 500

500 500

3,000 2,500 500

Ex. 16-95 Convertible debt and debt with warrants a) Explain in detail the accounting treatment required for convertible debt under both IFRS and ASPE. b) Explain how this compares to or differs from the accounting required for debt issued with stock warrants. Solution 16-95 a) Convertible debt is a hybrid/compound financial instrument and is generally treated as having both a debt component and an equity component. The conversion feature makes the bond more valuable to an investor; therefore, the convertible feature has value. Under IFRS, compound instruments must be split into their components and presented separately in the financial statements. IFRS also requires the use of the residual method: the value of the debt component is determined, and the balance is assigned to the equity component (as contributed surplus). ASPE allows a zero value to be assigned to the equity component, or the use of the residual method. b) When debt is issued with stock warrants, the warrants are also given separate recognition. After issue, the debt and the detachable warrants trade separately. The proceeds may be allocated to the 16-51 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

two elements based on the relative fair values of the debt security without the warrants and the warrants at the time of issue, or by the residual method. The proceeds allocated to the warrants should also be accounted for as contributed surplus. Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 16-96 Convertible bonds Lachapelle Drilling Inc., which follows IFRS, offers ten-year, 6% convertible bonds (par $ 1,000). Interest is paid annually on the bonds. Each $1,000 bond may be converted into 50 common shares, which are currently trading at $17 per share. Similar straight bonds carry an interest rate of 8%. One thousand bonds are issued at 91. Instructions a) Assume Lachapelle decides to use the residual method and measures the debt first. Calculate the amount to be allocated to the bond and to the option. b) Prepare the journal entry at date of issuance of the bonds under IFRS. c) Assume that after six years, the carrying amount of the bonds is $ 933,757. The holders of the convertible debt decide to convert their convertible bonds before the bond maturity date. Prepare the journal entry to record the conversion. d) How many shares were issued at the conversion? Solution 16-96 a) Value of the bonds (PV annuity 10 years, 8%, $60,000 + PV of $1,000,000 in 10 years at 8%. Using factor tables: Using factor tables: $1,000,000 x .46319 = ........................................................... $60,000 annuity x 6.71008 ................................................... Total .....................................................................................

$463,190 402,605 $865,795

Using a financial calculator or Excel PV function:

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PMT

$(60,000)

$(1,000,000)

Type

Yields $865,798

Total proceeds $1,000,000 x .91 .......................................... Value of the bond................................................................. Incremental value of the option ......................................... b)

$910,000 865,798 $ 44,202

Cash........................................................................................................... Contributed Surplus—Conversion Rights ........................................ Bonds Payable ..................................................................................

910,000

Bonds Payable .......................................................................................... Contributed Surplus—Conversion Rights ................................................ Common Shares ...............................................................................

933,757 44,202

44,202 865,798

977,959

1,000 bonds x 50 shares = 50,000 shares

Ex. 16-97 Convertible bonds On December 1, 2023, Dango Corp. issued $ 5,000,000 (par value), 12%, 5-year convertible bonds for $5,026,000 plus accrued interest. The bonds were dated April 1, 2023, with interest payable April 1 and October 1. If the bonds had NOT been convertible, they would have sold for $5,006,000. Bond premium/discount is amortized each interest period on a straight-line basis. Dango does NOT value the equity component at zero. Dango’s fiscal year end is September 30. On October 1, 2024, half of these bonds were converted into 35,000 no par common shares. Accrued interest was paid in cash at the time of conversion. Instructions a) Prepare the entry to record the interest expense at April 1, 2024. Assume that interest payable was credited when the bonds were issued (round to nearest dollar). b) Prepare the entry to record the conversion on October 1, 2024. Use the book value method. Assume that the entry to record amortization of the bond premium/discount and interest 16-53 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

payment has been made. Solution 16-97 a) April 1, 2024 Interest Payable........................................................................................ Interest Expense ....................................................................................... Bonds Payable .......................................................................................... Cash ...................................................................................................

100,000 199,540 460 300,000

Calculations: Issue price ................................................................................................. $5,026,000 Price without conversion ......................................................................... 5,006,000 Contributed surplus—conversion ............................................................ $ 20,000 Premium ($5,006,000 – $5,000,000) ......................................................... Months remaining .................................................................................... Premium per month ................................................................................. Premium amortized (4 × $115) ................................................................. b) October 1, 2024 Bonds Payable ($2,500,000 + $2,423*) ..................................................... Contributed Surplus—Conversion Rights ($20,000 x 50%) ..................... Common Shares ............................................................................... Calculations: Premium related to 1/2 of the bonds ($6,000 ÷ 2) ................................... Less premium already amortized [($6,000 x 10 ÷ 52) ÷ 2] ....................... *Premium remaining ................................................................................

$6,000 52 $115 $460

2,502,423 10,000 2,512,423

$3,000 577 $2,423

Difficulty: Hard Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 16-98 Convertible bonds Atlanta Ltd. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after the required interest was paid, all the bonds were converted into 3,000 no par value common shares, which were currently trading at $50 per share. Instructions 16-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

How should Atlanta account for the conversion of the bonds under the book value method? Discuss the rationale for this method. Solution 16-98 To account for the conversion of bonds under the book value method, Bonds Payable should be debited for the current carrying value, the entire amount of Contributed Surplus—Conversion Rights should be removed (debited), and Common Shares should be credited for the total of these two amounts. The current market value of the shares is irrelevant. No gain or loss on conversion is recorded. The amount to be recorded for the shares is equal to the carrying value of the bonds plus the balance of the Contributed Surplus—Conversion Rights that was recorded when the convertible bonds were first issued. The rationale for the book value method is that the conversion is the completion of the transaction initiated when the bonds were issued. Since this is viewed as a transaction with shareholders, no gain or loss should be recognized. Note that both ASPE and IFRS require the use of the book value method. Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 16-99 Redeemable preferred shares and succession planning Explain how redeemable preferred shares are used in succession planning for small business corporations. Solution 16-99 In succession planning for a small business, it is advantageous to use high/low redeemable preferred shares. The common shares of the existing company are transferred to a new company on a tax deferred basis. The retiring family member receives new redeemable preferred shares that will freeze their interest at the current value of the business. These shares may be redeemed over time. The next generation of the family receives the new common shares, which will result in any future increase in value of the business accruing to them. Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Carbon Energy Inc. is a new technology start up. It has decided to adopt a stock option plan for its executive management team, since it does not believe it will have available cash on hand for year-end bonuses. The plan was implemented on July 1, 2023, and provides participants with the right to purchase up to 4,000 common shares at $30 per share. The current fair value of the shares is estimated at $26.50 per share. Options for the maximum number of shares allowed under the plan was granted to three members of the executive management team on September 15, 2023, for services performed in 2023. The options have an expiry date of January 31, 2024. The compensation expense was estimated at $270,000 based on an appropriate option pricing model. Only two of the executives exercised their options in January prior to the deadline. Instructions Record all of Carbon Energy’s required entries to properly account for the stock option plan. Solution 16-100 December 31, 2023 Compensation Expense............................................................................ Contributed Surplus—Stock Options............................................... January 31, 2024 Cash (2 × 4,000 × $30) ............................................................................... Contributed Surplus—Stock Options ($270,000 × 2 ÷ 3) ......................... Common Shares ............................................................................... Contributed Surplus—Stock Options ($250,000 – $180,000) .................. Contributed Surplus—Expired Stock Options .................................

270,000 270,000

240,000 180,000 420,000 90,000 90,000

Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 16-101 Stock options Prepare the necessary entries from January 1, 2023 to February 1, 2025 for the following events. If no entry is needed, write "No entry necessary." 1. On January 1, 2023, the shareholders of Musetta Inc. adopted a stock option plan for its top executives, where each plan participant could receive rights to purchase up to 3,000 common shares at $40 per share. At this date, the shares were trading for $32 per share. 2. On February 1, 2023, options were granted to five executives to purchase 3,000 shares each. The options were non-transferable, and the executive had to remain an employee of the company to exercise the option. The options expire on February 1, 2025. It is assumed that the options were for services performed equally during 2023 and 2024. The Black-Scholes option pricing model determined total compensation expense to be $390,000. 3. On February 1, 2025, four executives exercised their options. The fifth executive chose not to 16-56 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

exercise their options, which therefore were forfeited. Solution 16-101 1. January 1, 2023 No entry necessary. 2. February 1, 2023 No entry necessary. December 31, 2023 Compensation Expense ($390,000 ÷ 2) .................................................... Contributed Surplus—Stock Options...............................................

195,000

December 31, 2024 Compensation Expense............................................................................ Contributed Surplus—Stock Options...............................................

195,000

3. February 1, 2025 Cash (4 × 3,000 × $40) ............................................................................... Contributed Surplus—Stock Options ($390,000 × 4 ÷ 5) ......................... Common Shares ............................................................................... Contributed Surplus—Stock Options ($390,000 – $312,000) .................. Contributed Surplus—Expired Stock Options .................................

195,000

480,000 312,000 792,000 78,000 78,000

Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 16-102 Employee share ownership plans Blanc Inc. set up an employee stock option plan under which employees may purchase shares of the company for $35 per share. The option premium is $4.50 per share and Blanc set aside 40,000 shares. On January 1, 2023, 16,000 options are purchased by employees. On December 1, 2023, 10,000 options are exercised. On February 14, 2024, 9,000 options were purchased by employees. Instructions Prepare the journal entries to record the above events. Solution 16-102 16-57 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

January 1, 2023 Cash (16,000 × $4.50) ................................................................................. Contributed Surplus—Stock Options................................................

72,000

December 1, 2023 Cash (10,000 × $35) .................................................................................... Contributed Surplus—Stock Options ($72,000 X 10,000/16,000) ............ Common Shares ................................................................................

350,000 45,000

February 14, 2024 Cash (9,000 × $4.50) ................................................................................... Contributed Surplus—Stock Options................................................

40,500

72,000

395,000

40,500

Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 16-103 Employee share ownership plans Grieger Inc. set up an ESOP under which employees may purchase shares of the company for $20 per share. The option premium is $.50 per share and Grieger set aside 20,000 shares. On January 1, 2023, 12,000 options are purchased by employees. On December 1, 2023, all 12,000 options are exercised. Instructions Prepare the journal entries to record the above events. Solution 16-103 January 1, 2023 Cash (12,000 × $.50) ................................................................................... Contributed Surplus—Stock Options................................................ December 1, 2023 Cash (12,000 × $20) .................................................................................... Contributed Surplus—Stock Options ....................................................... Common Shares ................................................................................

6,000 6,000

240,000 6,000 246,000

Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*Ex. 16-104 Stock appreciation rights On January 1, 2023, Hay Ltd. established a share appreciation rights (SAR) plan for its executives. The executives could receive cash at any time during the next four years equal to the difference between the market price of the common shares and a pre-established price of $16 for 180,000 SARs. The market prices are: Dec 31, 2023—$21 Dec 31, 2024—$18 Dec 31, 2025—$19 Dec 31, 2026—$20 On December 31, 2025, 40,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2026. Instructions a) Prepare a schedule that shows the amount of compensation expense for each of the four years, starting with 2023. b) Prepare the journal entry at December 31, 2024, to record compensation expense. c) Prepare the journal entry at December 31, 2026, to record the exercise of the remaining SARs. *Solution 16-104 a)

Schedule of Compensation Expense 180,000 SARs

Date Dec. 31, 2023

Market Price $21

Set Price $16

Value of SARs $900,000

Dec. 31, 2024

360,000

Dec. 31, 2025

540,000

Dec. 31, 2026

560,000 ($4 × 140,000)

PercentAccrued Accrued to Date 25% $225,000 (45,000) 50% 180,000 225,000 75% 405,000 155,000 100% 560,000

Expense $225,000 (45,000) 225,000 155,000

b) Liability Under Share Appreciation Rights Plan ...................................... Compensation Expense ....................................................................

45,000

Liability Under Share Appreciation Rights Plan ...................................... Cash ...................................................................................................

560,000

45,000

c) 560,000

Difficulty: Hard Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications 16-59 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

**Ex. 16-105 Options pricing models There are numerous options pricing models. Identify the two models discussed in the textbook and identify and describe what inputs (at a minimum) go into these models. Solution 16-105 Black-Scholes and binomial tree options models are discussed in the textbook. Inputs into the model include the following: 1. The exercise price 2. The expected life of the option 3. The current market price of the underlying stock 4. The volatility of the underlying stock 5. The expected dividend during the option life 6. The risk-free rate of interest for the option life Difficulty: Medium Learning Objective: Understand how options pricing models are used to measure financial instruments. Section References: Appendix 16C: Advanced Models for Measuring Fair Value and Disclosure of Fair Value Information, Options Pricing Models CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 16-106 Fair value disclosure for financial instruments – IASB standards What are the IASB rules regarding disclosure of financial instruments in the notes to the financial statements and why? Solution 16-106 Both the cost and fair value of all financial instruments are to be reported in the notes to the financial statements. IASB has decided that companies should disclose information that enables users to determine the extent of usage of fair value and the inputs used to implement fair value measurement. Two reasons for this are: 1. Differing levels of reliability exist in the measurement of fair value information; therefore, it is important to understand the varying risks involved in the measurement. 2.

Changes in the fair value of financial instruments are reported differently in the financial statements, depending on the type of financial instrument involved and whether the fair value option is used. Note disclosure provides an opportunity to explain more precisely the impact of the changes in the value of the financial instruments on financial results. 16-60

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Describe and analyze required fair value disclosures for financial instruments. Section Reference: Fair Value Disclosure for Financial Instruments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 16-107 Forward contract Trudel Builders Ltd. uses fir 2x6 lumber as its framing material. On November 15, 2023, Trudel enters into a forward contract for 1,500,000 board feet of lumber at $0.25 per board foot for March 2024 delivery. At Trudel’s year end of December 31, 2023, the market price for March delivery is $0.26. On March 5, 2024, Trudel took delivery of 1,500,000 board feet for $0.25 and settled the forward contract. The market rate on this date was $0.28 per board foot. Instructions Record all required entries related to this contract. Solution 16-107 a) November 15, 2023 No entry. b) December 31, 2023 Record gain to date Derivatives—Financial Assets/Liabilities ................................................. Gain or Loss on Derivatives ($0.26 – $0.25) × 1,500,000 .................. c) March 5, 2024 Settlement of futures contract Inventory ($0.28 × 1,500,000) ................................................................... Derivatives—Financial Assets/Liabilities ......................................... Gain or Loss on Derivatives .............................................................. Cash ($0.25 x 1,500,000)....................................................................

15,000 15,000

420,000 15,000 30,000 375,000

Pr. 16-108 Employee stock options On November 1, 2021, London Corp. adopted a stock option plan allowing certain company executives to purchase a total of 30,000 common shares. The options were granted on January 2, 2022 and were exercisable four years after the grant date (Jan. 2, 2026), as long as the executives were still employees. The options expire eight years from the grant date. The exercise price was set at $46 and, 16-62 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

using an option pricing model to value the options, the total compensation expense was estimated to be $510,000. At January 2, 2022, the market price of the shares was $50. On January 1, 2023, 3,000 options were terminated (forfeited) when an employee left the company. The market value of the shares at that date was $32. All the remaining options were exercised during 2026: 17,000 on January 3 when the market price was $62, and 10,000 on May 1 when the market price was $77. Instructions a) Calculate the intrinsic value and the time value of the stock option. b) Prepare journal entries related to the stock option plan for the years 2022 through 2026. Assume that the employees perform services equally from 2022 through 2025. Year end is December 31. c) Discuss the advantages and disadvantages of offering stock options to employees as a means of compensation. Solution 16-108 a) The intrinsic value of the option is the difference between the market price and the strike (exercise) price. In this case the market price is $50 and the strike price is $46. Intrinsic value component: ($50 – $46) x 30,000 = $120,000 The time value of the option is the remaining value of the options. Since the total value of the options is $510,000, then the difference between the total value and the intrinsic value should be the time value component. Time value component: $510,000 – $120,000 = $390,000 b) January 2, 2022 No entry required December 31, 2022 Compensation Expense............................................................................ Contributed Surplus—Stock Options...............................................

127,500

January. 1, 2023 Contributed Surplus—Stock Options ...................................................... Compensation Expense ....................................................................

12,750

December 31, 2023 Compensation Expense............................................................................ Contributed Surplus—Stock Options...............................................

114,750

December 31, 2024 Compensation Expense............................................................................ Contributed Surplus—Stock Options...............................................

114,750

127,500

12,750

114,750

114,750 16-63

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

December 31, 2025 Compensation Expense............................................................................ Contributed Surplus—Stock Options...............................................

114,750

January 3, 2026 Cash........................................................................................................... Contributed Surplus—Stock Options ...................................................... Common Shares ...............................................................................

782,000 289,000

May 1, 2026 Cash........................................................................................................... Contributed Surplus—Stock Options ...................................................... Common Shares ...............................................................................

460,000 170,000

114,750

1,071,000

630,000

b) Calculation of compensation expense 2022:

$510,000 ÷ 4 = $127,500

2023:

Jan. 1 – remove compensation expense related to employee who left $127,500 x 3,000 ÷ 30,000 = $12,750

For 2023, 2024, and 2025: New annual compensation expense: ($510,000 ÷ 4) – $12,750 or $127,500 x 90% = $114,750 January 3, 2026 Dr. to Cash: 17,000 x $46 = $782,000 Dr. to Contributed Surplus: $459,000 x 17 ÷ 27 = $289,000 May 1, 2026 Dr. to Cash: 10,000 x $46 = $460,000 Dr. to Contributed Surplus: $459,000 x 10 ÷ 27 = $170,000 c)

There are several advantages and disadvantages to the use of stock options as compensation.

Advantages • This type of compensation is tied to performance, which should motivate employees to work hard. • The mandatory service period helps to retain employees. If employees become more productive over time as they become more experienced, then the firm benefits. • Employees become shareholders if they exercise the options. This ensures that they will act in the best interests of the company. • Employees will benefit from any appreciation of the stock price. Disadvantages • Employees might be low risk tolerant and therefore not like the risk inherent in stock options. 16-64 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

• •

If employees do not understand the value of the options, they will not consider it a benefit and might ask for additional pay instead, so the firm will end up paying them more. Employees have limited ability to affect the stock price, so the stock options might not motivate them to work hard.

Difficulty: Hard Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 16-109 Employee stock options Ocean Block Inc. is a new business that has been experiencing significant growth. To attract new staff, the company has established an employee stock option plan that has both an ESOP and a CSOP component to the program. The ESOP component is available to all employees, while the CSOP is only available to executive management. At Dec 31, 2023, a total of 100,000 stock options were granted to 5 executive managers. The options have a vesting period of 2 years and expire 3 years from the end of the vesting period. If a manager leaves the firm, the options are terminated. Based on commonly used option pricing models, the intrinsic value of the 100,000 options is $200,000, and the time value of the options is $300,000. The exercise price on the shares is $45 for both the ESOP and CSOP. Instructions a) What is the total amount of compensation expense associated with the CSOP options? b) All of the executives stayed with the business to the end of the vesting period and earned the options evenly throughout the period. On June 30, 2026, 40,000 options were exercised when the market price of the shares was $55. What are the journal entries from the date of grant to the date of exercise? c) Two front-line staff who were hired in 2023 decided that they would like to participate in the ESOP established by the company. On June 30, 2024, each of them purchased 1,000 options at a premium of $4.50 each and exercised their right to buy shares at the same time as the executive managers did. What are the journal entries for these transactions? d) CRITICAL THINKING: What is a fundamental difference between an ESOP and a CSOP that is evident in the accounting treatment? Solution 16-109 a) Intrinsic value + Time value = Total value of the options (the compensation expense) $200,000 + $300,000 = $500,000 b) December 31, 2023 – No entry 16-65 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

December 31, 2024 Compensation Expense ($500,000/2) ........................................................ Contributed Surplus—Stock Options ..................................................

250,000

December 31, 2025 Compensation Expense ($500,000/2) ........................................................ Contributed Surplus—Stock Options ..................................................

250,000

June 30, 2026 Cash ($45 x 40,000) ..................................................................................... 1,800,000 Contributed Surplus—Stock Options ($500,000 x 40%) ............................ 200,000 Common Shares ................................................................................... c) June 30, 2024 Cash (1,000 x 2 x $4.50) ............................................................................... Contributed Surplus—Stock Options .................................................. June 30, 2026 Cash (2,000 x $45) ....................................................................................... Contributed Surplus—Stock Options......................................................... Common Shares ...................................................................................

2,000,000

9,000 9,000

90,000 9,000 99,000

d) CRITICAL THINKING: An ESOP is available to everyone and has nothing to do with performance or compensation for specific activities as a result of being employed with the organization. A CSOP is tied to performance and only available to defined groups of employees. The difference is also evident in the accounting treatment in that a CSOP will require “compensation expense” to be recorded whereas an ESOP does not. Another difference is that an ESOP would require the employee to purchase the option by paying the premium with cash, where the CSOP does not as the employee earns the option itself. Difficulty: Hard Learning Objective: Understand what derivatives are, how they are used to manage risks, and how to account for them. Section Reference: Derivatives Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 16-110 Convertible bonds and warrants For each of the unrelated situations described below, prepare the entries required to record the transactions. 16-66 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2. 3.

On August 1, 2023, Alpha Corporation called its 10% convertible bonds for conversion. The $4,000,000 par value bonds were converted into 160,000 no par common shares. On August 1, there was $350,000 of unamortized premium applicable to the bonds. At the time of issuance, Contributed Surplus—Conversion Rights was credited for $150,000, which represented the equity portion of the convertible bonds, and the market value of the common shares was $20 per share. The company records the conversion using the book value method. Ignore all interest payments. Beta Inc. issues 10% convertible bonds, par $1,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94. Use the residual method. Gamma Ltd. issues $2,000,000 par value, 8% bonds. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $1,974,000 and the value of the warrants is $126,000. The bonds with the warrants sold at 101. Use the residual method.

Solution 16-110 1. Bonds Payable ($4,000,000 + $350,000).................................................... Contributed Surplus—Conversion Rights ................................................. Common Shares ................................................................................ 2.

4,350,000 150,000 4,500,000

Cash............................................................................................................ Bonds Payable ($1,000,000 x 94%).................................................... Contributed Surplus—Conversion Rights .........................................

970,000

Cash ($2,000,000 x 101%) .......................................................................... Bonds Payable ................................................................................... Contributed Surplus—Stock Warrants ..............................................

2,020,000

940,000 30,000

1,974,000 46,000

Pr. 16-111 Convertible debt Miron Construction Ltd. offers five-year, 8% convertible bonds (par $1,000). Interest is paid annually on the bonds. Each $1,000 bond may be converted into 100 common shares, which are currently trading at $8 per share. Similar straight bonds carry an interest rate of 10%. One thousand bonds are issued at 101. Instructions a) Assume Miron Construction Ltd. follows IFRS and decides to use the residual method and measures the debt first. Calculate the amount to be allocated to the bond and to the option. b) Prepare the journal entry at the date of issuance of the bonds under IFRS. c) Assume that after three years, when the carrying amount of the bonds was $965,290, one-half of 16-67 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) e)

the holders of the convertible debt decided to convert their convertible bonds before the bond maturity date. Prepare the journal entry to record the conversion. How many shares were issued at the conversion? Assume now that Miron follows ASPE and has chosen as an accounting policy to value the equity component at zero. Prepare the journal entry at the date of issuance of the bonds.

Solution 16-111 a) Value of the bonds (PV annuity 5 years, 10%, $80,000 + PV of $1,000,000 in 5 years at 10%. Using factor tables: $1,000,000 x .62092 = ........................................................... $80,000 annuity x 3.79079 ................................................... Total .....................................................................................

$620,920 303,263 $924,183

Using a financial calculator or Excel PV function: PV

10%

PMT

$(80,000)

$(1,000,000)

Type

Yields $924,184

Total proceeds $1,000,000 x 1.01 Value of the bond Incremental value of the option

$1,010,000 924,184 $ 85,816

b) Cash........................................................................................................... Contributed Surplus—Conversion Rights ........................................ Bonds Payable ..................................................................................

1,010,000

Bonds Payable ($965,290 x 50%) ............................................................. Contributed Surplus—Conversion Rights1............................................... Common Shares ...............................................................................

482,645 42,908

85,816 924,184

525,553

($85,816 x 50%) = $ 42,908

d) 1,000 bonds X 50% = 500 bonds; 500 x 100 shares = 50,000 shares e) Cash........................................................................................................... Bonds Payable ..................................................................................

1,010,000 1,010,000 16-68

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 16-112 Convertible debt TinTech is a new technology start-up firm that is looking to grow quickly. While the company has secured investors who have already purchased equity, additional funds are needed to pay for the development of a new application that TinTech wants to bring to market. One of the existing investors approached the management team of TinTech and offered to purchase a new convertible bond from TinTech but wanted very favourable conversion terms and a 6% coupon paid semi-annually. The company needs $3,000,000 to cover all the software development costs along with additional hardware that is needed to support the project. It is estimated that the application will take 1 year to build and 5 years to generate enough excess cash flow to pay back the bond. The market rate for similar debt is 4%. TinTech is following IFRS. Instructions a) What should the term of the bond be, based on the information above? b) What is the present value of this bond if it was issued without any convertible features? (Round to the nearest dollar). How would the issue price be quoted in the market? c) The investor and the management team have agreed to the following conversion feature: Each $10,000 bond can be converted into 500 Class B common shares. The Class B common shares are a new class that come with 100 votes per share instead of 1. The estimated market price per Class B common share is $300. With this conversion feature, the bond is being issued at 115 on Jan. 1, 2023. Prepare the journal entry for the issuance of this bond. d) Exactly halfway through the term of the bond, the investor decided to convert the bond into the Class B common shares. How many shares are issued? Prepare the necessary journal entry. e) CRITICAL THINKING: Why do you think the investor pushed for favourable terms with regards to the conversion rights? Do you think that the terms are overly favourable? How would you react if you were one of the other investors? Solution 16-112 a) 1 year to build, plus 5 years to have enough cash to pay back the principal means that the company should set the term at 6 years. b) Use the follow variables for a financial calculator: FV $3,000,000 PMT $90,000 (6% coupon x $3,000,000/2) 16-69 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

N = 12 (6 years x 2 periods per year) I = 2% (4%/2 periods per year) Calculated PV = $3,317,260 $3,317,260/$3,000,000 = 110.575 c) Cash............................................................................................................ 3,450,000 Bonds Payable ................................................................................... Contributed Surplus—Conversion Rights .........................................

3,317,260 132,740

d) Number of shares issued is ($3,000,000/$10,000) x 500 = 150,000 shares

01-Jan 01-Jul-23 01-Jan-24 01-Jul-24 01-Jan-25 01-Jul-25 01-Jan-26

Interest Expense

Coupon

$ 66,345.20 $ 65,872.11 $ 65,389.55 $ 64,897.34 $ 64,395.29 $ 63,883.19

$ 90,000.00 $ 90,000.00 $ 90,000.00 $ 90,000.00 $ 90,000.00 $ 90,000.00

Amort of Prem $ 23,654.80 $ 24,127.89 $ 24,610.45 $ 25,102.66 $ 25,604.71 $ 26,116.81

CV $3,317,260.24 $ 3,293,605.44 $ 3,269,477.55 $ 3,244,867.10 $ 3,219,764.44 $ 3,194,159.73 $ 3,168,042.93

Bonds Payable ........................................................................................... Contributed Surplus—Conversion Rights ................................................. Common Shares ..................................................................................

3,168,043 132,740 3,300,783

e) CRITICAL THINKING: The investor likely pushed for more favourable terms because debt carries risk. In this particular case, since TinTech is a new company, the risk of non-payment (both interest and the principal) is probably fairly high. Being granted a right to acquire shares that carry more voting power than the existing shareholders is quite favourable and may come with governance issues. TinTech now has a single investor that may have more voting power (depending on the structure of the remaining shares) than the other existing investors. The other investors may be upset with this arrangement, or, in the least, would want an opportunity to participate equally in the bond issuance. Difficulty: Medium Learning Objective: Analyze and account for hybrid/compound instruments from an issuer perspective. Section Reference: Debt versus Equity: Issuer Perspective Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting 16-70 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

Pr. 16-113 Stock options Using a table format, compare and contrast employee stock option plans (ESOPs) and compensatory stock option plans (CSOPs). Solution 16-113

Purpose

Issuer Fair Value Measurement

Type of transaction Disclosure

ESOPs To give employees an opportunity to own part of the company Issued by the company Generally not traded on exchange; therefore, fair value cannot be measured as readily Operating Income Statement

CSOPs To remunerate management or employees Issued by the company Generally not traded on exchange; therefore, fair value cannot be measured as readily Capital Shareholders’ Equity

Difficulty: Medium Learning Objective: Describe and account for share-based compensation. Section Reference: Share-Based Compensation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*Pr. 16-114 Hedging Identify and describe the five steps used to analyze whether hedge accounting is necessary. *Solution 16-114 1. Identify the hedged item. Which risk is being hedged? 2.

Identify the hedging item. This is usually a derivative instrument that the company has purchased or signed a contract for (such as a forward, future, option, or swap). If a risk is properly hedged, the hedging item reduces the risk noted in step 1 above.

Identify how the hedged item is being accounted for without hedge accounting. Note that it might not even be recognized on the SFP yet if it is an anticipated transaction, such as a future purchase. Is it accounted for at FV-NI or FV-OCI or some sort of cost basis?

Note that the hedging item, which is normally a derivative, will be accounted for using FV-NI unless hedge accounting is applied. Therefore, if the hedged item is accounted for in any other way, we may need to consider using hedge accounting if IFRS and/or ASPE allows it. 16-71

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Locate where the recognized gains and losses for the hedged and hedging items are recognized (net income, OCI, or perhaps not at all). Do the gains and losses from the hedged item and hedging items offset? If they do, then we would say that there is symmetry in the accounting. The gains and losses are treated similarly in terms of measuring net income or OCI. If they do not offset, then we may need to consider hedge accounting if IFRS and/or ASPE allows it. In this case, we would argue that there is no symmetry in accounting unless we apply hedge accounting.

Difficulty: Easy Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

*Pr. 16-115 Interest rate swap On January 1, 2023, Miron Ltd. issues a floating rate bond for $500,000. At the same time, the corporation enters into an interest rate swap whereby it agrees to pay interest on $500,000 at 10% (the current interest rate) and to receive payments based on the floating rate. At December 31, 2023, the floating interest rate is 8%, and the value of the swap contract is $40,000 to the counterparty’s benefit. Instructions Prepare all journal entries required related to the swap agreement and the interest payment on the bond. *Solution 16-115 January 1, 2023 No entry (memorandum entry only) December 31, 2023 Payment of bond interest Interest Expense ($500,000 × 8%) ............................................................. Cash ....................................................................................................

40,000 40,000

Payment of swap interest (net) Interest Expense ($500,000 x 10%) – $40,000 ........................................... Cash ....................................................................................................

10,000

Record swap contract liability Unrealized Gain or Loss—OCI.................................................................... Derivatives—Financial Assets/Liabilities ..........................................

40,000

10,000

40,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Pr. 16-116 Hedging (forward contract) On May 1, 2023, Bella Corp., a coffee wholesaler, placed an order with its supplier for six tonnes of coffee, to be delivered and paid for on September 30, 2023. At that time, the spot (current) price for one tonne of coffee was $3,000, and the future (forward) price for September 30, 2023, delivery was $2,900. Thus, Bella decided to enter into a forward contract for six tonnes of coffee at $2,900 per tonne for September 30, 2023, delivery. It designated the contract as a cash flow hedge. The contract further calls for a net cash settlement. Bella’s year end is June 30, 2023. At that date the spot price was $2,980, the future price for threemonth delivery was $2,880, and the future price for five-month delivery was $2,850. On September 30, 2023, when the spot price was $2,940 and the future price for five-month delivery was $2,980, the company took delivery of the coffee, paid its supplier, and settled the forward contract. On October 31, 2023, Bella sold three tonnes of coffee from this delivery to Java Unlimited for $3,400 per tonne cash. Assume all prices are in Canadian dollars. Instructions a) Prepare journal entries for the following dates in 2023: May 1, June 30, September 30, and October 31. Bella is a publicly traded corporation and follows IFRS requirements. b) CRITICAL THINKING: The CFO of Bella is questioning your decision to use hedging. Explain how you made the decision to hedge this transaction. What criteria did you take into consideration? Would your answer be different if the future price were $3,100? *Solution 16-116 a) May 1: No entry. The contract value is zero. Memo entry only. June 30 (year end) Unrealized Gain or Loss—OCI................................................................... Derivatives—Financial Assets/Liabilities ......................................... 6 x ($2,880 – $2,900) = $120 Sept. 30 (settlement of contract) Cash...........................................................................................................

120 120

240 16-73

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Derivatives—Financial Assets/Liabilities ................................................. Unrealized Gain or Loss—OCI ........................................................... 6 x ($2,940 – $2,880) = $360

120

Inventory ($2,940 x 6) ............................................................................... Cash ...................................................................................................

17,640

Oct. 31 (sale of coffee) Cash ($3,400 x 3) ....................................................................................... Sales Revenue ...................................................................................

360

17,640

10,200 10,200

Cost of Goods Sold ($2,940 x 3) ................................................................ Inventory ...........................................................................................

8,820

Unrealized Gain or Loss—OCI................................................................... Cost of Goods Sold............................................................................

120

8,820

120

Gain/Loss ($360 – $120) x 1 ÷ 2 b) CRITICAL THINKING: The decision as to whether or not to hedge this transaction should depend on whether the company desires to eliminate the market risk associated with the fluctuations in the price of coffee. There is an optimal level of risk a firm desires to take on, and, accordingly, a decision should be made. The future price should not affect the decision as it represents the market expectations of the price at the time the company will take delivery and pay for the coffee. The future price will affect the decision only in the case the company has different expectations than the market about the future price. Because Bella is not a currency speculator, but makes its profits from selling coffee, it would make sense for this company to lower its market risk and hedge the transaction. Difficulty: Hard Learning Objective: Understand how derivatives are used in hedging and explain how to apply hedge accounting standards. Section Reference: Appendix 16A: Hedging CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Pr. 16-117 Share appreciation rights plans Lemire Inc. establishes a SARs program on January 1, 2024, which entitles executives to receive cash at the date of exercise (any time after the service period) for the difference between the shares’ fair value and the pre-established or stated price of $5 on 5,000 SARs. The SARs’ fair value on December 31, 2024 is $30,000, $70,000 on December 31, 2025, and $50,000 at December 31, 2026, and the service period runs for two years (2024 to 2025). Instructions a) Prepare a schedule of compensation expense covering the period from 2024 to 2026, assuming 16-74 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c) d) e)

the executives exercise their rights after holding the SARs for three years. Prepare the adjusting entry at December 31, 2024. Prepare the adjusting entry at December 31, 2025. Prepare the adjusting entry at December 31, 2026. Prepare the entry when the executives exercise their rights.

*Solution 16-117 a)

SHARE APPRECIATION RIGHTS Schedule of Compensation Expense (1)

(2)

(3)

(4)

Date

Fair Value of SARsa

Percentage Accruedb

Cumulative Compensation Accrued to Date

Expense 2024

$15,000

12/31/24

$30,000

50%

55,000 12/31/25

$70,000

100%

Expense 2025 $55,000

70,000 (20,000)

12/31/26

$50,000

100%

Expense 2026

$(20,000)

$50,000

Cumulative compensation for unexercised SARs to be allocated to periods of service. The percentage accrued is based on a two-year service period (2024 to 2025).

b) Compensation Expense............................................................................ Liability Under Share Appreciation Rights Plan ..............................

15,000

Compensation Expense............................................................................ Liability Under Share Appreciation Rights Plan ..............................

55,000

Liability Under Share Appreciation Rights Plan ...................................... Compensation Expense ....................................................................

20,000

Liability Under Share Appreciation Rights Plan ...................................... Cash ...................................................................................................

50,000

15,000

c) 55,000

d) 20,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Account for share appreciation rights plans and performance-type plans. Section Reference: Appendix 16B: Stock Compensation Plans—Additional Complications CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 16-118 Fair value hierarchy What is the fair value hierarchy and what information must a company provide under this hierarchy? Solution 16-118 To highlight reliability in reporting, the IASB established a fair value hierarchy with three broad levels. Level 1 is the most reliable measurement because fair value is based on quoted prices in active markets for identical assets or liabilities. Level 2 is less reliable – it is not based on quoted market prices for identical assets and liabilities, but instead may be based on similar assets or liabilities. Level 3 is least reliable – is uses unobservable inputs that reflect the company’s assumption as to the value of the financial instrument. Companies must provide: 1. Quantitative information about significant unobservable inputs used for all level three measurements. 2. A qualitative discussion about the sensitivity of recurring level three measurements to changes in the unobservable inputs disclosed. 3. A description of the company’s valuation process. 4. Any transfers between Levels 1 and 2 of the fair value hierarchy 5. Information about non-financial assets measured at fair value at amounts that differ from the assets’ highest and best use 6. The proper hierarchy classification for items that are not recognized on the statement of financial position but are disclosed in the notes. Difficulty: Hard Learning Objective: Describe and analyze required fair value disclosures for financial instruments. Section Reference: Fair Value Disclosure for Financial Instruments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 17 EARNINGS PER SHARE CHAPTER STUDY OBJECTIVES 1. Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Earnings per share numbers give common shareholders an idea of the amount of earnings that can be attributed to each common share. This information is often used to predict future cash flows from the shares and to value companies. Under IFRS, EPS must be presented for all public companies or companies that are intending to go public. The calculations must be presented on the face of the income statement for net income from continuing operations and net income (for both basic EPS and diluted EPS in the case of complex capital structures). When there are discontinued operations, the per share impact of these items must also be shown, but it can be shown either on the face of the income statement or in the notes to the financial statements. Comparative calculations must also be shown. EPS is one of the most commonly used metrics for assessing performance. Diluted EPS is especially important because it allows for the effects of potential dilution. The price earnings ratio is often used to value companies.

2. Calculate basic earnings per share. Basic earnings per share is an actual calculation that takes income available to common shareholders and divides it by the weighted average number of common shares outstanding during the period

3. Calculate diluted earnings per share. Diluted earnings per share is a “what if” calculation that considers the impact of potential common shares. Potential common shares include convertible debt and preferred shares, options and warrants, contingently issuable shares, and other instruments that may result in additional common shares being issued by the company. They are relevant because they may cause the present interests of the common shareholders to become diluted. The if-converted method considers the impact of convertible securities such as convertible debt and preferred shares. It assumes that the instruments are converted at the beginning of the year (or issue date, if later) and that any related interest or dividend is thus avoided. The treasury stock method looks at the impact of written call options on EPS numbers. It assumes that the options are exercised at the beginning of the year and that the money from the exercise is used to buy back shares in the open market at the average common share price. The reverse treasury stock method looks at the impact of written put options. It assumes that the options are exercised at the beginning of the year and that the company first issues shares in the market (at the average share price) to obtain sufficient funds to buy the shares under the option. Antidilutive potential common shares are irrelevant because they would result in diluted EPS calculations that are higher than the basic EPS. Diluted EPS must show the worst possible EPS number. Note that purchased options and written options that are not in the money are ignored for purposes of calculating diluted EPS because they are either antidilutive or will not be exercised 17-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

4. Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. ASPE does not prescribe accounting standards for EPS. The IASB and FASB were working on a revised plan of action to study the issues. At the time of writing, work on the project was paused.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer c c b d c c a c a d c a d b d b c c b b b c b b a b b a c d b a d a b d d b b a c c b

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Objective of EPS EPS presentation Basic and Diluted EPS EPS disclosure Complex capital structure EPS analysis EPS valuation Simple capital structure Calculating basic EPS Weighted average of common shares outstanding Contingently issuable shares IFRS nomenclature Choose incorrect statement. Effect of dividends on non-convertible preferred shares EPS and capital structure Calculate EPS Calculate basic EPS Calculate basic EPS. Calculate weighted average of common shares outstanding. Calculate weighted average of common shares outstanding Calculate basic EPS. Calculate basic EPS with non-convertible preferred shares. Calculate basic EPS. Calculate basic EPS. Weighted average number of shares Calculate denominator for basic and diluted EPS with convertible bonds. Calculate denominator for basic and diluted EPS with convertible bonds. Calculate denominator for basic and diluted EPS with convertible bonds. Effect of treasury shares on EPS Diluted EPS Dilutive convertible securities Cumulative convertible preferred shares effect on EPS Treasury stock method Treasury stock method Treasury stock method Antidilutive securities EPS calculation with two dilutive convertible securities Reverse treasury stock method. Choose correct statement. "If-converted" method Calculate basic EPS. Diluted EPS Calculate diluted EPS with convertible bonds 17-3

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b c b Answer c c

44. 45. 46. No. 47. 48.

b b b

49. 50. 51.

d a b b d d b

52. 53. 54. 55. 56. 57. 58.

Calculate diluted EPS with convertible bonds. Calculate diluted EPS with convertible bonds. Calculate diluted EPS with convertible bonds. Description Calculate diluted EPS with convertible preferred shares. Calculate diluted EPS with convertible bonds and convertible preferred shares. Calculate diluted EPS with convertible preferred shares. Calculate diluted EPS with convertible bonds. Calculate diluted EPS with convertible preferred shares and convertible bonds. Use of treasury stock method with outstanding warrants Use of reverse treasury stock method with outstanding put options Calculate denominator for diluted EPS with outstanding stock options. Calculate denominator for diluted EPS with call options. Calculate diluted EPS. IFRS vs ASPE Challenges for standard setters

EXERCISES Item E17-59 E17-60 E17-61 E17-62 E17-63 E17-64 E17-65 E17-66 E17-67 E17-68 E17-69 E17-70 E17-71 E17-72 E17-73

Description Company Valuation using EPS Assessing performance using EPS EPS Calculations EPS presentation and disclosures under IFRS Weighted average of common shares outstanding Weighted average of common shares outstanding Issuance of stock dividends/splits versus issuance/repurchase of shares Basic and diluted earnings per share Basic and diluted earnings per share Effect of dilutive securities on diluted earnings per share calculations Diluted earnings per share – Treasury Method Diluted earnings per share – Reverse Treasury Method Effects of antidilutive securities on EPS Multiple antidilutive financial instruments and EPS Multiple antidilutive financial instruments and EPS

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Item P17-74 P17-75 P17-76 P17-77 P17-78 P17-79 P17-80 P17-81 P17-82 P17-83

Description Weighted average calculations and basic EPS Diluted earnings per share Basic and diluted earnings per share Basic and diluted earnings per share Basic and diluted earnings per share Basic and diluted earnings per share Basic and diluted earnings per share Weighted average calculations, basic and diluted earnings per share Weighted average calculations, basic and diluted earnings per share If-converted, treasury stock and reverse treasury stock methods

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. EPS is important to common shareholders for all of the following reasons, except for a) it indicates the amount of income that is earned by each common share. b) common shareholders have a residual interest in the company. c) it is an indicator of cumulative dividend payments. d) it is an indicator of the amount of income earned by each share. Answer: c Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. EPS is normally a) on the income statement of privately held and publicly traded corporations. b) in the notes to the financial statements. c) not a requirement under ASPE. d) provided at the discretion of management. Answer: c Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. Diluted EPS is only required when a) a company has discontinued operations. b) there is a complex capital structure. c) basic EPS can’t be calculated. d) a company uses ASPE. Answer: b Difficulty: Easy 17-6 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. Standard setters require the EPS calculation to be included a) only when there is a complex capital structure. b) under both IFRS and ASPE. c) when is an indicator of cumulative dividend payments. d) for all publicly traded companies. Answer: d Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. Complex capital structures and dual presentation of earnings require all of the following additional disclosures except a) the amounts used in the numerator and denominator in calculating basic and diluted EPS. b) a reconciliation of the numerators and denominators of basic and diluted per share calculations for income before discontinued operations. c) adjustments to income before discontinued operations. d) securities that could dilute basic EPS in the future but were not included in the calculations due to antidilutive features. Answer: c Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

6. Standard setters are very specific regarding the calculation of EPS for all of the following reasons 17-7 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

except a) predictor of future company value. b) it can be used to assess management stewardship. c) the income tax consequences of increased share value. d) because of the dilutive nature of complex financial instruments. Answer: c Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how is should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

7. All of the following regarding company valuation are true except for a) EPS is the preferred method recommended by standard setters. b) sustainable cash flow or earnings can be used. c) EPS can be used because it is considered reliable and all inclusive. d) using EPS provides a very rough calculation only. Answer: a Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how is should be presented, disclosed and analyzed Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

8. With respect to the calculation of earnings per share, which of the following would constitute a simple capital structure? a) common shares and convertible bonds b) earnings derived from one primary line of business c) common shares and non-convertible preferred shares d) common shares and convertible preferred shares Answer: c Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

9. In calculating basic earnings per share, if the preferred shares are cumulative, the amount that should be deducted as an adjustment to the numerator is the a) annual preferred dividend. b) preferred dividends in arrears. c) annual preferred dividend times (one minus the income tax rate). d) preferred dividends in arrears times (one minus the income tax rate). Answer: a Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

10. In calculating the weighted average of common shares outstanding, when a stock dividend or stock split occurs, the additional shares are a) ignored. b) weighted by the number of months outstanding. c) considered outstanding at the beginning of the year. d) considered outstanding at the beginning of the earliest year reported. Answer: d Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

11. When a corporation agrees to issue common shares if some specific future event occurs, such shares are known as a) potential treasury shares. b) potential common shares. c) contingently issuable shares. d) convertible common shares.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

12. Under IFRS, common shares are also called a) ordinary shares. b) potential shares. c) treasury shares. d) non-dilutive shares. Answer: a Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

13. Which of the following statements is NOT correct? a) Options that are out of the money are ignored in earnings per share calculations. b) The treasury stock method is used for written call options. c) Corporations that have only antidilutive securities are not permitted to increase their earnings per share and are required to report only basic earnings per share. d) Contingently issuable shares are never included in diluted earnings per share calculations. Answer: d Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

14. In calculating diluted earnings per share, dividends on non-convertible cumulative preferred shares should be a) ignored.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) deducted from net income whether declared or not. c) deducted from net income only if declared. d) added back to net income whether declared or not. Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

15. EPS calculated as income available to common shareholders divided by the weighted average number of shares outstanding is used for a a) complex capital structure. b) hybrid capital structure. c) complex capital structure with call options. d) simple capital structure. Answer: d Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

16. Which of the following is the formula to compute EPS? a) (Net income – Preferred dividends) ÷ Average number of shares outstanding b) (Net income – Preferred dividends) ÷ Weighted average number of shares outstanding c) (Net income + Preferred dividends) ÷ Weighted average number of shares outstanding d) Net income ÷ Number of shares outstanding Answer: b Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

17. At January 1, 2023, Marvel Corp. had 200,000 common shares outstanding (no preferred shares issued). On July 1, 2023, the corporation issued 225,000 shares, and reported net income of $315,000 for calendar 2023. Basic earnings per share for 2023 would be a) $2.80. b) $1.40. c) $1.01. d) $0.74. Answer: c Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $315,000 ÷ [200,000 + (225,000 x 6 ÷ 12)] = $1.01

18. At December 31, 2023, Helium Corp. had 650,000 common shares outstanding, 500,000 of which were issued and outstanding throughout the year and 150,000 of which were issued on October 1, 2023. Net income for calendar 2023, was $382,500. There are no preferred shares issued. Basic earnings per share for 2023 would be a) $0.43. b) $0.59. c) $0.71. d) $0.77. Answer: c Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $382,500 ÷ [500,000 + (150,000 x 3 ÷ 12)] = $0.71

19. At January 1, 2023, Dango Ltd had 450,000 common shares outstanding (no preferred shares issued). During 2023, Dango issued 60,000 shares on May 1, purchased 36,000 treasury shares on September 1, and issued 42,000 more shares on November 1. The weighted average of common shares outstanding for 2023 is a) 497,000. b) 485,000. 17-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) 509,000. d) 469,000. Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 450,000 + (60,000 × 8 ÷ 12) – (36,000 × 4 ÷ 12) + (42,000 × 2 ÷ 12) = 485,000

20. At January 1, 2023, Wrango Ltd had 450,000 common shares outstanding (no preferred shares issued). During 2023, Wrango issued 60,000 shares on May 1, purchased 36,000 treasury shares on September 1, issued 42,000 more shares on November 1, and issued a 2 for 1 stock split on Dec 31. The weighted average of common shares outstanding for 2023 is a) 994,000. b) 970,000. c) 1,018,000. d) 938,000. Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 450,000 + (60,000 × 8 ÷ 12) – (36,000 × 4 ÷ 12) + (42,000 × 2 ÷ 12) = 485,000 x 2 = 970,000

21. During 2023, Neimer Ltd. had 350,000 common shares, 60,000 non-cumulative convertible preferred shares, and $1,200,000 10% convertible bonds outstanding. The preferred shares are convertible into 80,000 common shares. During 2023, Neimer paid dividends of $1.00 per share to the common shares and $1.50 per share to the preferred shares. Each $1,000 bond is convertible into 50 common shares. The net income for 2023 was $1,000,000 and the income tax rate was 30%. Basic earnings per share for 2023 is a) $2.04. b) $2.60. c) $2.86. d) $3.03.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: [$1,000,000 – (60,000 x $1.50)] ÷ 350,000 = $2.60

22. At December 31, 2022, Pliers Corp. had 380,000 common shares outstanding. No additional common shares were issued during 2023. On January 1, 2023, Pliers issued 420,000 non-cumulative, non-convertible preferred shares. During 2023, Pliers paid cash dividends of $200,000 to the common shares and $160,000 to the preferred shares. Net income for calendar 2023, was $540,000. Their income tax rate is 40%. Basic earnings per share for 2023 is a) $0.42. b) $1.84. c) $1.00. d) $1.42. Answer: c Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($540,000 – $160,000)÷ 380,000 = $1.00

23. At December 31, 2022, Grieger Corp. had 300,000 common shares outstanding. No common shares were issued during 2023; however, on January 1, 2023, Grieger issued 160,000 non-cumulative, nonconvertible preferred shares. During 2023, Grieger paid cash dividends of $100,000 to the common shareholders and $60,000 to the preferred shareholders. Net income for calendar 2023 was $450,000. Basic earnings per share for 2023 would be a) $0.20. b) $1.30. c) $1.50. d) $1.70. Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($450,000 – $60,000) / 300,000 = $1.30

24. At December 31, 2022 and 2023, Danish Corp. had 100,000 common shares and 10,000, $5, no par value cumulative preferred shares outstanding. No dividends were declared in 2022 or 2023. Net income for 2023 was $400,000. For 2023, basic earnings per share would be a) $4.00. b) $3.50. c) $3.00. d) $2.00. Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback:

$400,000− (10,000 $5.00) = $3.50 100,000

25. When calculating the weighted average number of shares outstanding for the year, a) restatement of the weighted average number of shares outstanding is required before the stock dividend or split. b) restatement of the weighted average number of shares is required for stock dividends only. c) restatement of the weighted average number of shares is required for stock splits only. d) restatement of the weighted average number of shares is required after the stock dividend or split. Answer: a Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

26. At December 31, 2022, Columbus Inc. had 3,000,000 common shares outstanding. An additional 500,000 common shares were issued on April 1, 2023, and 250,000 more on July 1, 2023. On October 1, 17-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2023, Marion issued 12,500, $1,000 par value, 8% convertible bonds. Each bond is convertible into 20 common shares. No bonds were converted in 2023. What is the number of shares to be used in calculating 2023 basic earnings per share and diluted earnings per share, respectively? a) 3,500,000 and 3,500,000 b) 3,500,000 and 3,562,500 c) 3,500,000 and 3,750,000 d) 3,750,000 and 4,250,000 Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 3,000,000 + (500,000 × 9 / 12) + (250,000 × 6 ÷ 12) = 3,500,000 3,500,000 + (12,500 × 20 × 3 ÷ 12) = 3,562,500

27. At December 31, 2022, Parrot Corp. had 1,000,000 common shares outstanding (no preferred shares issued). An additional 100,000 shares were issued on April 1, 2023, and 240,000 more on September 1. On October 1, Parrot issued $3,000,000 (par value) 9% convertible bonds. Each $1,000 bond is convertible into 40 common shares. No bonds have been converted yet. The number of shares to be used in calculating basic earnings per share and diluted earnings per share for 2023 is a) 1,155,000 and 1,155,000. b) 1,155,000 and 1,185,000. c) 1,155,000 and 1,275,000. d) 1,540,000 and 1,660,000. Answer: b Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 1,000,000 + (100,000 × 9 ÷ 12) + (240,000 × 4 ÷ 12) = 1,155,000 1,155,000 + ($3,000,000 $1,000)  40  3 ÷ 12 = 1,185,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

28. At December 31, 2022, St. John’s Limited had 4,000,000 common shares outstanding (no preferred shares issued). An additional 250,000 common shares were issued on July 1, 2023, and 500,000 more on October 1, 2023. As well, on April 1, 2023, St. John’s issued 10,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 40 common shares. No bonds were converted in 2023. What is the number of shares to be used in calculating basic earnings per share and diluted earnings per share, respectively, for 2023? a) 4,250,000 and 4,550,000 b) 4,250,000 and 4,250,000 c) 4,250,000 and 4,650,000 d) 4,750,000 and 5,050,000 Answer: a Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 4,000,000 + (250,000 × 6 ÷ 12) + (500,000 × 3 ÷ 12) = 4,250,000 4,250,000 + (10,000 × 40 × 9 ÷ 12) = 4,550,000

29. What effect will the acquisition of treasury shares have on shareholders’ equity and basic earnings per share, respectively? Shareholders’ equity Basic EPS a) decrease no effect b) increase no effect c) decrease increase d) increase decrease Answer: c Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

30. When calculating diluted earnings per share, convertible bonds are a) ignored. b) assumed converted whether they are dilutive or antidilutive. 17-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) assumed converted only if they are antidilutive. d) assumed converted only if they are dilutive. Answer: d Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

31. Dilutive convertible securities must be used in the calculation of a) basic earnings per share only. b) diluted earnings per share only. c) diluted and basic earnings per share. d) silly question: such securities are never included. Answer: b Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

32. In calculating diluted earnings per share, the equivalent number of convertible preferred shares is added as an adjustment to the denominator. If the preferred shares are cumulative, which amount should then be added as an adjustment to the numerator? a) annual preferred dividend b) annual preferred dividend times (one minus the income tax rate) c) annual preferred dividend times the income tax rate d) annual preferred dividend divided by the income tax rate Answer: a Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

33. In calculating diluted earnings per share, the treasury stock method is used for written call options and equivalents to reflect assumed reacquisition of common shares at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the calculation would a) fairly present diluted earnings per share on a prospective basis. b) fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. c) reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share. d) be antidilutive. Answer: d Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

34. In applying the treasury stock method to determine the dilutive effect of options and warrants, the proceeds assumed to be received upon exercise of the options and warrants a) are used to calculate the number of common shares repurchased at the average market price, when calculating diluted earnings per share. b) are added, net of tax, to the numerator of the calculation for diluted earnings per share. c) are disregarded in the calculation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common shares. d) are not included in the calculation. Answer: a Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

35. When applying the treasury stock method, the price of the common shares used for the assumed repurchase is the a) market price at the end of the year. b) average market price during the year. c) market price at the beginning of the year. d) market price at the time the options or warrants were granted. 17-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

36. Antidilutive securities a) should be included in the calculation of diluted earnings per share but not basic earnings per share. b) are those whose inclusion in earnings per share calculations would cause basic earnings per share to exceed diluted earnings per share. c) include call options and warrants whose exercise price is less than the average market price of common shares. d) should be ignored in all earnings per share calculations. Answer: d Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

37. Assume a corporation has two potentially dilutive convertible securities outstanding. The one that should be used first to calculate diluted earnings per share is the security with the a) greater earnings adjustment. b) greater earnings per share adjustment. c) smaller earnings adjustment. d) smaller earnings per share adjustment. Answer: d Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

38. The reverse treasury stock method is used for a) written call options. b) written put options. c) convertible preferred shares. d) convertible bonds. Answer: b Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

39. Which of the following statements is correct? a) Options that are in the money are ignored in earnings per share calculations. b) Options that are out of the money are ignored in earnings per share calculations. c) Contingently issuable shares are never included in diluted earnings per share calculations. d) The treasury stock method is used for written put options. Answer: b Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

40. The if-converted method of calculating earnings per share data assumes conversion of convertible securities as of the a) beginning of the earliest period reported (or at time of issuance, if later). b) beginning of the earliest period reported (regardless of time of issuance). c) middle of the earliest period reported (regardless of time of issuance). d) ending of the earliest period reported (regardless of time of issuance). Answer: a Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application 17-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

41. Information concerning the capital structure of Shepherd Corporation follows December 31, 2023 2022 Common shares outstanding 100,000 shares 100,000 shares Convertible preferred shares outstanding 10,000 shares 10,000 shares 9% convertible bonds $2,000,000 $2,000,000 During 2023, Shepherd paid dividends of $1.00 per common share and $2.50 per preferred share. The preferred shares are non-cumulative, and convertible into 20,000 common shares. The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar 2023 was $500,000. Assume the income tax rate is 30%. Basic earnings per share for 2023 is a) $3.33. b) $3.65. c) $4.75. d) $5.00. Answer: c Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic $500,000 − (10,000  $2.50) Feedback: = $4.75 100,000

42. Crow Ltd. reported net income of $780,000 in 2023 and had 300,000 common shares outstanding throughout the year. Also, outstanding all year were 60,000 (written) options to purchase common shares at $11 per share. The average market price for the common shares during the year was $16 per share. Calculate the diluted earnings per share (round to 2 decimal places). a) $2.45 b) $2.60 c) $2.17 d) $2.89 Answer: c Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application 17-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: $780,000 / (300,000+60,000) = $2.17

43. Owl Corp. earned net income of $560,000 in 2023 and had 100,000 common shares outstanding throughout the year. Also outstanding all year was $400,000 of 10% bonds that are convertible into 22,000 common shares. Owl Corp.’s tax rate is 35%. What is Owl Corp.’s 2023 diluted earnings per share? a) $4.59 b) $4.80 c) $5.60 d) $5.86 Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: = ($560,000 + ($400,000 x 10% x (1 – .35)) / (100,000+22,000) = $4.80

44. On January 2, 2023, Delila Inc. issued at par $10,000 6% bonds convertible into 1,000 of its common shares. No bonds were converted during 2023. Throughout 2023, Delila had 1,000 common shares outstanding (no preferred shares issued). Delila’s 2023 net income was $6,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2023. Delila diluted earnings per share for 2023 would be a) $3.00. b) $3.21. c) $3.30. d) $6.42. Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic $6,000 + ($10,000  .06  .70) Feedback: = $3.21 1,000 + 1,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

45. At December 31, 2022, Felix Ltd. had 500,000 common shares outstanding (no preferred shares issued). On October 1, 2023, an additional 100,000 common shares were issued. In addition, Felix had $5,000,000, 6% convertible bonds outstanding at December 31, 2022, which are convertible into 225,000 common shares; however, no bonds were converted during 2023. Net income for calendar 2023 was $1,500,000. Assuming the income tax rate was 30%, the diluted earnings per share for 2023 would be a) $3.26. b) $2.40. c) $2.28. d) $2.00. Answer: c Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic $1,500,000 + ($5,000,00 0  .06  .7) Feedback: = $2.28 3  500,000 + 100,000   + 225,000 12  

46. On January 2, 2023, Helisinki Ltd. issued at par $300,000, 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2023. There were 50,000 common shares outstanding during 2023 (no preferred shares issued). Helsinki’s 2023 net income was $160,000 and its income tax rate was 30%. Helsinki’s diluted earnings per share for 2023 is a) $2.71. b) $3.03. c) $3.20. d) $3.58. Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic $160,000 + ($300,000  .09  .7) Feedback: = $3.03 50,000 + ($300,000  $1,000 )  30 

47. At December 31, 20229, Pinwheel Ltd. had 900,000 common shares outstanding. In addition, the 17-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

corporation had 350,000 non-cumulative preferred shares outstanding, which were convertible into 600,000 common shares. During 2023, Pinwheel paid cash dividends of $360,000 to the common shares and $225,000 to the preferred shares. Net income for 2023 was $1,350,000 and the income tax rate was 40%. Diluted earnings per share for 2023 is a) $2.25. b) $1.50. c) $0.90. d) $1.11. Answer: c Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,350,000 ÷ (900,000 + 600,000) = $0.90

48. During 2023, Madrid Ltd. had 200,000 common shares, 30,000 non-cumulative convertible preferred shares, and $1,500,000 10% convertible bonds outstanding. The preferred shares are convertible into 40,000 common shares. During 2023, Madrid paid dividends of $1.20 per share to the common shares and $2.00 per share to the preferred shares. Each $1,000 bond is convertible into 45 common shares. The net income for 2023 was $900,000 and the income tax rate was 30%. Diluted earnings per share for 2023 is a) $2.98. b) $3.38. c) $3.27. d) $3.41. Answer: c Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback:

$900,000 + ($1,500,00 0  .10  .7) = $3.27 200,000 + 67,500 + 40,000

49. On December 31, 2022, Lingo. had 1,000,000 common shares outstanding. On January 1, 2023, Lingo issued 250,000 non-cumulative preferred shares, which were convertible into 500,000 common shares. During 2023, Lingo paid cash dividends of $450,000 to the common shares and $150,000 to the 17-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

preferred shares. Net income for calendar 2023, was $4,500,000. Assuming an income tax rate of 30%, the diluted earnings per share for 2023 is a) $0.33. b) $3.00. c) $2.57. d) $4.50. Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $4,500,000 ÷ (1,000,000 + 500,000) = $3.00

50. At December 31, 2022, Jack Russell Ltd. had 900,000 common shares outstanding (no preferred shares issued). On September 1, 2023, an additional 300,000 common shares were issued. In addition, Jack Russell had $10,000,000 (par value) 6% convertible bonds outstanding at December 31, 2022, which are convertible into 600,000 common shares. No bonds were converted in 2023. Net income for calendar 2023 was $3,750,000. Assuming the income tax rate is 30%, the diluted earnings per share for 2023 is a) $2.35. b) $2.61. c) $2.72. d) $3.75. Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback:

$3,750,000+ ($10,000,000  .06  .7) = $2.61 900,000 + (300,000  ÷ ) + 

51. Information concerning the capital structure of Shelmardine Corporation follows December 31, 2023 2022 Common shares outstanding 100,000 shares 100,000 shares Convertible preferred shares outstanding 10,000 shares 10,000 shares 17-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

9% convertible bonds $2,000,000 $2,000,000 During 2023, Shelmardine paid dividends of $1.00 per common share and $2.50 per preferred share. The preferred shares are non-cumulative, and convertible into 20,000 common shares. The 9% convertible bonds are convertible into 50,000 common shares. Net income for calendar 2023 was $500,000. Assume the income tax rate is 30%. What is the diluted earnings per share for 2023? a) $4.00 b) $3.68 c) $3.54 d) $2.94 Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic $500,000 + ($2,000,00 0  .09  .7) Feedback: = $3.68 100,000 + 50,000 + 20,000

52. Warrants exercisable at $20 each to obtain 50,000 common shares were outstanding during a period when the average market price of the common shares was $25. Application of the treasury stock method in calculating diluted earnings per share will increase the weighted average number of outstanding shares by a) 50,000. b) 40,000. c) 12,500. d) 10,000. Answer: d Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 50,000 × $20 ÷ $25 = 40,000 50,000 – 40,000 = 10,000

53. Put options exercisable at $20 each to sell 50,000 common shares were outstanding during a period when the average market price of the common shares was $10. Application of the reverse 17-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

treasury stock method in calculating diluted earnings per share will increase the weighted average number of outstanding shares by a) 50,000. b) 40,000. c) 12,500. d) 10,000. Answer: a Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($20 x 50,000) / $10 = 100,000 100,000 – 50,000 = 50,000

54. At December 31, 2023, Spearmint Inc. had 300,000 common shares outstanding (no preferred shares issued). In addition, the corporation had granted 90,000 stock options to certain executives, and which gave them the right to purchase Spearmint’s shares at the option price of $37 per share. None of these options have yet been exercised. The average market price of Spaniel’s common shares during 2023 was $50. What is the number of shares that should be used in calculating diluted earnings per share for 2023? a) 300,000 b) 323,400 c) 331,622 d) 366,600 Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 90,000 – (90,000 × $37 ÷ $50) = 23,400 300,000 + 23,400 = 323,400

55. At December 31, 2022, Skye Inc. had 500,000 common shares outstanding (no preferred shares issued). On July 1, 2023, an additional 50,000 common shares were issued. Skye also had unexercised call options to purchase 40,000 common shares at $15 per share outstanding throughout 2023. The average market price of Skye’s common shares was $20 during 2023. The number of shares that

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

should be used in calculating diluted earnings per share for 2023 is a) 525,000. b) 535,000. c) 560,000. d) 565,000. Answer: b Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 500,000 + (50,000 × 6 ÷ 12) + 40,000 – (40,000 × $15 ÷ $20) = 535,000

56. Throughout 2023, Moon Ltd. had 1,200,000 common shares outstanding. As well, the corporation paid $300,000 in preferred dividends and reported net income of $5,100,000 for 2023. In connection with the acquisition of a subsidiary company in June 2022, Moon is required to issue 50,000 additional common shares on July 1, 2024, to the former owners of the subsidiary. Moon’s diluted earnings per share for 2023 should be a) $4.25. b) $4.08. c) $4.00. d) $3.84. Answer: d Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic $5,100,000 − $300,000 Feedback: = $3.84 1,200,000 + 50,000

57. The main difference between IFRS and ASPE as it relates to EPS calculations is a) there is no difference. b) diluted EPS applies only to IFRS, both use basic EPS. c) only companies with complex financial structures must calculate EPS under IFRS. d) there are no prescribed standards under ASPE. Answer: d 17-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: Analysis and IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

58. Major challenges for standard setters calculating EPS includes all of the following, except a) complex financial instruments. b) redeveloping standards under ASPE. c) treatment of conversion features. d) dilutive securities. Answer: b Difficulty: Easy Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: Analysis and IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 17-59 EPS calculations Answer the following: a) Explain why EPS is only calculated on common shares. b) How is EPS calculated? c) What are the two formulas normally calculated only for common shares, and how and why are they used? d) Explain what constitutes a complex structure? Solution 17-59 a) Common shares are entitled to the residual interest in net income, after preferred dividends are deducted. That is why EPS is normally only calculated for common shares. b) Earnings per share is calculated by dividing net income less preferred dividends by the weighted average number of common shares outstanding. c) Basic EPS – looks at the actual earnings and the actual number of common shares outstanding. Earnings per share disclosures help investors by indicating the amount of income that is earned by each share. It helps shareholders assess future dividend payouts and value of each share. Diluted EPS – is a “what if” calculation that takes into account the possibility that financial instruments such as convertible debt and options might have a negative impact on existing shareholder returns; therefore, the shares value. It a corporation has a complex capital structure both EPS and diluted EPS would be presented. d)

A complex capital structure exists when a corporation has convertible securities, options, warrants, or other rights that, upon conversion or exercise, could dilute earnings per share.

Difficulty: Medium Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 17-60 EPS presentation and disclosures under IFRS When and how is EPS used? Are there any differences for EPS between IFRS and ASPE? If so, explain 17-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

these differences in detail. Solution 17-60 EPS is required under IFRS only and is presented on the face of the income statement. This is due to the importance of EPS information for companies whose shares are trading on the stock markets or that are in the process of listing on a stock market. In Canada only publicly traded companies are required use IFRS. Privately held companies can choose to whether or not they wish to prescribe to IFRS. ASPE does not require EPS calculations or disclosures, mainly because these firms are closely held and due to the cost – benefit considerations. The are no standards for calculating EPS under ASPE at all. As a result, IFRS requires the following: • Earnings per share amounts must be shown for all periods presented. • If there has been a stock dividend or stock split, all per share amounts of prior period earnings should be restated using the new number of outstanding shares. • If diluted EPS data are reported for at least one period, they should be reported for all periods that are presented, even if they are the same basic EPS. • When the results of operations of a prior period have been restated the corresponding EPS date should also be restated. The restatement’s effect should then be disclosed in the year of the restatements. Difficulty: Medium Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: Analysis and IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 17-61 Weighted average of common shares outstanding At January 1, 2023, Elan Corporation had 300,000 common shares outstanding (no preferred issued). On March 1, the corporation issued 45,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2 for 1 stock split. On October 1, the corporation purchased on the open market 180,000 of its own shares at $35 each and retired them. Instructions Calculate the weighted average number of common shares outstanding to be used in calculating earnings per share for 2023. Solution 17-61 Increase (Decrease)

Shares Outstanding

Portion of year Outstanding

Stock Split 17-32

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Jan 1 300,000 Mar 1 45,000 345,000 Jul 1 345,000 690,000 Oct 1 (180,000) 510,000 Weighted average of common shares

2/12 4/12 3/12 3/12

x2 x2

100,000 230,000 172,500 127,500 630,000

Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 17-62 Weighted average of common shares outstanding At January 1, 2023, Silverline Ltd. had 300,000 common shares outstanding (no preferred issued). On March 1, the corporation issued 45,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 10% stock dividend. On October 1, the corporation purchased on the open market 18,000 of its own shares at $35 each and retired them. Instructions Calculate the weighted average number of common shares outstanding to be used in calculating earnings per share for 2023. Solution 17-62 Increase Shares (Decrease) Outstanding Jan 1 300,000 Mar 1 45,000 345,000 Jul 1 34,500 379,500 Oct 1 (18,000) 361,500 Weighted average of common shares

Portion of year Outstanding 2/12 4/12 3/12 3/12

Stock Dividend x 1.1 x 1.1

55,000 126,500 94,875 90,375 366,750

Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 17-63 Basic and diluted earnings per share Throughout the calendar year 2023, Kali Corporation has 400,000 common shares outstanding (no preferred shares issued). In addition, Kali has 5,000, 20-year, 7% bonds outstanding, issued at par in 2021. Each $1,000 bond is convertible into 20 common shares after June 30, 2024. Kali reported net income of $600,000 for calendar 2023. Its income tax rate is 30%. 17-33 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions Calculate the following for 2023: a) Basic earnings per share b) Diluted earnings per share c) CRITICAL THINKING: The CEO of Kali has asked you to explain why a company would want to calculate diluted EPS (DEPS). Explain the importance of DEPS and when it is used. Solution 17-63 a) Basic earnings per share:

Net income $600,000 = = $1.50 Outstandin g shares 400,000

Incremental effect of conversion of bonds Bond interest after taxes $245,000 = = $2.45 Assumed incrementa l shares 100,000 b) The conversion of the bonds would be antidilutive, since the incremental effect of $2.45 is greater than the basic EPS of $1.50. No diluted EPS calculation is required. The basic and diluted earnings per share of $1.50 should be reported. c) CRITICAL THINKING: The diluted EPS calculation is especially useful because there are many potential common shares outstanding through convertible securities, options and warrants, and other financial instruments, and shareholders need to understand how these instruments can affect their holdings. From an economic perspective, it is therefore important to carefully analyze the potential dilutive impact of the various securities instruments, and the IASB is helping make it possible to do such analyses by continually striving to ensure greater transparency in EPS calculations. Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 17-64 Basic and diluted earnings per share Barker Inc. reported net income (30% tax rate) of $1,600,000 for calendar 2023, and an average of 500,000 common shares outstanding during the year. Barker issued $2,000,000 par value, 10-year, 9% convertible bonds on January 1, 2022 at a $18,000 discount. The bonds are convertible into 60,000 common shares. Barker uses the straight-line method for amortizing the bond discount. Instructions

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Calculate the following for 2023: a) Basic earnings per share b) Diluted earnings per share c) CRITICAL THINKING: As the controller you have been approached by a junior accountant that has recently been hired by Barker. The junior accountant is having difficulty understanding between simple and complex financial structures and is unsure which structure applies to Barker. Explain the difference between the structures and identify which applies to Barker. Solution 17-64 a) Basic earnings per share ($1,600,000 ÷ 500,000 shares) = $3.20 b) Diluted earnings per share $1,600,000 +.7($180,000 + $1,800) ————————————————— = $3.08 500,000 + 60,000 c) CRITICAL THINKING: When a corporation’s capital structure consists only of common shares and preferred shares and/or debt without conversion rights, the company is said to have a simple capital structure. In contrast, a company is said to have a complex capital structure if the structure includes securities that could have a dilutive or negative effect (that is, a lowering effect) on earnings per common share. Given this, Barker has a complex capital structure. Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 17-65 Issuance of stock dividends/splits versus issuance/repurchase of shares Why does the issuance of a stock dividend or stock split require a restatement (which is applied retroactively), but the issuance or repurchase of shares for cash does not? Solution 17-65 Stock splits and stock dividends do not increase or decrease the net enterprise’s assets; only additional shares are issued. Therefore, the weighted average number of shares must be restated. By restating the number, valid comparisons of earnings per share can be made between periods before and after the stock split or stock dividend. Conversely, the issuance or purchase of shares for cash changes the amount of net assets. The company earns either more or less in the future as a result of this change in net assets. Stated another way, a stock dividend or split does not change the shareholders’ total investment; it only increases (or decreases if it is a reverse stock split) the number of common shares. 17-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 17-66 Effect of dilutive securities on diluted earnings per share calculations A publicly accountable enterprise is planning on issuing the following two securities in the coming year 1. Convertible debt where mandatory conversion will take place five years after issue. 2. Debt with detachable warrants. The warrants can be exercised if profits exceed $1,000,000 in the next five years. Instructions Discuss how these two securities will affect the diluted earnings per share calculation. Solution 17-66 1. The convertible debt is an example of an instrument that is mandatorily convertible. As a result, it is assumed the conversion has already taken place for calculating diluted earnings per share. The common shares should be treated as if they were outstanding and included in the weighted average of common shares calculation. 2.

The second instrument is an example of contingently issuable shares, contingent on profits exceeding $1,000,000 for the shares to be issued. If this condition is already met, then the shares must be treated as if they are issued. However, if the condition has not been met, then these shares should not be included in the diluted EPS calculation until the condition has been met.

Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 17-67 Diluted earnings per share – Treasury Method During 2023, Basenji Corp. had 300,000 common shares outstanding. In addition, at December 31, 2023, 50,000 shares were issuable upon exercise of executive stock options, which require a $40 cash payment upon exercise (options were granted in 2021). The average market price of the common shares during 2023 was $50. Instructions 17-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Calculate the number of shares to be used in determining diluted earnings per share for 2023. Solution 17-67 Shares outstanding (given) .................................................................... Add: Assumed issuance of stock options .............................................. Deduct: Proceeds/Average market price ($2,000,000 ÷ $50) ................ Number of shares to use for diluted EPS...............................................

300,000 50,000 350,000 (40,000) 310,000

Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 17-68 Diluted earnings per share – Reverse Treasury Method During 2023, Jaguar Corp. had 300,000 common shares outstanding. At December 31, 2023, the company had 50,000 put options outstanding that it had written. The exercise price on these options is $40. The average market price of the common shares during 2023 was $35. Instructions Calculate the number of shares to be used in determining diluted earnings per share for 2023. Solution 17-68 Shares outstanding (given) .................................................................... Add: Assumed issuance of stock options to cover the exercise of the put order ($40 x 50,000) = $2,000,000; ($2,000,000 / $35)........... Deduct: Shares received on the execution of the put are retired......... Number of shares to use for diluted EPS...............................................

300,000 57,143 357,143 (50,000) 307,143

Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 17-69 Effects of antidilutive securities on EPS What are antidilutive securities and how do they affect EPS? Solution17-69 Antidilutive securities are securities that, upon conversion or exercise, would increase earnings per 17-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

share (or reduce the loss per share). The purpose of presenting both EPS numbers is to inform financial statement users of situations that may occur and to provide worst-case dilutive situations. If the securities are antidilutive, the likelihood of conversion or exercise is considered remote. Thus, companies that have only antidilutive securities report only the basic EPS number. Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 17-70 Multiple antidilutive financial instruments and EPS Explain the three steps that should be completed to calculate diluted EPS when there are multiple potentially dilutive financial instruments. Solution 17-70 Where there are multiple potentially dilutive financial instruments, the following three steps should be completed: 1. Determine, for each dilutive security, the incremental per share effect if the security is exercised or converted. 2. Where there are multiple dilutive securities, rank the results from the lowest earnings effect per share to the largest; that is, rank the results from the most dilutive to least dilutive. The instruments with the lowest incremental EPS calculation will drag the EPS number down the most and are therefore most dilutive. 3. Beginning with the basic earnings per share based upon the weighted average number of common shares outstanding, recalculate the earnings per share by adding the most dilutive per share effects from the first step. If the results from this recalculation are less than EPS in the prior step, go to the next most dilutive per share effect and recalculate the earnings per share. This process is continued as long as each recalculated earnings per share amount is smaller than the previous amount. The process will end either because there are no more securities to test or because a particular security maintains or increases the earnings per share (that is, it is antidilutive). Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 17-71 Multiple antidilutive financial instruments and EPS

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bluewave Telecom Inc. has a complex capital structure and reports both basic and diluted earnings per share on its financial statements. After reviewing the securities, and in order to understand which are dilutive and which are antidilutive, the following securities have been identified along with the incremental per share effect: Convertible Bond A – $2.25 Convertible Bond B – $1.82 Convertible Preferred Shares – $1.25 Stock Options – “In the money” Instructions If the Basic Earnings Per Share is calculated at $2.75, rank the securities in the order that they should be applied to calculate Diluted Earnings Per Share. Solution 17-71 Start with most dilutive to least dilutive. 1. Stock Options 2. Convertible Preferred Shares 3. Convertible Bond B 4. Convertible Bond A Difficulty: Medium Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Communication CPA: Financial Reporting Bloomcode: Application AACSB: Communication

Ex. 17-72 Company valuation Using EPS When and how might EPS be used for company valuation? Solution 17-72 Company Valuation using EPS Typically, a normalized or sustainable cash flow or earnings number should be used in the valuation calculation because earnings of new income may be of higher or lower quality. However, since this requires significant judgement when valuing common shares, the EPS number is sometimes used instead because it is believed to be more reliable and all inclusive. PE ratio divides the price of the share by EPS and result is called a multiplier. The multiplier shows the per share value that each dollar of earnings generates. This is a rough calculation only and must be used with caution. Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Comprehension 17-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Ex. 17-73 Assessing performance using EPS How can EPS be used to assess performance and what challenges arise with this measurement? Solution 17-73 EPS can be used to assess management stewardship and predict future value. Therefore, IFRS is very specific regarding its calculation. From an economic perspective, it is very important to carefully analyze the potential dilutive impact of various securities instruments. This can be quite difficult due to the complexity of financial instruments that are very complex and difficult to break down. IASB is continually striving to create greater transparency in EPS calculations. Difficulty: Easy Learning Objective: Understand why earnings per share (EPS) is an important number and how it should be presented, disclosed and analyzed. Section Reference: Objective of EPS CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 17-74 Weighted average calculations and basic EPS Harley Corp. has been operating successfully for the past fifteen years. However, during recent years, its common shares outstanding changed as shown below. The corporation uses the calendar year as its fiscal year. 2023 2022 2021 Shares outstanding, Jan 1 ............................ 300,000 240,000 200,000 Shares sold, Apr 1,2021 ................................. 40,000 25% stock dividend, Jul 1, 2022 .................... 60,000 2-for-1 stock split, Jul 1, 2023 ...................... 300,000 Shares sold, Oct 1, 2023 ................................ 100,000 Shares outstanding, Dec 31 .......................... 700,000 300,000 240,000 Net Income .................................................... $750,000 660,000 598,000 Instructions a) Calculate the weighted average number of shares outstanding for each year. b) Assuming there were no preferred shares outstanding, calculate EPS for each year based on your calculations in part a. Solution 17-74 a) 2021: (200,000 x 3 ÷ 12) + (240,000 x 9 ÷ 12) = 230,000 2022:

(300,000 x 12 ÷ 12) = 300,000 Stock dividend is weighted back to the beginning of the period. Alternate calculation: (240,000 x 1.25 x 6 ÷ 12) + (300,000 x 6 ÷ 12)

2023:

(300,000 x 2 x 9 ÷ 12) + (700,000 x 3 ÷ 12) = 625,000

b) Net income .................................................... Average shares outstanding (including stock dividend and stock split) ..................... Earnings per share.........................................

2023 $750,000

2022 $660,000

2021 $598,000

625,000 $1.20

300,000 $2.20

230,000 $2.60

Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

On January 1, 2023, Barley Corp. had 200,000 common shares outstanding. On April 1, 2023, 20,000 common shares were issued and on September 1, 2023, Bernard bought back 30,000 treasury shares. The market price of the common shares averaged $50 during 2023. The corporation’s income tax rate is 40%. During 2023, there were 30,000 call options to buy common shares at $40 a share outstanding; and there were 20,000, $7, no par value, cumulative and convertible preferred shares outstanding. Each preferred share is convertible into three common shares. During 2022, the corporation had issued $2,000,000 of 8% convertible bonds at face value. Each $1,000 bond is convertible into 20 common shares. The corporation reported $750,000 net income for calendar 2023. Instructions Calculate diluted earnings per share for 2023. Complete the schedule below and show all calculations.

Security

Net Income

Adjust -ment

Adjusted Net Income

Adjust -ment

Adjusted Shares

EPS

Net Adjust Income -ment $750,000 $(140,000)

Adjusted Net Income $610,000 610,000 750,000 846,000

Shares 200,000 205,000 211,000 271,000

Adjust -ment 5,000a 6,000b 60,000 40,000

Adjusted Shares 205,000 211,000 271,000 311,000

EPS $2.98 2.89 2.77 2.72

Solution 17-75 Security Com. Shares Options Preferred Bonds a

610,000 750,000

20,000 × 3 ÷ 4 = 30,000 × 1 ÷ 3 =

$1,200,000 ÷ $50 =

140,000 96,000c

15,000 (10,000) 5,000 SA 30,000 (24,000) (or) [(50 – 40) ÷ 50] × 30,000 = 6,000 SA 6,000 SA

$2,000,000 ×.08 ×.6 = $96,000;

$96,000 $140,000 = $2.40; = $2.33 40,000 60,000

Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application 17-42 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Pr. 17-76 Basic and diluted earnings per share Bloodhound Corp. provides the following data for calendar 2023 Net Income .................................................................................. $2,400,000 Transactions in Common Shares Change Cumulative Jan 1 beginning .......................................... 1,000,000 Mar 1 purchase of treasury shares ............. (60,000) 940,000 Jun 1 shares split 2 for 1............................. 940,000 1,880,000 Nov 1 issuance of new shares..................... 120,000 2,000,000 8% Cumulative Convertible Preferred Shares (no par) Convertible into 200,000 common shares adjusted for split on June 1 ................................................. $1,000,000 Stock Options Exercisable at the option price of $25 per share. Average market price in 2023 was $30 (market price and option price adjusted for split). ...................................... 60,000 shares Instructions a) Calculate basic earnings per share for 2023. b) Calculate diluted earnings per share for 2023. Solution 17-76 Calculation of weighted average shares outstanding during the year: Jan 1- Feb 28 1,000,000 x 2 / 12 x 2= 333 333 Mar 1- May 31 940,000 x 3 / 12 x 2= 470,000 Jun 1- Oct 31 1,880,000 x 5 / 12= 783,333 Nov 1- Dec 31 2,000,000 x 2 / 12= 333,333 1,920,000 Additional shares for purposes of diluted earnings per share Potentially dilutive securities 8% convertible preferred shares.............................................................. Stock options Proceeds from exercise of 60,000 options (60,000 × $25) ............... $1,500,000 Shares issued upon exercise of options ........................................... 60,000 Less: treasury shares purchasable with proceeds ($1,500,000 ÷ $30) ............................................................................. 50,000 Dilutive securities—additional shares ..................................................... a)

Basic earnings per share:

200,000

10,000 210,000

$2,400,000 − $80,000 = $1.21 1,920,000 17-43

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Diluted earnings per share:

$2,400,000 = $1.13 1,920,000 + 210,000

Pr. 17-77 Basic and diluted earnings per share Aria Ltd. provides the following information for calendar 2023: 1. Net income.................................................................................................................... $420,000 2. Capital Structure a) $8 preferred shares, no par value, cumulative, ....................................................... $600,000 6,000 shares outstanding No dividends were declared during 2023. b) Common shares, 76,000 shares outstanding on January 1. On April 1, 40,000 shares were issued for cash. On October 1, 16,000 shares were purchased and retired. ................................. $1,000,000 c) On January 2, 2022, Aria purchased Apso Corporation. One of the terms of the purchase was that if Aria’s net income for 2022 or subsequent years is $400,000 or more, 50,000 additional common shares would be issued to Apso shareholders. Instructions Calculate basic and diluted earnings per share for 2023. Solution 17-77 Net income ....................................................................................................... *Less preferred dividends ($6,000 x $8)........................................................... Income available to common (numerator) ..................................................... * Since they are cumulative, PFD dividends are deducted from NI. The fact dividends were not declared is irrelevant. Share Changes Jan 1 .......................................................................................................... Apr 1, issuance 40,000 .............................................................................. Oct 1, retirement 16,000 ........................................................................... Ending Balance.................................................................................................

$420,000 (48,000) $372,000

76,000 40,000 116,000 (16,000) 100,000

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Weighted average shares outstanding Jan 1- Mar 31 76,000 x 3 / 12= Apr 1- Sep 30 116,000 x 6 / 12= Oct 1- Dec31 100,000 x 3 / 12=

19,000 58,000 25,000 102,000

Basic earnings per share: $372,000 ÷ 102,000 = $3.65 Diluted earnings per share: $372,000 ÷ (102,000 + 50,000) = $2.45 Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 17-78 Basic and diluted earnings per share Chamaa Ltd. provides the following information for 2023 1. Net income.................................................................................................................... 2. Capital structure a) Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible into 50 common shares for the next 10 years ...................................................... b) Common shares, 200,000 shares issued and outstanding during the entire year ............................................................................................................. c) Stock options outstanding to buy 16,000 common shares at $20 per share. 3. Other information a) Bonds converted during 2023 .................................................................................. b) Income tax rate......................................................................................................... c) Convertible debt was outstanding the entire year d) Average market price per common share during 2023........................................... e) Stock options were outstanding the entire year f) Stock options exercised during 2023........................................................................

$560,000

300,000 2,000,000

None 30% $32 None

Instructions Calculate basic and diluted earnings per share for 2023. Solution 17-78 Basic EPS = $560,000 ÷ 200,000 = $2.80 Net

Adjust

Adjusted

Adjust

Adjusted Diluted 17-45

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Security Com. Shares Options Conv. Bonds

Income $560,000 560,000 560,000

-ment — — $12,600b

Net Income $560,000 560,000 572,600

Shares 200,000 200,000 206,000

-ment — 6,000a 15,000

Shares 200,000 206,000 221,000

EPS $2.80 2.72 2.59

16,000

320,000 = 32

(10,000) 6,000 SA

$300,000 ×.06 ×.7 = $12,600;

$12,600 = $.84 15,000

Pr. 17-79 Basic and diluted earnings per share Arlt Inc., a publicly accountable corporation, has a July 31 year end. For the 2023 fiscal year, there were 100,000 common shares outstanding all year. Net income for the year ended July 31, 2023 was $950,000. Its income tax rate is 30%. Part A During the 2022 fiscal year, Arlt issued at par a 5% convertible bond, face value $5,000,000. Each $1,000 bond is convertible into 20 common shares. No bonds were converted in 2022, however, on March 31, 2023, 50% of the bonds were converted into common shares. Part B On August 1, 2022, Arlt issued 100,000, $2, cumulative, convertible preferred shares. Two preferred shares are convertible into one common share. On September 30, 2022, 20% of these preferred shares were converted to common shares. The preferred share dividend was declared and paid on June 15, 2023. Instructions Treating each part independently, calculate basic and diluted earnings per share for fiscal 2023. Solution 17-79 Part A Weighted average common shares and basic EPS Date Aug 1, 2022

# shares 100,000

Fraction of year 8/12

66,667 17-46

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Mar 31, 2023 Total

150,000

4/12

50,000 116,667

Basic EPS = $950,000 ÷ 116,667 = $8.14 For 5% convertible bonds: Maturity value................................................ Stated rate x .................................................. Interest expense ............................................ 1 – tax rate (30%) ........................................... After-tax interest ........................................... Less amount saved from 50% conversion.... Numerator effect ........................................... 1

$5,000,000 5% 250,000 X .70 175,000 29,1671 $ 145,833

(5,000,000 x 50% x .05 x 4 / 12 x .7)

$5,000,000 / $1,000 = 5,000 bonds Increase in diluted earnings per share denominator: ....................... ............................................................................................................. ............................................................................................................. Less number on conversion 16,667 (100,000 shares X 50% X 4/12)... Denominator effect ............................................................................. Individual EPS calculation: $145,833 / 83,333 = $1.75 < $8.14

5,000 X 20 100,000 16,667 83,333

Therefore, potentially dilutive Recalculate EPS Income available to common shareholders Basic EPS ..................................................................................... $950,000 5% convertible bond ................................................................... 145,833 Total ............................................................................................. 1,095,833 Therefore, diluted EPS is $1,095,833 ÷ 200,000 = $5.48

WACS 116,667 83,333 200,000

Part B Weighted average common shares and basic EPS Date Aug 1, 2022 Sep 30, 2022 Total

# shares 100,000 110,000

Fraction of year 2 ÷ 12 10 ÷ 12

WACS 16,667 91,667 108,333

Basic EPS = ($950,000 – ($2 x 80,000)) ÷ 108,333 = $7.29 Diluted EPS Calculation Effect of conversion rights 17-47 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Preferred share dividend for year avoided................................................................ Number of common shares issued assuming conversion on Aug 1 (100,000 ÷ 2) ............................................................................. Less: Portion actually converted on Sep 30/22 ......................................................... Incremental effect of conversion option ................................................................... Per share effect = 160,000 ÷ 40,000............................................................................

$160,000 50,000 (10,000) 40,000 4.00

Therefore, potentially dilutive Recalculate EPS Income available to common shareholders Basic EPS ..................................................................................... $790,000 Convertible preferred shares ...................................................... 160,000 Total ............................................................................................. 950,000 Therefore, diluted EPS is $950,000 ÷ 148,333 = $6.40

WACS 108,333 40,000 148,333

Pr. 17-80 Basic and diluted earnings per share The following data are presented by Quentin Corp. for calendar 2023: Net income ........................................................................................................................... $4,500,000 Common shares outstanding, 1,000,000 shares 10%, cumulative preferred shares, convertible into 120,000 common shares .......... $1,600,000 8% convertible bonds; convertible into 105,000 common shares ..................................... $7,500,000 360,000 call options exercisable at $25 per share Additional information 1. The common and preferred shares and the convertible bonds were outstanding from the beginning of the year. 2. In 2023, a $500,000 dividend was declared and distributed; however, no dividends were declared in 2022. 3. The average market price of the common shares in 2023 was $30. The stock price was $27 on January 1, 2023, and $35 on December 31, 2023. 4. The convertible bonds were sold at par. 5. The income tax rate for 2023 is 30%. Instructions a) Calculate basic EPS. 17-48 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c)

Calculate diluted EPS. Briefly discuss the usefulness of the EPS measure in general. What is the additional importance of reporting diluted EPS?

Solution 17-80 a) Basic EPS = (4,500,000 – 160,000) ÷ 1,000,000 = $4.34 b) Start Options EPS after step 1 Convertible preferred shares EPS after step 2 Convertible bonds

Denominator 1,000,000 60,000* 1,060,000 120,000 1,180,000 105,000 1,285,000

Numerator $4,340,000 0 4,340,000 160,000 4,500,000 420,000** $4,920,000

EPS $4.34 4.09 1.33 3.81 4.00 3.83

antidilutive!

* 360,000 – (25 ÷ 30 × 360,000) = 60,000 ** ($7,500,000 ×.08) × (1 –.30) = 420,000 Since the bonds are antidilutive, they are not included in the calculation, and diluted EPS = $4,500,000 ÷ 1,180,000 = $3.81 c) EPS in general provides investors with the information on how much of the earnings each common share earned in the current year. This informs investors how much of the firm’s earnings they “own” and will help them in predicting future dividend payouts. Diluted EPS provides shareholders with a more realistic picture of the future EPS as it also considers complex financial instruments that are not common shares yet, but are likely to be converted into common shares, which will lower the current shareholder’s share of the earnings. Diluted EPS can also be viewed as a “worst case” scenario for the current shareholders. Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 17-81 Weighted average calculations, basic and diluted earnings per share Drako Corp. had the following activity related to its common shares for the year ending December 31, 2023: Shares outstanding, Jan 1 ............................ 150,000 10% stock dividend, Apr 1 ............................. 15,000 17-49 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Shares issued, Jul 1 ....................................... Shares repurchased, Oct 1 ............................ Shares issued, Dec 31* .................................. Ending balance, Dec 31 ................................. Net Income ....................................................

20,000 (50,000) 10,000 145,000 $476,000

Additional information: • Drako issued 3,000, $2, cumulative preferred shares for $300,000, however, dividends were not declared during 2023. • During 2023, Drako had 15,000 stock options outstanding that were “in the money”. The exercise price of the options is $20, while the market price was $25. Instructions a) Calculate the weighted average number of shares. b) Calculate basic EPS. c) Calculate full diluted EPS. Solution 17-81 a) Weighted average number of shares: (150,000 x 1.1 x 6 ÷ 12) + (185,000 x 3 ÷ 12) + - (135,000 x 3 ÷ 12) = 162,500 *Shares sold on December 31, 2023 are ignored because they have not been outstanding during the year b)

Basic EPS**: ($476,000 – (3,000 x $2)) ÷ 162,500 = $2.89

Fully Diluted EPS: Stock option dilutive effect: Company receipt of cash on exercise (15,000 x $20) ......................... Shares issued to satisfy the stock options ......................................... Cash proceeds used to buy back shares for retirement ($300,000 / $25) ................................................................................... Incremental shares ............................................................................. New average weighted common shares (162,500 + 3,000) ................

$300,000 15,000 (12,000) 3,000 165,500

Diluted EPS ($476,000 – (3,000 x $2)) ÷ 165,500 = $2.84 ** Since the preferred shares are cumulative, preferred dividends are deducted from net income. The fact dividends were not declared is irrelevant. Difficulty: Medium Learning Objective: Calculate basic earnings per share.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 17-82 Weighted average calculations, basic and diluted earnings per share Mangey Corp. had the following activity related to its common shares for the year ending December 31, 2023: Shares outstanding, Jan 1 ............................ 150,000 2-for-1 stock split, Apr 1 ................................ 150,000 Shares issued, Jul 1 ....................................... 20,000 Shares repurchased, Oct 1 ............................ (50,000) Shares issued, Dec 31* .................................. 10,000 Ending balance, Dec 31 ................................. 280,000 Net Income .................................................... $476,000 In addition, the company issued 3,000, $2, cumulative preferred shares for $300,000, however, dividends were not declared during 2023. Instructions a) Calculate the weighted average number of shares. b) Calculate basic EPS. c) Calculate full diluted EPS. d) CRITICAL THINKING: If dividends were declared, would the answer to part c) change? Explain why or why not. Solution 17-82 a) Weighted average number of shares: (150,000 x 2 x 6 ÷ 12) + (320,000 x 3 ÷ 12) + (270,000 x 3 ÷ 12) = 297,500 *Shares sold on December 31, 2023 are ignored because they have not been outstanding during the year b) Basic EPS:** ($476,000 – (3,000 x $2)) ÷ 297,500 = $1.58 c) Fully Diluted EPS: ($476,000 – (3,000 x $2)) ÷ 297,500 = $1.58 ** Since the preferred shares are cumulative, preferred dividends are deducted from net income. The fact dividends were not declared is irrelevant. d)

No, the answer would not change. Since the preferred shares are cumulative, the preferred 17-51

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

dividend is incorporated into the calculation, regardless of whether the dividend is declared or not. Difficulty: Medium Learning Objective: Calculate basic earnings per share. Section Reference: Basic EPS Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 17-83 If-converted, treasury stock and reverse treasury stock methods Explain the if-converted, treasury stock and reverse treasury stock methods that are used to consider the impact of potential common shares on diluted earnings per share. Solution 17-83 The if-converted method considers the impact of convertible securities such as convertible debt and convertible preferred shares. It assumes that the instruments are converted at the beginning of the year (or issue date, if later) and that any related interest or dividend is thus avoided. The treasury stock method looks at the impact of written call options on EPS numbers. It assumes that the options are exercised at the beginning of the year and that the money from the exercise is used to buy back shares in the open market at the average common share price. The reverse treasury stock method looks at the impact of written put options. It assumes that the options are exercised at the beginning of the year and that the company first issues shares in the market (at the average share price) to obtain sufficient funds to buy the shares under the option. Difficulty: Easy Learning Objective: Calculate diluted earnings per share. Section Reference: Diluted EPS CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 18 INCOME TAXES CHAPTER STUDY OBJECTIVES 1. Understand the importance of income taxes from a business perspective. When a company decides where to set up its operations, a major consideration is the tax rate that it will face on its profits. The fact that corporate taxes can slow growth may help to explain why governments in Canada have steadily reduced corporate tax rates over time. For example, the combined federal and provincial tax rate declined from an average of approximately 43% to approximately 26.5% between 2000 and 2021.

2. Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Accounting income is calculated in accordance with generally accepted accounting principles. Taxable income is calculated in accordance with prescribed tax legislation and regulations. Because tax legislation and GAAP have different objectives, accounting income and taxable income often differ. To calculate taxable income, companies start with their accounting income and then add and deduct items to adjust the GAAP measure of income to what is actually taxable and tax deductible in the period. Current tax expense and income taxes payable are determined by applying the current tax rate to taxable income.

3. Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. A taxable temporary difference is the difference between the carrying amount of an asset or liability and its tax base with the consequence that, when the asset is recovered or the liability is settled in the future for an amount equal to its carrying value, the taxable income of that future period will be increased. Because taxes increase in the future as a result of temporary differences that exist at the SFP date, the future tax consequences of these taxable amounts are recognized in the current period as a deferred tax liability. A deductible temporary difference is the difference between the carrying amount of an asset or liability and its tax base with the consequence that, when the asset is recovered or the liability is settled in the future for an amount equal to its book value, the taxable income of that future period will be reduced. Because taxes are reduced in the future as a result of temporary differences that exist at the SFP date, the future tax consequences of these deductible amounts are recognized in the current period as a deferred tax asset.

4. Prepare analyses of deferred tax balances and record deferred tax expense. The following steps are taken: (1) identify all temporary differences between the carrying amounts and tax bases of assets and liabilities at the SFP date; (2) calculate the correct net deferred tax asset or liability balance at the end of the period; (3) compare the balance in the deferred tax asset or liability before the adjustment with the correct balance at the SFP date—the difference is the deferred tax expense/benefit; and (4) 18-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

make the journal entry, which is based on the change in the amount of the net deferred tax asset or liability.

5. Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Tax rates other than the existing rates can be used only when the future tax rates have been enacted into legislation or substantively enacted. Deferred tax assets and liabilities are measured at the tax rate that applies to the specific future years in which the temporary difference is expected to reverse. When there is a change in the future tax rate, its effect on the future tax accounts is recognized immediately. The effects are reported as an adjustment to deferred tax expense in the period of the change.

6. Account for tax loss carryover benefits, including any note disclosures. A company may carry a taxable loss back three years and receive refunds to a maximum of the income taxes paid in those years. Because the economic benefits related to the losses carried back are certain, they are recognized in the period of the loss as a tax benefit on the income statement and as an asset (income tax receivable) on the balance sheet. A post-2005 tax loss can be carried forward and applied against the taxable incomes of the next 20 years. If the economic benefits related to the tax loss are more likely than not to be realized during the carryforward period, they are recognized in the period of the loss as a deferred tax benefit in the income statement and as a deferred tax asset on the SFP. Otherwise, they are not recognized in the financial statements. Alternatively, ASPE also allows the use of a contra valuation allowance account, but this approach is not used under IFRS. Disclosure is required of the amounts of tax loss carryforwards and their expiry dates. If previously unrecorded tax losses are subsequently used to benefit a future period, the benefit is recognized in that future period.

7. Explain why the Deferred Tax Asset account is reassessed at the statement of financial date, and account for the deferred tax asset with and without a valuation allowance account. Every asset must be assessed to ensure that it is not reported at an amount higher than the economic benefits that are expected to be received from the use or sale of the asset. The economic benefit to be received from the deferred tax asset is a reduction in taxes payable in future years. If it is unlikely that sufficient taxable income will be generated in the future to allow the future deductions, the income tax asset may have to be written down. If previously unrecognized amounts are now expected to be realizable, a deferred tax asset and a deferred tax benefit would be recognized.

8. Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Under all methods, current income taxes payable or receivable are reported separately as a current liability or current asset. Under IFRS, the deferred tax accounts are all classified as non-current. Current and deferred tax expense is reported separately with income before discontinued operations, discontinued operations, items in OCI, retained earnings, and other capital. Separate disclosure is required of the amounts and expiry dates of unused tax losses, and the amount of deductible temporary differences for which no 18-2 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

deferred tax asset has been recognized. Under ASPE and assuming a single tax authority, future income tax assets and liabilities are classified as one net non-current amount. ASPE calls for limited disclosures, but under IFRS, additional disclosures are required about temporary differences and unused tax losses, the major components of income tax expense, and the reasons for the difference between the statutory tax rate and the effective tax rate. Analytics can help assess earnings quality.

9. Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. ASPE allows an accounting policy choice—either the taxes payable method or the future income taxes method—while IFRS requires use of the temporary difference approach (a method consistent with the future income taxes method). The main differences relate to terminology, the SFP classification of deferred/future tax assets and liabilities, use of a valuation allowance, and the extent of disclosure. The Looking Ahead section summarizes some recent developments.

10. Apply the temporary difference approach (future income taxes method) of accounting for income taxes in a comprehensive situation. In a comprehensive situation, take the following steps. (1) Calculate the current tax expense and payable. (2) Determine the taxable and deductible temporary differences as the difference between the carrying amounts and tax bases of the assets and liabilities; calculate the correct balance of the Deferred Tax Asset or Deferred Tax Liability account. (3) Determine the deferred tax expense as the adjustment needed to the existing SFP balance. (4) Make an adjusting entry to restate the deferred tax asset or liability amounts if a change in the future tax rates has been substantively enacted. (5) Classify the net deferred/future tax asset or liability according to the accounting standards being applied.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer c c d b c c d b c a b d b a a d b a c c a a c a c d a d a b c c a d a a a c d d c b d

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Impact of corporate income taxes Year-end adjustments for income tax purposes ASPE income tax methods allowed IFRS terminology Differences between taxable income and accounting income IFRS income tax methods allowed Identify reversible difference Definition of a temporary difference Identify a permanent difference Calculate a permanent difference Identify incorrect statement Calculate CCA claimed Calculate current income tax payable Calculate instalment accounts receivable Calculate current income tax liability Calculate current income tax liability Calculate current income tax expense Temporary differences Permanent differences Calculate deferred tax liability and current income taxes payable Deferred tax liability from instalment sales Deferred tax liability from depreciation and warranty differences Deferred tax asset from warranty expenses Definition of the tax base of a liability Income tax expense—IFRS Calculate future/deferred tax liability Depreciation and temporary differences Definition of deferred tax liability Composition of total income tax expense Difference due to unrealized loss on short-term securities Definition of deferred tax asset Adjusting entry to credit deferred tax asset account Calculate deferred tax liability Calculate deferred tax liability with changing tax rates Calculate deferred tax liability Calculate income tax expense for the year Calculate deferred tax liability Deferred tax liability from reversible and permanent differences Deferred tax liability when using equity method of accounting Calculate deferred tax asset Calculate deferred tax asset Calculate deferred tax asset or liability Calculate deferred tax asset or liability 18-4

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d a a Answer a d b b a c b b d c c a c d b b c c d b b a

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68.

Deferred tax liability Adjust tax liability with changing tax rates Objective of interperiod tax allocation Description Result of interperiod tax allocation Income tax allocation Calculation of effective tax rate Differences between taxable and accounting income Definition of intraperiod tax allocation Appropriate tax rate for deferred tax amounts Change of tax rate on future income tax assets/liabilities Recognition of tax benefits of a loss carryforward Financial statement presentation of a tax benefit from loss carryback Loss carryforward benefits Operating loss tax benefits Tax losses Deferred Tax Asset account under IFRS and ASPE Appropriate use of the Deferred Tax Asset account Calculate tax recovery of a loss carryback Calculate loss to be reported after loss carryback Calculate deferred taxes on loss carryforward Calculate loss to be reported after loss carryback Calculate income tax refund following a loss carryback Calculate loss to be reported after loss carryforward IFRS SFP presentation of deferred tax assets and liabilities IFRS and IAS 12

EXERCISES Item E18-69 E18-70 E18-71 E18-72 E18-73 E18-74 E18-75 E18-76 E18-77 E18-78 E18-79 E18-80 E18-81 E18-82

Description Taxable income vs. accounting and taxes payable under IFRS and ASPE Permanent and reversible differences Permanent and reversible differences Reversible differences Calculate taxable income Calculate future income taxes Permanent and reversible differences and disclosure Temporary differences, deferred tax liabilities, and deferred tax assets Calculate deferred income taxes Calculate change in tax rates Calculate change in tax rates, and disclosure Calculate and journalize taxable loss carryforward without valuation allowance (IFRS) Calculate and journalize taxable loss carryforward with valuation allowance (ASPE) Presentation of Deferred Tax Assets and Liabilities 18-5

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

E18-83 E18-84 E18-85

Intra period presentation Calculate taxes under the taxes payable method, and disclosure Comparing IFRS and ASPE for income tax purposes

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Item P18-86 P18-87 P18-88 P18-89 P18-90 P18-91 P18-92 P18-93 P18-94

Description Differences between accounting and taxable income and effect on future income taxes Multiple reversible differences Interperiod tax allocation with change in enacted tax rates Comprehensive income tax situation with multiple differences (ASPE) Comprehensive income tax situation with multiple differences and tax rates (IFRS) Deferred tax asset Loss carryover benefits Deferred tax asset and tax law Intraperiod tax allocation and disclosure

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

NOTE TO INSTRUCTOR: Except where ASPE is specifically noted, it is assumed that all questions are to be solved using current IFRS pronouncements. MULTIPLE CHOICE QUESTIONS 1. Of the various taxation options available to OECD countries, those that had the most negative impact on gross domestic product were a) property taxes. b) consumption taxes. c) corporate taxes. d) personal income taxes. Answer: c Difficulty: Easy Learning Objective: Understand the importance of income taxes from a business perspective. Section Reference: Income Taxes from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. Under IFRS, end-of-year adjustments may need to be made to income for all of the following reasons, except a) income taxes must be filed in accordance with the Income Tax Act. b) IFRS does not provide guidance on allowable deductions for the CRA. c) IFRS allows for the taxes payable approach. d) income tax preparation may also be subject to provincial legislation. Answer: c Difficulty: Easy Learning Objective: Understand the importance of income taxes from a business perspective. Section Reference: Income Taxes from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. For calculating income tax expense, ASPE allows the use of a) any method as long as the CRA approves it. b) the taxes payable method only. c) the future income taxes method only. 18-8 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) either the taxes payable method or the future income taxes method. Answer: d Difficulty: Easy Learning Objective: Understand the importance of income taxes from a business perspective. Section Reference: Income Taxes from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. Under IFRS, accounting income and taxable income are referred to as Accounting Income Taxable Income a) Accounting profit Income for tax purposes b) Accounting profit Taxable profit c) Income before taxes Taxable profit d) Pre-tax profit Taxable income Answer: b Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. When calculating income tax expense, taxable income of a corporation differs from pre-tax accounting income because of Permanent Reversible Differences Differences a) no no b) no yes c) yes yes d) yes no Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting 18-9 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Knowledge AACSB: Analytic

6. For calculating income tax expense, IFRS requires the use of a) any method as long as the CRA approves it. b) the taxes payable method only. c) the temporary difference approach only. d) either the taxes payable method or the temporary difference approach. Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

7. Which of the following will NOT result in a reversible difference? a) product warranty liabilities b) unrealized holding losses c) instalment sales d) fines and penalties Answer: d Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

8. The difference between the tax base of an asset or liability and its reported amount on the SFP is called a a) permanent difference. b) temporary difference. c) current difference. d) future tax expense. Answer: b 18-10 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

9. Alabama Corp.'s taxable income differed from its accounting income for 2023. An item that would create a permanent difference in accounting and taxable incomes for the corporation would be a) a balance in the Unearned Rent account at year end. b) using CCA for tax purposes and straight-line depreciation for book purposes. c) a payment of the golf club dues for the president’s membership. d) making instalment sales during the year. Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. Alabama Corp.'s taxable income differed from its accounting income for 2023. Accounting income includes an expense of $25,000 under meals and entertainment expense, with $3,000 of that total being spent on golf dues. What is the permanent and temporary difference respectively for Alabama? a) Permanent $14,000 / Temporary $0 b) Permanent $11,000 / Temporary $3,000 c) Permanent $0 / Temporary $14,000 d) Permanent $3,000 / Temporary $12,500. Answer: a Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: (($25,000 - $3,000) / 2) + $3,000 = $14,000 18-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

11. With regard to reconciling income reported on the financial statements to taxable income, which of the following statements is INCORRECT? a) All differences between accounting income and taxable income are considered. b) Only reversible differences are considered. c) Only those that result in temporary differences are considered when determining deferred tax amounts for the SFP. d) Permanent differences may be added back to or deducted from accounting income. Answer: b Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

12. Columbia Corp.'s partial income statement for its first year of operations is as follows: Income before income taxes ........................... $1,750,000 Income tax expense Current ..................................................... $483,000 Deferred ................................................... 42,000 525,000 Net income....................................................... $1,225,000 Columbia uses straight-line depreciation for financial reporting purposes and CCA for tax purposes. The depreciation expense for the year was $700,000. Except for depreciation, there were no other differences between accounting income and taxable income. Assuming a 30% tax rate, what amount was claimed for CCA on the corporation's tax return for the year? a) $560,000 b) $665,000 c) $700,000 d) $840,000 Answer: d Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 30% × Temporary Difference = $42,000; 18-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Temporary Difference = $42,000 ÷ 30% = $140,000; $700,000 + $140,000 = $840,000

13. At the end of 2023, its first year of operations, Kali Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income ............................. $800,000 Estimated lawsuit expense ............................. 400,000 Excess CCA for tax purposes ........................... (900,000) Taxable income ............................................... $300,000 The estimated lawsuit expense of $400,000 will be deductible in 2024 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The income tax rate is 25% for all years. Kali adheres to IFRS requirements. The current income tax payable is a) $0. b) $75,000. c) $150,000. d) $200,000. Answer: b Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 × 25% = $75,000

14. Macintyre Inc. sells household furniture on an instalment basis. Customers make payments in equal monthly instalments over a two-year period, with no down payment required. Macintyre's gross profit on instalment sales is 40% of the selling price. For book purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the instalment method is used. There are no other accounting and income tax accounting differences, and Macintyre's income tax rate is 30%. If Macintyre's December 31, 2023, SFP includes a deferred tax liability of $90,000 arising from the difference between accounting and tax treatment of the instalment sales, it should also include instalment accounts receivable of a) $750,000. b) $300,000. c) $225,000. d) $90,000. Answer: a 18-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $90,000 ÷ 30% = $300,000 temporary difference $300,000 ÷ 40% = $750,000

15. Bare Fashions Corp. reported pre-tax accounting income of $300,000 for calendar 2023. To calculate the income tax liability, the following data were considered: Life insurance proceeds received on the death of the CEO .... $130,000 CCA in excess of depreciation .................................................. 20,000 Instalment tax payments made during 2023........................... 25,000 Enacted income tax rate for 2023 ............................................ 30% What amount should Bare Fashions report as its current income tax liability on its December 31, 2023 SFP? a) $20,000 b) $26,000 c) $45,000 d) $51,000 Answer: a Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($300,000 – $130,000 – $20,000) × 30% = $45,000; $45,000 – $25,000 = $20,000

16. Shierling Ltd. reported pre-tax accounting income of $750,000 for calendar 2023. To calculate the income tax liability, the following data were considered: Non-taxable portion of capital gains .................................. $ 30,000 CCA in excess of depreciation ............................................. 60,000 Instalment tax payments made during 2023...................... 150,000 Enacted income tax rate for 2023 ....................................... 30% What amount should Shierling report as its current income tax liability on its December 31, 2023 SFP? a) $198,000 18-14 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) $75,000 c) $66,000 d) $48,000 Answer: d Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($750,000 – $30,000 – $60,000) × 30% = $198,000; $198,000 – $150,000 = $48,000

17. For calendar 2023, Peanuts Corp. prepared the following reconciliation of accounting income to taxable income: Pre-tax accounting income ...................................................................... $750,000 Add reversible difference Construction contract revenue, which will reverse in 2024 ............ 100,000 Deduct reversible difference Depreciation expense, which will reverse in equal amounts in each of the next four years ............................................................... (400,000) Taxable income ........................................................................................ $450,000 Peanut’s income tax rate is 25% for 2023. What amount should the corporation report in its 2023 income statement as current income tax expense? a) $25,000 b) $112,500 c) $187,500 d) $212,500 Answer: b Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $450,000 × 25% = $112,500

18. All the following are examples of temporary differences that result in taxable deductible amounts 18-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

in future years except for a) warranty costs paid. b) holding losses. c) warranty costs accrued. d) pension costs accrued. Answer: a Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

19. Which of the following is NOT a permanent difference? a) interest paid on fines for breaking a law b) the 50% non-deductible portion of meals and entertainment c) litigation accruals d) proceeds from life insurance carried on key officers Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

20. For calendar 2023, its first year of operations, Lion Ltd. reported pre-tax accounting income of $100,000. Lion uses CCA for tax purposes and straight-line depreciation for financial reporting. The differences between depreciation and CCA over the five-year life of their assets, and the enacted tax rates for 2023 to 2027 are as follows: Depreciation Over (Under) CCA Tax Rate 2023 $(20,000) 35% 2024 (26,000) 30% 2025 (6,000) 30% 2026 24,000 30% 2027 28,000 30% There are no other reversible differences. On Lion's December 31, 2023 SFP, the deferred tax liability 18-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

and the current income taxes payable should be Deferred Current Income Tax Liability Taxes Payable a) $7,000 $28,000 b) $5,600 $28,000 c) $6,000 $28,000 d) $6,000 $24,000 Answer: c Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $20,000 × 30% = $6,000; ($100,000 – $20,000) × 35% = $28,000

21. Casey Inc. uses the accrual method of accounting for financial reporting purposes and the instalment method of accounting for income tax purposes. Instalment income of $930,000 will be collected in the following years when the enacted tax rates are: Collection of Income Enacted Tax Rates 2023 $120,000 35% 2024 180,000 30% 2025 270,000 30% 2026 360,000 25% The instalment income is Casey's only reversible difference. What amount should be included as the deferred tax liability on its December 31, 2023 SFP? a) $225,000 b) $243,000 c) $256,500 d) $315,000 Answer: a Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. 18-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($180,000 × 30%) + ($270,000 × 30%) + ($360,000 × 25%) = $225,000

22. For calendar 2023, Melvin Corp. reported depreciation expense of $800,000 on its income statement, but on its 2023 income tax return, Melvin claimed CCA of $1,200,000. The 2023 income statement also included $150,000 in accrued warranty expense that will be deducted for tax purposes when paid. Melvin's income tax rates are 30% for 2023 and 2024, and 24% for 2025 and 2026. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation Difference Warranty Expense 2024 $160,000 $ 30,000 2025 140,000 50,000 2026 100,000 70,000 $400,000 $150,000 These were Melvin's only reversible differences. At December 31, 2023, Melvin’s deferred tax liability should be a) $67,800. b) $73,200. c) $75,000. d) $133,800. Answer: a Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($160,000 – $30,000) × 30% = $39,000; ($140,000 – $50,000) × 24% = $21,600; ($100,000 – $70,000) × 24% = $7,200; $39,000 + $21,600 + $7,200 = $67,800

23. For calendar 2023, its first year of operations, Snow Corp. reported pre-tax accounting income of $330,000 and taxable income of $600,000. The only reversible difference is accrued warranty costs, which are expected to be paid as follows: 2024 $90,000 2025 45,000 2026 45,000 18-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2027 90,000 The enacted income tax rates are 35% for 2023, 30% for 2024, 2025 and 2026, and 25% for 2027. The deferred tax asset reported on Snow’s December 31, 2023 SFP should be a) $54,000. b) $63,000. c) $76,500. d) $94,500. Answer: c Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($90,000 + $45,000 + $45,000) × 30% = $54,000; $90,000 × 25% = $22,500; $54,000 + $22,500 = $76,500

24. The tax base of a liability is its carrying amount on the SFP a) reduced by any amount that will be deductible for tax purposes in future periods. b) increased by any amount that will be deductible for tax purposes in future periods. c) less any amount that will not be taxable in the future. d) plus any amount that will not be taxable in the future. Answer: a Difficulty: Easy Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred/Future Income Taxes CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

25. Under IFRS, income tax expense is calculated as current tax expense a) less an increase in a deferred tax liability. b) less a decrease in a deferred tax asset. c) plus or minus the change in deferred taxes. d) plus or minus the change in the provision for income taxes. 18-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Easy Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

26. Hunter Limited is a commercial construction company that takes on long-term building projects. The company uses accounting practices that recognize revenue faster than the Income Tax Act requires. In 2023, Hunter recognized $350,000 of revenue on its books that is NOT taxable until 2024. What is the impact to the statement of financial position based on a 20% enacted tax rate? a) Deferred Tax Asset $70,000 b) Deferred Tax Benefit $70,000 c) Deferred Tax Expense $70,000 d) Deferred Tax Liability $70,000 Answer: d Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Future taxable temporary difference is $350,000 x 20% = $70,000

27. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Taxable Temporary Deductible Temporary Differences Differences a) yes yes b) yes no c) no yes d) no no Answer: a Difficulty: Medium

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

28. A deferred tax liability is the a) current tax consequence of a taxable temporary difference. b) current tax consequence of a deductible temporary difference. c) future tax consequence of a deductible temporary difference. d) future tax consequence of a taxable temporary difference. Answer: d Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

29. Total income tax expense for a corporation consists of a) current tax expense and deferred tax expense. b) current tax expense only. c) deferred tax expense only. d) The deferred tax asset minus any deferred tax liability. Answer: a Difficulty: Easy Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

30. A corporation records an unrealized loss on FV-NI investments. This would result in what type of difference and in what type of deferred tax account? Type of Difference Deferred tax a) Reversible Liability 18-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c) d)

Reversible Permanent Permanent

Asset Liability Asset

Answer: b Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

31. A deferred tax asset is the a) current tax consequence of a taxable temporary difference. b) current tax consequence of a deductible temporary difference. c) future tax consequence of a deductible temporary difference. d) future tax consequence of a taxable temporary difference. Answer: c Difficulty: Easy Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

32. If a corporation prepares an adjusting entry to credit the deferred tax asset account, this should represent a) additional future income taxes payable. b) a transfer to the deferred tax liability account. c) the reversal of a deferred tax benefit that originated in a prior year. d) the reversal of a deferred tax expense that originated in a prior year. Answer: c Difficulty: Easy Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting 18-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Knowledge AACSB: Analytic

33. On January 2, 2022, Brunswick Corp. purchased a depreciable asset for $600,000. The asset has an estimated 4-year life with no residual value. Straight-line depreciation is being used for financial statement purposes but the following CCA amounts will be deducted for tax purposes: 2022 $150,000 2025 $56,250 2023 225,000 2026 28,125 2024 112,500 2027 28,125 Assuming an income tax rate of 30% for all years, the deferred tax liability that should be reflected on Brunswick's SFP at December 31, 2023, should be a) $22,500. b) $33,750. c) $45,000. d) $50,625. Answer: a Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($600,000 – $150,000 – $150,000) – ($600,000 – $150,000 – $225,000) = – $75,000 $75,000 × 30% = $22,500

34. A reconciliation of Quebec Corp.'s pre-tax accounting income with its taxable income for 2023, its first year of operations, is as follows: Pre-tax accounting income ............................. $3,000,000 Excess CCA ....................................................... (90,000) Taxable income ............................................... $2,910,000 The excess CCA will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2023, 35% in 2024, and 30% in both 2025 and 2026. The total deferred tax liability to be reported on Quebec's SFP at December 31, 2023 is a) $36,000. b) $31,500. c) $30,000. d) $28,500. Answer: d Difficulty: Medium 18-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

35. At the end of 2023, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income ............................. $300,000 Estimated lawsuit expense ............................. 750,000 Instalment sales .............................................. (600,000) Taxable income ............................................... $450,000 The estimated lawsuit expense of $750,000 will be deductible in 2025 when it is expected to be paid. The instalment sales will be realized at $300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax liability to be recorded is a) $180,000. b) $90,000. c) $67,500. d) $45,000. Answer: a Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $600,000 × 30% = $180,000

36. At the end of 2023, its first year of operations, Ontario Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income ............................. $300,000 Estimated lawsuit expense ............................. 750,000 Instalment sales .............................................. (600,000) Taxable income ............................................... $450,000 The estimated lawsuit expense of $750,000 will be deductible in 2025 when it is expected to be paid. The instalment sales will be realized at $300,000 in each of the next two years. The income tax rate is 30% for all years. The total income tax expense to be reported on the income statement is a) $90,000. b) $135,000. 18-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) $150,000. d) $300,000. Answer: a Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Income tax payable = $450,000 × 30% = $135,000 Change in deferred tax liability = $600,000 × 30% = $180,000 Change in deferred tax asset = $750,000 × 30% = $225,000 $135,000 + $180,000 – $225,000 = $90,000

37. At the end of 2023, its first year of operations, Halifax Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income ............................. $800,000 Estimated lawsuit expense ............................. 400,000 Excess CCA for tax purposes ........................... (900,000) Taxable income ............................................... $300,000 The estimated lawsuit expense of $400,000 will be deductible in 2024 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The income tax rate is 25% for all years. Halifax adheres to IFRS requirements. The deferred tax liability to be recorded is a) $225,000. b) $200,000. c) $100,000. d) $0. Answer: a Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $900,000 × 25% = $225,000

38. In its 2023 income statement, its first year of operations, Penelope Corp. reported depreciation of 18-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$525,000 and dividend revenue from a Canadian corporation of $105,000. For 2023 income tax purposes, Penelope claimed CCA of $825,000. The difference in depreciation/CCA will reverse in equal amounts over the next three years. Penelope's income tax rates are 35% for 2023, 30% for 2024, and 25% for both 2025 and 2026. What amount should be included as the deferred tax liability on Penelope's December 31, 2023 SFP? a) $99,000 b) $90,000 c) $80,000 d) $75,000 Answer: c Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $825,000 – $525,000 = $300,000; ($100,000 × 30%) + ($100,000 × 25%) + ($100,000 × 25%) = $80,000

39. On January 1, 2023, Lake Corp., a publicly accountable enterprise, purchased 40% of the common shares of Michigan Inc. and accounts for this investment by the equity method. During 2023, Michigan reported earnings of $900,000 and paid dividends of $300,000. Assume that these dividends are taxable to Lake when received. Lake assumes that all of Michigan's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 20%. Lake's current income tax rate is 25%. The increase in Lake's deferred tax liability for this temporary difference is a) $120,000. b) $100,000. c) $60,000. d) $48,000. Answer: d Difficulty: Hard Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($900,000 – $300,000) × 40% = $240,000 (earnings from associate, not income for tax purposes); $240,000 × 20% = $48,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

40. At the end of 2023, its first year of operations, Rinaldo Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income $300,000 Estimated lawsuit expense 750,000 Instalment sales (600,000) Taxable income $450,000 The estimated lawsuit expense of $750,000 will be deductible in 2025 when it is expected to be paid. The instalment sales will be realized at $300,000 in each of the next two years. The income tax rate is 30% for all years. The deferred tax asset to be recorded is a) $0. b) $45,000. c) $90,000. d) $225,000. Answer: d Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $750,000 × 30% = $225,000

41. At the end of 2023, its first year of operations, Gaucho Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: Pre-tax accounting income $800,000 Estimated lawsuit expense 400,000 Excess CCA for tax purposes (900,000) Taxable income $300,000 The estimated lawsuit expense of $400,000 will be deductible in 2024 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The income tax rate is 25% for all years. Gaucho adheres to IFRS requirements. The deferred tax asset to be recorded is a) $200,000. b) $160,000. c) $100,000. d) $60,000. Answer: c Difficulty: Medium 18-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $400,000 × 25% = $100,000

42. Gretna Corp. reported the following results for calendar 2023, its first year of operations: Pre-tax accounting income $250,000 Taxable income 400,000 The difference between accounting income and taxable income is due to a temporary difference, which will reverse in 2024. Assuming that the enacted tax rates in effect are 30% in 2023 and 25% in 2024, what amount should Gretna record as the deferred tax asset or liability for calendar 2023? a) $45,000 deferred tax liability b) $37,500 deferred tax asset c) $45,000 deferred tax asset d) $37,500 deferred tax liability Answer: b Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($400,000 – $250,000) × 25% = $37,500

43. In 2023, Savoury Ltd. accrued, for book purposes, estimated losses on disposal of unused plant facilities of $750,000. The facilities were sold in March 2024 and a $750,000 loss was recognized for tax purposes. Also, in 2023, Savoury paid $50,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 25% in both 2023 and 2024, and that Savoury paid $390,000 in income taxes in 2023, the amount reported as the deferred tax asset or liability on Savoury's SFP at December 31, 2023, should be a a) Cannot be determined from the information given. b) $175,000 asset. c) $187,500 liability. d) $187,500 asset. Answer: d Difficulty: Medium 18-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $750,000 × 25% = $187,500

44. Devlin Ltd. reports a deferred tax liability in its 2023 financial statements. This implies that Devlin a) likely reported net income for the 2023 year. b) is a private corporation. c) is a public corporation. d) can be a public or a private corporation. Answer: d Difficulty: Easy Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

45. Quebec Corp. currently has a deferred tax liability on the statement of financial position in the amount of $400,000, which is based on a tax rate of 25% for 2023. The federal government has announced changes to the tax rate for 2024, increasing it to 28%. What is the journal entry to record this adjustment? a) Dr. Deferred Tax Expense ........................................................ $48,000 Cr. Deferred Tax Liability ..................................................... $48,000 b) Dr. Deferred Tax Liability ........................................................ $48,000 Cr. Deferred Tax Expense .................................................... $48,000 c) Dr. Deferred Tax Expense ........................................................ $448,000 Cr. Deferred Tax Liability ..................................................... $448,000 d) No entry required because the tax rate doesn’t affect Quebec Corp.’s financial statements. Answer: a Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section Reference: Deferred Tax Liabilities

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: The taxable difference is equal to $400,000 / 25% = $1,600,000. The liability account should be adjusted to $1,600,000 x 28% = $448,000. Adjustment = $448,000 – $400,000 = $48,000

46. One objective of interperiod tax allocation is to a) recognize the tax effects in the accounting period when the transactions and events are recognized for financial reporting purposes. b) recognize a distribution of earnings to the shareholders. c) reconcile the tax consequences of permanent and reversible differences appearing on the current year's financial statements. d) adjust income tax expense on the income statement to be in agreement with income taxes payable on the SFP. Answer: a Difficulty: Medium Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense. Section Reference: Income Tax Accounting Objectives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

47. Interperiod tax allocation causes a) the income tax expense reported on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year. b) the income tax expense reported on the income statement to bear a normal relation to the tax liability. c) the income tax liability reported on the SFP to bear a normal relation to the income before tax reported on the income statement. d) the income tax expense reported on the income statement to be presented with the specific revenues causing the tax. Answer: a Difficulty: Medium Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense. Section Reference: Income Tax Accounting Objectives 18-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

48. Income tax expense should be allocated to all of the following except a) continuing operations. b) discontinued operations. c) prior period adjustments. d) unusual or infrequent items. Answer: d Difficulty: Easy Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense. Section Reference: Income Tax Accounting Objectives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

49. The effective tax rate for a period is calculated by dividing a) total income tax expense by taxable income. b) total income tax expense by the pre-tax income on the income statement. c) taxable income by total income tax expense. d) taxable income by the pre-tax income on the income statement. Answer: b Difficulty: Easy Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense. Section Reference: Income Tax Accounting Objectives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

50. Taxable income of a corporation a) differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. b) differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. c) is based on generally accepted accounting principles. d) is reported on the corporation's income statement. Answer: b 18-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense. Section Reference: Income Tax Accounting Objectives CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

51. Allocating income tax expense or benefit for the period (both current and deferred) to the income and other statements to reflect transactions that attract income tax is known as a) intraperiod tax allocation. b) interperiod tax allocation. c) current tax allocation. d) reconciliation approach. Answer: a Difficulty: Medium Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense. Section Reference: Income Tax Accounting Objectives Section Reference: Analyses of Temporary Deductible Differences Bloomcode: Knowledge AACSB: Analytic

52. Tax rates other than the current tax rate may be used to calculate the future income tax amount on the SFP if a) it is probable that a future income tax rate change will occur. b) it appears likely that a future income tax rate will be higher than the current tax rate. c) the future income tax rates have been enacted or substantively enacted into law. d) it appears likely that a future income tax rate will be less than the current tax rate. Answer: c Difficulty: Easy Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

53. When a change in the tax rate is enacted, the effect on existing future income tax assets or 18-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

liabilities is a) recorded immediately as a retroactive adjustment to retained earnings. b) recorded as an adjustment to income tax expense in the period of the rate change. c) recorded prospectively over the number of years from the year of the change until the period in which the timing differences are expected to reverse. d) not recognized until the benefit or cost of the rate change is realized when the timing differences actually reverse. Answer: b Difficulty: Easy Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

54. Recognition of tax benefits in a loss year due to a loss carryforward requires a) the establishment of a deferred tax liability. b) the establishment of a deferred tax asset. c) the establishment of an income tax receivable. d) only a note to the financial statements. Answer: b Difficulty: Easy Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

55. McMurray Ltd. incurred an accounting and taxable loss for 2023. The corporation therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2023 financial statements? a) The reduction of the loss should be reported as an adjustment to retained earnings. b) The refund claimed should be reported as a future charge and amortized over five years. c) The refund claimed should be reported as revenue in the current year. d) The refund claimed should be shown as a reduction of the loss in 2023.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Easy Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

56. Which of the following statements related to loss carrybacks and carryforwards is correct? a) The benefit due to a loss carryback can be reported in both the loss year and future years. b) The benefit due to a loss carryforward should always be reported in the loss year. c) The benefit due to a loss carryforward could be reported in both the loss year and future years. d) The benefit due to a loss carryback is reported only in the second year preceding the loss year. Answer: c Difficulty: Easy Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

57. A net operating loss a) must always be carried back 3 years. b) must always be carried forward 10 years. c) may be carried back 3 years or carried forward up to 20 years. d) occurs when a company reports a net loss in their income statement. Answer: c Difficulty: Easy Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

58. What factors into the decision on how to use a tax loss? a) past and future anticipated tax rates b) the results of industry competitors c) different tax rates across nations 18-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) All of the choices are correct. Answer: a Difficulty: Easy Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

59. Recognizing a deferred tax asset for most deductible temporary differences and carryforward of unused tax losses is a) used under IFRS only. b) used under ASPE only. c) used only to the extent that it is probable and the deferred tax asset will be realized. d) used only for corporate income tax purposes for the CRA. Answer: c Difficulty: Easy Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

60. The use of a Deferred Tax Asset account is subject to all of the following restrictions, except a) if the future taxable income is not probable, the deferred tax asset account will be removed. b) the deferred tax asset account is regularly reviewed. c) when conditions change, a previously unrecognized deferred tax asset account may be recognized. d) the allowance method for recognizing the deferred tax asset account is the required standard. Answer: d Difficulty: Easy Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

61. Sassy Inc. reported a taxable and accounting loss of $130,000 for 2023. Its pre-tax accounting income for the preceding two years was as follows: 2021 $60,000 2022 80,000 Assuming that management wants to use the losses to carryback and recover previous income taxes paid, how much will Sassy receive as a refund based on a 25% tax rate for all years involved? a) $20,000 b) $32,500 c) $35,000 d) $130,000 Answer: b Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Loss of $130,000 x 25% = $32,500

62. Saucy Inc. reported a taxable and accounting loss of $130,000 for 2023. Its pre-tax accounting income for the preceding two years was as follows: 2021 $60,000 2022 80,000 The amount that Saucy reports as a net loss for financial reporting purposes in 2023, assuming that it uses the carryback provisions, and that the tax rate is 25% for all years involved, is a) $0. b) $97,500. c) $105,000. d) $130,000. Answer: b Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $130,000 – (25% × $130,000) = $97,500.

63. Sassy Inc. reported a taxable and accounting loss of $130,000 for 2023. Its pre-tax accounting income for the preceding two years was as follows: 18-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2021 $60,000 2022 $80,000 Assuming that management wants to use the losses to carryforward and offset against future income, what will be the impact to the 2023 financial statements if future tax rates are increasing to 28%? a) Deferred Tax Benefit $39,200 b) Deferred Tax Expense $39,200 c) Deferred Tax Asset $36,400 d) Deferred Tax Expense $36,400 Answer: c Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Loss of $130,000 x 28% = $36,400

64. Hopper Corporation reported the following results for its first three years of operations: 2022 income (before income taxes) $ 40,000 2023 loss (before income taxes) (360,000) 2024 income (before income taxes) 400,000 There were no permanent or reversible differences during these three years. Assume an income tax rate of 30% for 2022 and 2023, and 40% for 2024, and that any deferred tax asset recognized is more likely than NOT to be realized. If Hopper elects to use the carryback provisions, what income (loss) is reported for 2023? a) $(360,000) b) $(348,000) c) $(220,000) d) $0 Answer: c Difficulty: Hard Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated Section Reference: Loss Carryforward Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $40,000 × 30% = $12,000; $320,000 × 40% = $128,000; $360,000 – $12,000 – $128,000 = $220,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

65. Night Owl Inc. reports a taxable and pre-tax accounting loss of $150,000 for 2023. The corporation's taxable and pre-tax accounting income and tax rates for the preceding two years were: 2021 $200,000 20% 2022 200,000 20% The 2023 tax rate is 30%. If Night Owl elects to use the carryback provisions, the amount that should be reported as income tax receivable for 2023 is a) $50,000. b) $45,000. c) $35,000. d) $30,000. Answer: d Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $150,000 × 20% = $30,000

66. Colombe Properties Corporation reported the following results for its first three years of operations: 2022 income (before income taxes) ................ $ 40,000 2023 loss (before income taxes)...................... (360,000) 2024 income (before income taxes) ................ 400,000 There were no permanent or reversible differences during these three years. Assume an income tax rate of 30% for 2022 and 2023, and 40% for 2024, and that any deferred tax asset recognized is more likely than NOT to be realized. If Colombe Properties elects to use the carryforward provisions and NOT the carryback provisions, what income (loss) is reported for 2023? a) $0 b) $(216,000) c) $(232,000) d) $(360,000) Answer: b Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryforward Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $360,000 × 40% = $144,000; $360,000 – $144,000 = $216,000 18-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

67. Under IFRS, how are deferred tax asset and liability accounts presented on the SFP? a) They must be segregated into current and non-current items. b) They must be shown as non-current assets or liabilities. c) They must be shown as current assets or liabilities. d) They must be reported as a reduction of the related asset or liability accounts. Answer: b Difficulty: Easy Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, apply intraperiod tax allocation, and discuss analytics. Section Reference: Statement of Financial Position Presentation CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

68. Using IFRS, IAS 12 guidelines allow for all of the following, except a) the choice of using either the taxes payable method or the future income taxes method. b) the use of the temporary difference approach. c) it does not use a valuation account. d) it permits the use of a deferred tax asset account to the extent that it is probable that it will be realized. Answer: a Difficulty: Easy Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex 18-69 Taxable income vs. accounting income and taxes payable under IFRS and ASPE Explain the difference between accounting income and taxable income. How do these differences impact income under IFRS between what is and what is not allowable for income tax purposes? Are there any differences under ASPE? Solution18-69 Accounting income is calculated in accordance with generally accepted accounting principles. Taxable income is calculated in accordance with prescribed tax legislation and regulations. Because tax legislation and GAAP have different objectives, accounting income and taxable income almost always differ. Corporations file income tax returns following the Income Tax Act (and related provincial legislation), which is administered by the CRA. IFRS differs in several ways from tax regulations and as a result, adjustments need to be made on the income reported on the financial statements when determining taxable income. Pre-tax income on the income statement and taxable income are generally different under IFRS and ASPE. However, under ASPE, companies have the option of using the taxes payable approach where income tax expense would typically equal income taxes payable. Difficulty: Easy Learning Objective: Understand the importance of income taxes from a business perspective. Section Reference: Income Taxes from a Business Perspective Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 18-70 Permanent and reversible differences Explain whether each of the following independent situations should be treated as a reversible difference or a permanent difference. 1. For accounting purposes, Barley Corp. reports revenue from instalment sales on the accrual basis. For income tax purposes it reports the revenues by the instalment method, deferring recognition of gross profit until cash is collected. 2. Pre-tax accounting income and taxable income differ because dividends received from Canadian corporations were not included in Rye Corp.’s taxable income, while 100% of the dividends received were included as revenue for financial statement purposes. 3. Flax Corp.’s estimated warranty costs (covering a three-year period) are expensed for accounting purposes at the time of sale, but deducted for income tax purposes only when paid. 18-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 18-70 1. Reversible difference. This difference in the timing of revenue recognition between pre-tax accounting income and taxable income will initially increase pre-tax accounting income, but will not increase taxable income by the amount of future gross profits until cash is collected in subsequent years. Assuming the estimate as to collectibility of instalment receivables is valid, the total amounts reported as gross profits for accounting purposes and for tax purposes will be equal over the life of a group of instalment receivables. The time lag between the accrual for accounting purposes and the recognition for tax purposes will increase the deferred tax liability as long as instalment sales are level or increasing. The deferred tax liability will be reduced as the receivables are collected. 2.

Permanent difference. This difference in pre-tax accounting income and taxable income will never reverse because present tax laws allow a corporation that owns shares in another Canadian corporation to exclude the dividends it receives from that corporation. Thus, there are no tax consequences for such dividends, even though they are recognized as income for accounting purposes. [Note from author: this is not exactly correct. It is true such dividends are not subject to Part I (“regular” income tax) but they may be subject to Part IV tax.]

Reversible difference. The full estimated three years of warranty expense reduces the current year's pre-tax accounting income, but will reduce taxable income in varying amounts each year as the costs are paid. Assuming the warranty estimate is valid, the total amounts deducted for accounting and for tax purposes will be equal over the three-year period. This is an example of an expense that, in the first year, reduces pre-tax accounting income more than it does the taxable income and, in later years, reverses and reduces taxable income without affecting pre-tax accounting income.

Ex. 18-71 Permanent and reversible differences Listed below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether the items are permanent differences or reversible differences. For reversible differences, indicate whether they will create deferred tax assets or deferred tax liabilities. 1. Investments accounted for by the equity method (investment income exceeds dividends received) 2. Advance rental receipts 3. Membership costs for executives at a local golf club 4. Estimated future warranty costs 5. Excess of pension contributions over pension expense 6. Expenses incurred in obtaining tax-exempt revenue 18-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

7. Instalment sales 8. Excess CCA over accounting depreciation 9. Long-term construction contracts 10. Premiums paid on life insurance of officers (company is the beneficiary) 11. Penalty assessed by the CRA for late submission of income tax return Solution 18-71 1. Reversible difference, deferred tax liability 2.

Reversible difference, deferred tax asset

Permanent difference

Reversible difference, deferred tax asset

Reversible difference, deferred tax liability

Permanent difference

Reversible difference, deferred tax liability

10. Permanent difference 11. Permanent difference Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-72 Reversible differences There are four types of reversible differences. For each type, indicate the cause of the difference, give some examples, and indicate whether the difference will create a taxable or deductible amount in the future.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 18-72 1. Revenues or gains taxable after they are recognized in pre-tax accounting income. Examples are instalment sales, long-term construction contracts, and the equity method of accounting for investments. They result in future taxable amounts. 2.

Revenues or gains taxable before they are recognized in pre-tax accounting income. Examples are subscriptions received in advance and rents received in advance. They result in future deductible amounts.

Expenses or losses deductible before they are recognized in pre-tax accounting income. Examples are the use of CCA for tax purposes, prepaid expenses, and pension funding in excess of pension expense. They result in future taxable amounts.

Expenses or losses deductible after they are recognized in pre-tax accounting income. Examples are warranty expenses, estimated lawsuit losses, and unrealized losses on investments. They result in future deductible amounts.

Difficulty: Medium Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-73 Calculate taxable income The records for Kalman Ltd. show the following data for calendar 2023: 1. Gross profit on instalment sales recorded on the books was $100,000. Gross profit from collections of instalment receivables was $50,000. 2. Golf club dues were $3,800. 3. Machinery was acquired in January 2023 for $300,000. Kalman uses straight-line depreciation over a ten-year life (no residual value). For tax purposes, Kalman uses CCA at 14% for 2023 after considering the half-year rule. 4. Dividends received from a Canadian corporation were $4,000. 5. The estimated warranty liability related to 2023 sales was $19,600. Warranty repair costs paid during 2023 were $13,600. The remainder will be paid in 2024. 6. Pre-tax accounting income is $250,000. The enacted income tax rate is 25%. Instructions a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income. b) Prepare the required adjusting entries to record income taxes for 2023. 18-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 18-73 a) Pre-tax financial income .............................................................................. Permanent differences Golf dues (add back) ......................................................................... Dividends (deduct)............................................................................ Reversible differences Instalment sales ($100,000 – $50,000) ............................................. CCA ($42,000 – $30,000) .................................................................... Warranty expense ($19,600 – $13,600)............................................. Taxable income ........................................................................................ b)

$250,000 3,800 (4,000) (50,000) (12,000) 6,000 $193,800

Current Tax Expense................................................................................. Income Tax Payable (25% × $193,800) .............................................

48,450

Deferred Tax Expense .............................................................................. Deferred Tax Asset (25% × $6,000) ........................................................... Deferred Tax Liability [25% × ($50,000 + $12,000)] ..........................

14,000 1,500

48,450

15,500

Ex. 18-74 Calculate future income taxes Pan Corp., at the end of 2023, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: Pre-tax accounting income ...................................................................... $300,000 Estimated warranty expenses deductible when paid ............................. 800,000 Excess CCA ................................................................................................ (600,000) Taxable income ........................................................................................ $500,000 Estimated warranty expenses of $530,000 will be deductible in 2024, $200,000 in 2025, and $70,000 in 2026. The use of the depreciable assets will result in taxable amounts of $200,000 in each of the next three years. The enacted tax rate is 30% and is not expected to change. Instructions a) Prepare a schedule of the future taxable and deductible amounts. 18-44 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Prepare the required adjusting entries to record income taxes for 2023.

Solution 18-74 a) Future taxable (deductible) amounts Warranties Excess CCA b)

2024

2025

2026

Total

$(530,000) 200,000

$(200,000) 200,000

$(70,000) 200,000

$(800,000) 600,000

Current Tax Expense ($500,000 x 30%) .................................................... Income Tax Payable ..........................................................................

150,000

Deferred Tax Asset ($800,000 x 30%) ....................................................... Deferred Tax Liability ($600,000 × 30%) ........................................... Deferred Tax Benefit .........................................................................

240,000

150,000

180,000 60,000

Ex. 18- 75 Permanent and reversible differences and disclosure The records for Gursoy Inc. show the following data for calendar 2023: 1. Pre-tax accounting income is $175,000. The enacted income tax rate is 28%. 2. The gross profit on construction contracts calculated using percentage of completion recorded on the books was $100,000. No contracts were completed in 2023 and so the gross profit for tax purposes was $0. 3. Interest paid on late and deficient tax instalments was $3,000. 4. Equipment was acquired in January 2023 for $300,000. Gursoy uses straight-line depreciation over a ten-year life (no residual value). For tax purposes, Gursoy uses CCA at 30% for 2023. 5. Gursoy held FV-NI investments on which $1,500 unrealized losses were recorded at the end of 2023. Instructions a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income. b) Prepare the required adjusting entries to record income taxes for 2023. c) Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on income taxes. Round tax rates to one decimal place. Solution 18-75 18-45 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) Pre-tax accounting income .......................................................................... Permanent difference Interest paid on late and deficient tax instalments......................... Reversible differences Percentage completion construction ($100,000 – $0)..................... CCA ($45,000 – $30,000) .................................................................... FV-NI investment unrealized loss ..................................................... Taxable income ........................................................................................ b)

$175,000 3,000 (100,000) (15,000) 1,500 $ 64,500

Current Tax Expense................................................................................. Income Tax Payable (28% × $64,500) ...............................................

18,060

Deferred Tax Expense ............................................................................... Deferred Tax Asset (28% × $1,500) ........................................................... Deferred Tax Liability [($100,000 + $15,000) x 28%] ........................

31,780 420

18,060

32,200

c) Effective tax rate = $18,060 / $175,000 Adjustment for permanent differences = ($3,000 x 28%)/$175,000 Adjustment for reversing differences = [($100,000 + $15,000 - $1,500) x 28%)] / $175,000 Statutory tax rate

10.3% (0.5%) 18.2% 28.0%

Ex. 18-76 Temporary differences, deferred tax liabilities, and deferred tax assets Explain the difference between a taxable temporary difference and a deductible temporary difference. When would a deferred tax liability by recognized and why? Explain how this differs from a deferred tax asset and how it would be recognized. Solution 18-76 Temporary differences are differences between the tax base of an asset or liability and its reported amount in the financial statements, which will result in taxable amounts or deductible amounts in future years. Taxable temporary differences increase taxable income in future years and cause a deferred tax 18-46 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

liability to be recorded. Deductible temporary differences decrease taxable income in future years and cause a deferred tax asset to be recorded. Specifically, a taxable temporary difference is the difference between the carrying value of an asset or liability and its tax base. When the asset is recovered or the liability is settled in the future for an amount equal to the carrying value, taxable income of that future period will be increased. Because taxes arise in the future as a result of reversible differences existing at the SFP date, the future income tax consequences of these taxable amounts are recognized in the current period as a deferred tax liability. A deferred tax asset is the future income tax consequences attributable to deductible temporary differences and loss carryforwards. IFRS (IAS 12) permits a deferred tax asset to be recognized only to the extent that it is probable that it will be realized in the future. Note that IFRS does not use a valuation account, although ASPE does. Difficulty: Easy Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets Learning Objective: Explain why the Deferred Tax Asset account is reassessed at the statement of financial date, and account for the deferred tax asset with and without a valuation allowance account. Section Reference: Review of Deferred Tax Asset Account Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 18-77 Calculate deferred income taxes Seenath Ltd., at the end of 2023, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: Pre-tax accounting income ................................................. $ 300,000 Excess CCA claimed for tax purposes ................................. (600,000) Estimated expenses deductible when paid........................ 500,000 Taxable income ................................................................... $ 200,000 Use of the depreciable assets will result in taxable amounts of $200,000 in each of the next three years. The estimated expenses of $500,000 will be deductible in 2026 when settlement is expected to be made. The enacted tax rate is 25% and is not expected to change. Instructions 18-47 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) b)

Prepare a schedule of the deferred taxable and deductible amounts. Prepare the required adjusting entries to record income taxes for 2023.

Solution 18-77 a) Future taxable (deductible) amounts CCA Expenses b)

2024

2025

2026

Total

$200,000

$ 200,000 (500,000)

$ 600,000 (500,000)

Current Tax Expense ($200,000 × 25%) ................................................. Income Tax Payable .......................................................................

50,000

Deferred Tax Expense ............................................................................ Deferred Tax Asset ($500,000 × 25%) .................................................... Deferred Tax Liability ($600,000 × 25%) ........................................

25,000 125,000

50,000

150,000

Difficulty: Medium Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-78 Calculate change in tax rates Engage Ltd., at the end of 2023, its first year of operations, prepared a reconciliation between pre-tax accounting income and taxable income as follows: Pre-tax accounting income ...................................................................... $300,000 Excess CCA claimed for tax purposes ...................................................... (600,000) Estimated expenses deductible when paid............................................. 500,000 Taxable income ........................................................................................ $200,000 Use of the depreciable assets will result in taxable amounts of $200,000 in each of the next three years. The estimated expenses of $500,000 will be deductible in 2026 when settlement is expected to be made. The enacted tax rate is 25% and is to increase to 28%, starting in 2024. Instructions a) Prepare a schedule of the deferred taxable and deductible amounts. b) Prepare the required adjusting entries to record income taxes for 2023. Solution 18-78 a) Future taxable (deductible) amounts

2024

2025

2026

Total 18-48

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CCA ...................................................... $200,000 Expenses ............................................. b)

$200,000

$ 200,000 (500,000)

Current Tax Expense ($200,000 × 25%) .................................................... Income Tax Payable ..........................................................................

50,000

Deferred Tax Expense ............................................................................... Deferred Tax Asset ($500,000 × 28%) ....................................................... Deferred Tax Liability ($600,000 × 28%) ...........................................

28,000 140,000

$ 600,000 (500,000)

50,000

168,000

Difficulty: Medium Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-79 Calculate change in tax rates, and disclosure Vansatia Construction Inc. uses the completed contract method for tax purposes and the percentage completion method for accounting purposes Assume that on July 15, 2023, a new income tax rate is enacted that lowers the corporate rate from 30% to 28%, effective January 1, 2025. Vansatia Construction Inc. has one temporary difference at the beginning of 2023 related to $1 million tax deferral from using the completed contract method. Vansatia therefore had a Deferred Tax Liability account at January 1, 2023 with a balance of $300,000 ($1,000,000 × 30%). The $1,000,000 in gross profit recognized to date is expected to be taxed in 2026. Instructions a) Calculate the deferred tax liability at July 15, 2023 after taking into account the change in tax rates and prepare the related journal entry at that date. b) Discuss if the impact of the change in rates is required to be disclosed or not under IFRS and ASPE. Solution 18-79 The deferred tax liability at July 15, 2023 for Vansatia Construction Inc. is now $800,000, as shown below: Total Future taxable amounts

$1,000,000

Tax rate Revised deferred tax liability

$ 280,000

2024

2025

2026

$1,000,000

30%

28%

$ 280,000 18-49

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

An entry is made on July 15, 2023 to recognize the $20,000 decrease ($300,000 – $280,000) in the deferred tax liability: Deferred Tax Liability ....................................................................................... Deferred Tax Benefit .................................................................................

20,000 20,000

b) While ASPE does not require separate disclosure of the future tax expense or benefit due to a change in tax rates, IFRS does. Difficulty: Medium Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Section Reference: Disclosure Requirements Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-80 Calculate and journalize taxable loss carryforward without valuation allowance (IFRS) In 2023, its first year of operations, Liu Inc. reported a $500,000 loss for tax purposes. However, in 2024, Liu reported $200,000 taxable income. The tax rate is 25%, and is likely to remain at this rate for the foreseeable future. Lui reports under IFRS. Assume that, at the end of 2023, because it is a new company, Liu’s management thought that it was probable that the loss carryforward would not be realized in the near future. However, by the end of 2024, management feels it is now probable that there will be future taxable incomes against which the 2023 loss could be applied. Instructions a) What entries (if any) would be prepared in 2023 to record the loss carryforward? b) What entries (if any) would be prepared in 2024 to record current and deferred taxes and to recognize the loss carryforward? Solution 18-80 a) Since management believes it is probable that the loss carryforward would not be realized in the near future, no journal entry is required. b)

Current Tax Expense ($200,000 × 25%) ....................................................

50,000 18-50

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Deferred Tax Benefit ......................................................................... Deferred Tax Asset .................................................................................... Deferred Tax Benefit ($300,000 × 25%) ............................................

50,000 75,000 75,000

Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryforward Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-81 Calculate and journalize taxable loss carryforward with valuation allowance (ASPE) In 2023, its first year of operations, Jersey Inc. reported a $200,000 loss for tax purposes. However, in 2024, Jersey reported $250,000 taxable income. The tax rate is 20%, and is likely to remain at this rate for the foreseeable future. Jersey is a private corporation reporting under ASPE. Assume Jersey’s management thinks, at the end of 2023, that it is likely that the loss carryforward will not be realized in the near future. Jersey chooses to use the valuation allowance method for loss carryforwards. Instructions a) What entries (if any) would be prepared in 2023 to record the loss carryforward? b) What entries (if any) would be prepared in 2024 to record the current and future taxes and to recognize the loss carryforward? Solution 18-81 a) Future Tax Asset ($200,000 × 20%) .......................................................... Future Tax Benefit.............................................................................

40,000 40,000

Future Tax Expense .................................................................................. Allowance to Reduce Future Tax Asset to Expected Realizable Value ..................................................

40,000

Current Tax Expense ($50,000 × 20%)...................................................... Income Tax Payable ..........................................................................

10,000

Future Tax Expense .................................................................................. Future Tax Asset................................................................................

40,000

Allowance to Reduce Future Tax Asset to Expected Realizable Value ......................................................... Future Tax Benefit.............................................................................

40,000

10,000

40,000

40,000 40,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryforward Illustrated CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex 18-82 Presentation of Deferred Tax Assets and Liabilities Describe how the presentation of deferred or future tax asset and liability accounts differs under IFRS and ASPE? Solution 18-82 As of January 2020, there are no longer any differences between IFRS and ASPE as it relates to the presentation of all deferred/future tax assets and liabilities on the balance sheet or statement of financial position. Under both standards, deferred tax assets and liabilities are reported as noncurrent items. However, IFRS still maintains the use of the term “deferred”, whereas ASPE maintains the use of the term “future”. Difficulty: Easy Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Section Reference: Statement of Financial Position Presentation Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. 18-83 Intra period presentation Hammer Ltd. sells goods and services in more than one industry. For the year 2023, the company ended with accounting and taxable income of $600,000 from continuing operations. The company also identified $35,000 of taxable income from discontinued operations, and $150,000 of Other Comprehensive Income (OCI) that will be taxable in the future. The company is subject to a 20% tax rate that is not expected to change. Instructions a) Prepare the journal entry to record the current income tax for 2023 and any future income tax implications. b) Prepare a partial income statement using the above information Solution 18-83 a) Current Tax Expense ($600,000 x 20%)............................................................ Current Tax Expense—Discontinued Operations ($35,000 x 20%) .................

120,000 7,000 18-52

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Income Tax Payable .................................................................................

127,000

Deferred Tax Expense ($150,000 x 20%) .......................................................... Deferred Tax Liability ...............................................................................

30,000 30,000

b) HAMMER LTD. Partial Income Statement for the Year Ended 2023 Income from continuing operations (before tax) ........................................... $600,000 Less: Current tax expense ........................................................................ (120,000) Income from discontinued operations (before tax)........................................ Less: Current tax expense ........................................................................

$480,000

35,000 (7,000)

Net income ........................................................................................

28,000 $508,000

Partial Statement of Comprehensive Income for the Year Ended 2023 Net income .......................................................................................................

$508,000

Other comprehensive income ......................................................................... Less: Deferred tax expense.......................................................................

120,000

Comprehensive income ...................................................................................

$150,000 (30,000)

$628,000

Difficulty: Medium Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Section Reference: Statement of Financial Position Presentation Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-84 Calculate taxes under the taxes payable method, and disclosure Gursol Exchange Inc. is arriving at the financial statement disclosures for the 2023 financial statement note on income taxes. The company uses ASPE and follows the taxes payable method. The statutory tax rate is currently 25%. During 2023, income before tax was $170,000. CCA exceeded depreciation expense by $45,000. Gursol paid interest on late and deficient tax instalments of $18,000 during 2023. Instructions a) Determine the income tax expense to be recorded using the taxes payable method and record the necessary journal entry.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on income taxes. Round tax rates to one decimal place.

Solution 18-84 a) Accounting income before tax Add: Interest penalty on late and deficient instalments Less: CCA in excess of depreciation Taxable income Income tax expense at 25% Current Tax Expense................................................................................. Income Tax Payable ..........................................................................

$170,000 18,000 (45,000) $143,000 $35,750 35,750 35,750

b) Effective tax rate = $35,750 / $170,000 Adjustment for permanent difference = ($18,000 x 25%) / $170,000 Adjustment for reversing difference = ($45,000 x 25%) / $170,000 Statutory tax rate

21.0% (2.6%) 6.6% 25.0%

Difficulty: Medium Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 18-85 Comparing IFRS and ASPE for income tax purposes What are the major differences between IFRS and ASPE as it relates to income tax accounting? Solution 18-85 Under IFRS (IAS 12): In terms of recognition, no choices are permitted, and all companies apply the temporary differences approach. A deferred tax asset account is permitted to the extent that it is probable that it will be realized in the future and a valuation account is not used. Under ASPE: A company may choose either the taxes payable method or the future income taxes method as its accounting policy. The future income taxes method is also known as the asset and liability approach and the temporary difference approach. A future income tax asset is permitted to be recognized for all deductible temporary differences, unused tax losses, and income tax reductions. Difficulty: Medium Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. 18-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 18-86 Differences between accounting and taxable income and the effect on future income taxes The following differences apply to the reconciliation of accounting income and taxable income of Kulik Inc. for calendar 2023, its first year of operations. The enacted income tax rate is 30% for all years. Pre-tax accounting income $ 450,000 Excess CCA (240,000) Lawsuit accrual 35,000 Unearned rent revenue deferred on the books but correctly included in taxable income 25,000 Dividend income from Canadian corporations (10,000) Taxable income $ 260,000 1. 2. 3.

Excess CCA will reverse equally over a four-year period, 2024–2027. It is estimated that the lawsuit accrual will be paid in 2027. Unearned rent revenue will be recognized as earned equally over a four-year period, 2024–2027.

Instructions a) Prepare a schedule of future taxable and deductible amounts. b) Prepare a schedule of any deferred tax asset and/or deferred tax liability. c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Calculate the net deferred tax expense (benefit). d) Prepare the adjusting entries to record income tax expense, deferred taxes, and income taxes payable for 2023. Solution 18-86 a) Future taxable (deductible) amounts: CCA Lawsuit Unearned rent b)

2025

2026

$60,000

(6,250)

2027

Total

$ 60,000 $240,000 (35,000) (35,000) (6,250) (25,000)

Future Taxable Reversible Differences CCA Lawsuit Unearned rent Totals

2024

Deferred tax expense Deferred tax benefit Net deferred tax expense

(Deductible) Amounts $240,000 (35,000) (25,000) $180,000

Tax Rate 30% 30% 30%

Deferred Tax Asset Liability $72,000 (10,500) (7,500) _________ $(18,000) $72,000

$72,000 (18,000) $54,000 18-56

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Current Tax Expense ($260,000 x 30%) .................................................... Income Tax Payable ..........................................................................

78,000

Deferred Tax Expense ............................................................................... Deferred Tax Asset .................................................................................... Deferred Tax Liability....................................................................

54,000 18,000

78,000

72,000

Pr. 18-87 Multiple reversible differences The following information is available for the first three years of operations for Faberge Corporation: 1. Year Taxable Income 2023 $250,000 2024 180,000 2025 200,000 2. On January 2, 2023, equipment was purchased for $500,000. The equipment had an estimated service life of 5 years and no residual value. Straight-line depreciation is used for book purposes and CCA at 30% is used for tax purposes (subject to the accelerated investment incentive). 3. On January 2, 2024, $210,000 was collected in advance for the rental of a building for three years. The entire $210,000 was included in taxable income in 2024, but two-thirds of the $210,000 was reported as unearned revenue at December 31, 2024 for book purposes. 4. The enacted tax rate is 40% for all years. Instructions a) Prepare a schedule comparing depreciation for book purposes with CCA for tax purposes. b) Determine the deferred tax asset or liability at the end of 2023. c) Prepare a schedule of future taxable and deductible amounts at the end of 2024. d) Prepare a schedule of the deferred tax asset and/or liability at the end of 2024. e) Calculate the net deferred tax expense or benefit for 2024. f) Prepare the adjusting entries to record income tax expense, deferred taxes, and income tax payable for 2024. g) CRITICAL THINKING In the context of predicting future cash flows, why is the deferred/future income tax method more appropriate than the taxes payable method for this company? 18-57 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 18-87 a)

Depreciation for Book Year Purposes Tax Purposes 2023 $100,000 2024 100,000 2025 100,000 2026 100,000 2027 100,000 Remainder -0 $500,000

b) Future taxable (deductible) amounts: CCA

CCA for Difference $225,000 82,500 57,750 40,425 28,298 66,027 $500,000

Reversible $(125,000) 17,500 42,250 59,575 71,702 (66,027) $ 0

2024

2025

2026

2027

Remainder

Total

$17,500

$42,250

$59,575

$71,702

$(66,027)

$125,000

Deferred tax liability: $125,000 × 40% = $50,000 at the end of 2023. c) Future taxable (deductible) amounts: CCA Rent

2025

2026

2027

$42,250 (70,000)

$59,575 (70,000)

$71,702

Remainder

Total

$(66,027) $ 107,500 (140,000)

d) Future taxable reversible differences CCA Rent Totals e)

Amounts $ 107,500 (140,000) $(32,500)

(Deductible) Rate 40% 40%

Deferred tax asset at end of 2024 Deferred tax asset at beg. of 2024 Deferred tax (benefit)

$(56,000) 0 $(56,000)

Deferred tax liability at end of 2024 Deferred tax liability at beg. of 2024 Deferred tax benefit

$43,000 50,000 $ 7,000

Deferred tax (benefit) Deferred tax (benefit) Net deferred tax (benefit) for 2024

$(56,000) (7,000) $(63,000)

Current Tax Expense ($180,000 x 40%) ....................................................

Tax Asset $(56,000) $(56,000)

Deferred tax Liability $43,000 _________ $43,000

72,000 18-58

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Income Tax Payable .......................................................................... Deferred Tax Asset ($56,000) .................................................................... Deferred Tax Liability ($50,000 – $43,000) ............................................... Deferred Tax Benefit ......................................................................... g)

72,000 56,000 7,000 63,000

When a reporting entity simply discloses the amount of taxes payable in a fiscal year without any additional information about what occurred to arrive at that value, the reader is left unknowing with regards to what events occurred as it relates to taxable/deductible items, and whether there are any implications into the future. Taxes payable is a cash outflow, and sometimes a cash inflow. The deferred/future taxes method allows the reader to understand the current taxes payable as it relates to any tax expenses (or benefits) that are deferred into the future. The user is better able to understand the cash flow implication today with regards to taxes, and whether that also includes a deferred expense or benefit into the future that will also affect cash flows.

Pr. 18-88 Interperiod tax allocation with change in enacted tax rates Harrow Corp. purchased equipment for $180,000 on January 2, 2023, its first day of operations. For book purposes, the equipment will be depreciated straight-line over three years with no residual value. Pre-tax accounting incomes and taxable incomes are as follows: 2023 2024 2025 Pre-tax accounting income $124,000 $140,000 $150,000 Taxable income 100,000 140,000 174,000 The reversible difference between pre-tax accounting income and taxable income is due solely to the use of CCA for tax purposes. Instructions a) Prepare the adjusting entries to record income taxes for all three years (expense, deferred tax assets/liabilities, etc.), assuming that the enacted income tax rate for all three years is 30%. b) Prepare the adjusting entries to record income taxes for all three years (expense, deferred tax assets/liabilities, etc.), assuming that the enacted income tax rate for 2023 is 30% but that in the middle of 2024, Parliament raises the income tax rate to 35%, retroactive to the beginning of 2024. 18-59 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 18-88 a) Book depreciation CCA Reversible difference

2023 $ 60,000 84,000 $(24,000)

2024 $60,000 60,000 $ 0

2025 $60,000 36,000 $24,000

2023 Current Tax Expense ($100,000 x 30%) .................................................... Income Tax Payable .......................................................................... Deferred Tax Expense ($24,000 x 30%) .................................................... Deferred Tax Liability........................................................................

Total $180,000 180,000 $ 0

30,000 30,000 7,200 7,200

2024 Current Tax Expense ($140,000 × 30%) .................................................... Income Tax Payable ..........................................................................

42,000

2025 Current Tax Expense ($174,000 × 30%) .................................................... Income Tax Payable ..........................................................................

52,200

Deferred Tax Liability ($24,000 x 30%)..................................................... Deferred Tax Benefit .........................................................................

42,000

52,200 7,200 7,200

b) 2023 Current Tax Expense ($100,000 × 30%) ................................................... Income Tax Payable......................................................................

30,000

Deferred Tax Expense ($24,000 × 30%) ................................................... Deferred Tax Liability....................................................................

7,200

Current Tax Expense ($140,000 × 35%) ................................................... Income Tax Payable......................................................................

49,000

Deferred Tax Expense .............................................................................. Deferred Tax Liability....................................................................

1,200

30,000

7,200

2024

*Future taxable amount Deferred tax @ 30% Deferred tax @ 35% Adjustment required

49,000

1,200*

$24,000 7,200 8,400 $ 1,200

2025 Current Tax Expense ($174,000 × 35%) ...................................................

60,900 18-60

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Income Tax Payable...................................................................... Deferred Tax Liability ($24,000 x 35%) .................................................... Deferred Tax Benefit .....................................................................

60,900 8,400 8,400

Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets Learning Objective: Prepare analyses of deferred tax balances and record deferred tax expense. Section Reference: Income Tax Accounting Objectives Section Reference: Analyses of Temporary Deductible Differences Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations CPA: Financial Reporting Bloomcode: Application Bloomcode: Comprehension AACSB: Analytic

Pr. 18-89 Comprehensive income tax situation with multiple differences (ASPE) Vansadia Ltd., a private corporation that follows ASPE, is in the process of preparing its financial statements for its second year of operations ended December 31, 2023. Pertinent information follows: 1. Accounting income before tax is $1,500,000. Depreciation on property, plant, and equipment (PPE) in the books is $150,000 and CCA claimed will be $250,000. At the beginning of the year, the book value of the PPE was $1,200,000. 2. The company sells a product with a 2-year warranty. The estimated warranty cost is $100 per unit. At the beginning of 2023, the balance in the warranty liability account was $400,000. During 2023, the company sold 5,000 units of the product and paid out $200,000 in warranty costs. It expects that the adjusted warranty liability balance at the end of 2023 to be spent evenly over 2024 and 2025. At the end of 2022, the company also expected the adjusted warranty liability amount to be paid evenly over 2023 and 2024. 3. The beginning balance of the future income tax liability account related to the PPE was $60,000. The beginning balance of the future income tax asset account related to the warranty was $160,000. 4. The accounting income before tax included $50,000 in entertainment expenses, of which only 50% can be deducted for income tax purposes. 5. At the beginning of 2023, the enacted income tax rate went down from 40% to 35%. 6. On December 31, 2023, the company received three years advance rent income (for 2024 through 2026) of $90,000, which was recorded as unearned revenue for book purposes, but which must be reported as 2023 revenue for income tax purposes. 18-61 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions a) Reconcile accounting income before tax to taxable income for 2023. b) Prepare the required income tax related journal entries for 2023. c) Prepare the bottom section of the 2023 income statement, beginning with income before income taxes. d) What are the amounts and the SFP classifications of the future income tax asset and liability accounts at December 31, 2023? Solution 18-89 a) Reconciliation: Accounting income before tax .................................................... Add back 50% of entertainment expense .................................. Warranty expense........................................................................ Warranty costs allowable............................................................ Depreciation expense ................................................................. CCA for tax purposes ................................................................... Rent received in advance ............................................................ Taxable income for 2023 ............................................................. Tax payable ($1,815,000 x 35%) ..................................................

$1,500,000 25,000 $500,000 200,000 150,000 250,000

300,000 (100,000) 90,000 $1,815,000 635,250

b) Before recording the journal entries, we need to calculate the change in deferred tax assets and liabilities. Future income taxes related to PPE Future income tax liability Dec. 31, 2022......................................................... 60,000 Enacted tax rate in 2022................................................................................... 40% Reversible difference due to PPE in 2022 ........................................................ 150,000 Reversible difference due to PPE in 2023 ........................................................ 100,000 Accumulated reversible differences to end of 2023........................................ 250,000 Enacted tax rate in 2023................................................................................... 35% Future income tax liability Dec. 31, 2023......................................................... 87,500 Increase in future income tax liability in 2023 ................................................ 27,500 Future income taxes related to warranty Reversible difference due to warranty in 2022................................................ Enacted tax rate in 2022................................................................................... Future income tax asset Dec 31, 2022 ............................................................. Reversible difference due to warranty in 2023................................................ Accumulated reversible differences to end of 2023........................................ Enacted tax rate in 2023................................................................................... Future income tax asset Dec 31, 2023 ............................................................. Increase in future income tax asset in 2023 ....................................................

400,000 40% 160,000 300,000 700,000 35% 245,000 85,000

Future income taxes related to unearned rent Rent received in advance ................................................................................. Enacted tax rate ...............................................................................................

90,000 35% 18-62

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Increase in future income tax asset due to unearned rent ............................. Journal entries: Future Tax Asset ....................................................................................... Future Tax Liability ........................................................................... Future Tax Benefit............................................................................. Current Tax Expense................................................................................. Income Taxes Payable ...................................................................... c)

Bottom section of the income statement for 2023: Income before tax..................................................................................... Income tax expense Current .............................................................................................. Future ................................................................................................ Net income................................................................................................

31,500

116,500 27,500 89,000 635,250 635,250

$1,500,000 635,250 (89,000)

d) SFP presentation of future income tax accounts: Current assets Future income tax asset ($245,000 x 50%) + $31,500 / 3)................................

$133,000

Non-current assets Future income tax asset ($245,000 x 50% + $31,500 – $10,500) .....................

143,500

Non-current liabilities Future income tax liability ...............................................................................

87,500

(546,250) $ 953,750

Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Section Reference: Statement of Financial Position Presentation CPA: Financial Reporting Bloomcode: Application Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pr. 18-90 Comprehensive income tax situation with multiple differences and tax rates (IFRS) Stadia Ltd., a public corporation that follows IFRS, is in the process of preparing its financial statements for its second year of operations ended December 31, 2023. Pertinent information follows: 1. Accounting income before tax is $1,500,000. Included in this amount is $100,000 of Other Comprehensive Income arising from unrealized gains on investments. 2. Depreciation on property, plant and equipment (PPE) in the books is $150,000 and CCA claimed will be $250,000. At the beginning of the year, the book value of the PPE was $1,200,000. 3. The company sells a product with a 2-year warranty. The estimated warranty cost is $100 per unit. At the beginning of 2023, the balance in the warranty liability account was $400,000. During 2023, the company sold 5,000 units of the product and paid out $200,000 in warranty costs. It expects that the adjusted warranty liability balance at the end of 2023 to be spent evenly over 2024 and 2025. At the end of 2022, the company also expected the adjusted warranty liability amount to be paid evenly over 2023 and 2024. 4. The beginning balance of the deferred tax liability account related to the PPE was $60,000. The beginning balance of the deferred tax asset account related to the warranty was $160,000. 5. The accounting income before tax included $25,000 in golf dues expenses, none of which can be deducted for income tax purposes. 6. At the beginning of 2023, the enacted income tax rate went down from 40% to 35%. 7. On December 31, 2023, the company received three years advance rent income (for 2024 through 2026) of $90,000, which was recorded as unearned revenue for book purposes, but which must be reported as 2023 revenue for income tax purposes. Instructions a) Reconcile accounting income before tax to taxable income for 2023. b) Prepare the required income tax related journal entries for 2023. c) Prepare the bottom section of the 2023 income statement, beginning with income before income taxes. d) What are the amounts and the SFP classifications of the future income tax asset and liability accounts at December 31, 2023? Solution 18-90 a) Reconciliation: Accounting income before tax .................................................... Less: Other comprehensive income ........................................... Add back golf dues expense........................................................ Warranty expense........................................................................ Warranty costs allowable............................................................ Depreciation expense ................................................................. CCA for tax purposes ................................................................... Rent received in advance ............................................................ Taxable income for 2023 ............................................................. Tax payable ($1,715,000 x 35%) ..................................................

$1,500,000 (100,000) 25,000 500,000 200,000 150,000 250,000

300,000 (100,000) 90,000 $1,715,000 $600,250

b) Before recording the journal entries, we need to calculate the change in deferred tax assets and 18-64 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

liabilities. Deferred taxes related to PPE Deferred tax liability Dec. 31, 2022 .................................................................. Enacted tax rate in 2022................................................................................... Reversible difference due to PPE in 2022 ........................................................ Reversible difference due to PPE in 2023 ........................................................ Accumulated reversible differences to end of 2023........................................ Enacted tax rate in 2023................................................................................... Deferred tax liability Dec. 31, 2023 .................................................................. Increase in deferred tax liability in 2023..........................................................

60,000 40% 150,000 100,000 250,000 35% 87,500 27,500

Deferred taxes related to warranty Reversible difference due to warranty in 2022................................................ Enacted tax rate in 2022................................................................................... Deferred tax asset Dec 31, 2022 ....................................................................... Reversible difference due to warranty in 2023................................................ Accumulated reversible differences to end of 2023........................................ Enacted tax rate in 2023................................................................................... Deferred tax asset Dec 31, 2023 ....................................................................... Increase in deferred tax asset in 2023 .............................................................

400,000 40% 160,000 300,000 700,000 35% 245,000 85,000

Deferred taxes related to unearned rent Rent received in advance ................................................................................. Enacted tax rate ............................................................................................... Increase in deferred tax asset due to unearned rent ......................................

90,000 35% 31,500

Journal entries: Deferred Tax Asset .................................................................................... Deferred Tax Liability........................................................................ Deferred Tax Benefit ......................................................................... Current Tax Expense................................................................................. Income Taxes Payable ...................................................................... c)

116,500 27,500 89,000 600,250 600,250

1,400,000 600,250 (89,000)

(511,250) $ 888,750

Other comprehensive income .........................................................................

$100,000

Comprehensive income ...................................................................................

$988,750

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Non-current assets Deferred tax asset ($245,000 + $31,500) ..........................................................

$276,500

Non-current liabilities Deferred tax liability .........................................................................................

$87,500

Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets Learning Objective: Explain the effect of multiple tax rates and tax rate changes on income tax accounts, and calculate current and deferred tax amounts when there is a change in substantively enacted tax rates. Section Reference: Tax Rate Considerations Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Section Reference: Statement of Financial Position Presentation CPA: Financial Reporting Bloomcode: Application Bloomcode: Comprehension AACSB: Analytic

Pr. 18-91 Deferred tax asset Seenath Ltd. began operations on January 1, 2023, and adheres to IFRS. Its pre-tax accounting income for the first two years was as follows: 2023 $ 80,000 2024 150,000 The following items caused the only differences between pre-tax accounting income and taxable income. 1. In 2023, the company collected $75,000 in rental revenue; of this amount, $25,000 was earned in 2023; the other $50,000 will be earned equally during 2024 and 2025. The full $75,000 was included in taxable income in 2023. 2. The company pays $5,000 a year for membership in a local golf club. 3. In 2024, the company terminated a top executive and agreed to pay $30,000 severance pay. This will be paid $10,000 each year for three years, starting in 2024. The 2024 payment was made as scheduled. The entire $30,000 was expensed in 2024 for book purposes. For tax purposes, the severance pay is deductible only when it is paid. The enacted tax rates at December 31, 2023 are: 2023 30% 2025 40% 2024 35% 2026 40% 18-66 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions a) Calculate taxable income for 2023 and 2024. b) Calculate the deferred tax asset and/or liability at the end of 2023, and prepare the adjusting entries to record income taxes for 2023. c) Prepare a schedule of future taxable and deductible amounts at the end of 2024. d) Prepare a schedule of the deferred tax asset and/or liability at the end of 2024. e) Calculate the deferred tax expense (benefit) for 2024. f) Prepare the adjusting entries to record income taxes for 2024 (both current and deferred). g) Show how the deferred tax asset or liability should be reported on the SFP at December 31, 2024. Solution 18-91 a) Pre-tax accounting income Permanent difference: Golf club membership Reversible differences: Rent Severance pay Taxable income

2023 $80,000

2024 $150,000

5,000 85,000

5,000 155,000

50,000 0 $135,000

(25,000) 20,000 $150,000

b) Future taxable (deductible) amounts: Rent Tax rate Future income tax (asset) liability

2024

2025

Total

$(25,000) 35% $ (8,750)

$(25,000) 40% $(10,000)

$(50,000) $(18,750) at end of 2023

Current Tax Expense ($135,000 × 30%) .................................................... Income Tax Payable ..........................................................................

40,500

Deferred Tax Asset .................................................................................... Deferred Tax Benefit .........................................................................

18,750

2025 Future taxable (deductible) amounts: Rent Severance pay

$25,000) (10,000)

40,500

18,750

2026

Total

$(10,000)

$(25,000) (20,000)

d) Future Taxable Reversible Difference Rent Severance pay Totals

(Deductible) Amounts $(25,000) (20,000) $(45,000)

Tax Rate 40% 40%

Asset $(10,000) (8,000) $(18,000)

Deferred tax Liability

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Deferred tax asset at end of 2024 Deferred tax asset at beg. of 2024 Deferred tax expense (benefit) for 2024

Current Tax Expense ($150,000 × 35%) .................................................... Income Tax Payable ..........................................................................

52,500

Deferred Tax Expense ............................................................................... Deferred Tax Asset ............................................................................

750

$(18,000) (18,750) $ 750

Non-current assets Deferred tax asset ($45,000 × 40%) ..........................................................

52,500

750

$18,000

Difficulty: Hard Learning Objective: Explain the difference between accounting income and taxable income, and calculate taxable income and current income taxes. Section Reference: Accounting Income and Taxable Income Learning Objective: Explain taxable and deductible temporary differences, determine their amounts, and calculate deferred tax liabilities and deferred tax assets. Section References: Deferred Tax Liabilities, Deferred Tax Assets Learning Objective: Explain why the Deferred Tax Asset account is reassessed at the statement of financial date, and account for the deferred tax asset with and without a valuation allowance account. Section Reference: Review of Deferred Tax Asset Account Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Section Reference: Statement of Financial Position Presentation CPA: Financial Reporting Bloomcode: Application Bloomcode: Comprehension AACSB: Analytic

Pr. 18-92 Loss Carryover Benefits Zhao Inc. reports the following pre-tax incomes (losses) for both financial reporting purposes and tax purposes: Year Accounting Income Tax Rate (Loss) 2021

$ 20,000

25%

2022

50,000

28%

2023

(150,000)

30%

2024

120,000

30%

The tax rates listed were all enacted by the beginning of 2021. Zhao reports under the ASPE future income taxes method and uses a valuation allowance to account for future tax assets. 18-68 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions a) Assume that at the end of 2023 it is more likely than not that 20% of the carry forward benefits will not be realized. Prepare the journal entries for 2023 and 2024. b) Based on your entries in part (a), prepare the income tax section of the 2023 and 2024 income statements, beginning with the line “Income (loss) before income tax.” c) Indicate how the future tax asset account will be reported on the December 31, 2023 and 2024 balance sheets. d) Repeat part (c) assuming Zhao Inc. follows IFRS. e) CRITICAL THINKING: If in 2024 the company experienced a loss again, and management believes that future profitability is in question, is it appropriate to record a deferred tax asset? Solution 18-92 a) December 31, 2023 Income Tax Receivable .................................................................................... Current Tax Benefit1 ................................................................................. 1 [25% X $20,000] + [28% X $50,000] = $19,000

19,000 19,000

Future Tax Asset ............................................................................................... Future Tax Benefit2 ................................................................................... 2 30% X ($150,000 – $20,000 – $50,000) = $24,000

24,000

Future Tax Benefit3 ................................................................................................................................................................. Allowance to Reduce Deferred Tax Asset to Expected Realizable Value ......................................................... 3 ($24,000 X 20%)

4,800

December 31, 2024 Current Tax Expense4 ....................................................................................... Income Tax Payable ................................................................................. 4 [($120,000 – $80,000) X 30%] Future Tax Expense5 ......................................................................................... Future Tax Asset ....................................................................................... 5 ($0 – $24,000) Allowance to Reduce Deferred Tax Asset to Expected Realizable Value ................................................................. Future Tax Expense ..................................................................................

24,000

4,800

12,000 12,000

24,000 24,000

4,800 4,800

b) 2023 Operating loss before income tax.................................................................... Income tax benefit Current benefit due to loss carryback .....................................................

$(150,000) $19,000 18-69

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Future benefit due to loss carryforward ................................................. Net loss ............................................................................................................. 2024 Operating income before income tax .............................................................. Income tax Current tax expense ................................................................................. Future tax expense .................................................................................. Net income .......................................................................................................

19,200

38,200 $(111,800)

$120,000 $12,000 19,200

31,200 $ 88,800

c) Current assets: Future Tax Asset Less: Allowance to Reduce Deferred Tax Asset to Expected Realizable Value Deferred Tax Asset (net)

2023

2024

$24,000

(4,800)

$19,200

Under IFRS, the only difference is the deferred tax asset would be classified as a non-current asset on the 2023 SFP, and a valuation allowance is not used. Instead, the Deferred Tax Asset account would be $19,200.

In order to meet the definition of an asset, the resource must have future economic benefit. If management believes that the probability of future income is low or nil, then the future benefit of the deferred tax asset is in question. It may be more appropriate to use a valuation allowance account, or to not record the asset in the statement of financial position at all.

Difficulty: Medium Learning Objective: Account for tax loss carryover benefits, including any note disclosures. Section Reference: Loss Carryback Illustrated Section Reference: Loss Carryforward Illustrated Learning Objective: Identify the differences between ASPE and IFRS for income taxes, and what changes are expected in the near future. Section Reference: A Comparison of IFRS and ASPE CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 18-93 Deferred tax asset and tax law Identify the various possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences, tax loss carryovers, and other tax reductions.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 18-93 Sources include: 1. Future reversals of existing taxable temporary differences 2. Future taxable income before taking into account reversing temporary differences, tax loss, and other tax reductions 3. Taxable income available in carryback years 4. Tax planning strategies that would, if necessary, be implemented to realize a deferred tax asset. Difficulty: Medium Learning Objective: Explain why the Deferred Tax Asset account is reassessed at the SFP date, and account for the deferred tax asset with and without a valuation allowance account. Section Reference: Review of Deferred Tax Asset Account CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Pr. 18-94 Intraperiod tax allocation and disclosure Welyhorsky Inc. presents you with the following information for its taxation year ended December 31, 2024: Income from continuing operations before income taxes ............................. $600,000 Gain on discontinued operations .................................................................... 50,000 Correction of prior year’s error in recording depreciation expense on equipment. The depreciation expense was understated in 2023 and the capital cost allowance was correctly calculated. ................................................................................. 10,000 An unrealized holding gain on investments accounted for at fair value through other comprehensive income (FV-OCI). Assume that this will be taxable as ordinary income when it is realized .................... 20,000 Tax rate all years .............................................................................................. 25% Instructions a) Determine how and where the current tax expense or benefit will be reported for Welyhorsky Inc. in 2024 and provide the journal entry to record current income tax. b) Assume that the $20,000 temporary difference between the carrying amount of the FV-OCI investments and their tax base is the only temporary difference in this year. Calculate deferred taxes and prepare the related journal entry. c) Prepare the necessary journal entry for the correction of the prior year error. d) Show all income tax items calculated above in their appropriate financial statement. Solution 18-94 a) Current Income Tax Expense ($600,000 x 25%)....................................... Income Tax Payable ..........................................................................

150,000

Current Income Tax Expense ($50,000 x 25%).........................................

12,500

150,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Income Tax Payable .......................................................................... b)

12,500

Deferred Tax Expense ($20,000 x 25%) .................................................... Deferred Tax Liability ........................................................................

5,000

Deferred Tax Liability ($10,000 x 25%)..................................................... Retained Earnings .................................................................................... Accumulated Depreciation—Equipment .........................................

2,500 7,500

5,000

10,000

d) WELYHORSKY INC. Statement of Income For the Year Ended December 31, 2023 Income from continuing operations before tax .................................................................. Income tax expense ............................................................................................................. Income from continuing operations ................................................................................... Income from discontinued operations (net of tax of $12,500) ........................................... Net income ........................................................................................................................... WELYHORSKY INC. Statement of Comprehensive Income For the Year Ended December 31, 2023 Net income ........................................................................................................................... Other comprehensive income Holding gain on FV-OCI investments (net of deferred tax expense of $5,000)................... Comprehensive income .......................................................................................................

$600,000 150,000 450,000 37,500 $487,500

$487,500 15,000 $502,500

WELYHORSKY INC. Statement of Changes in Equity (partial) For the Year Ended December 31, 2023 Retained Earnings Retained earnings, 1/1/23, as previously reported ............................................................. $XX Correction of depreciation error, (net of tax of $2,500) ...................................................... (7,500) Retained earnings, 1/1/23, as adjusted ............................................................................... XX – $7,500 Difficulty: Medium Learning Objective: Identify and apply the presentation and disclosure requirements for income tax assets and liabilities, and apply intraperiod tax allocation, and discuss analytics. Section Reference: Disclosure Requirements CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 19 PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS CHAPTER STUDY OBJECTIVES 1. Understand the importance of pensions from a business perspective. A pension plan, together with post-retirement health care, is often part of an employee’s overall compensation package. The size of these plans, in terms of both the number of employees and cost of benefits, has made their costs very large (on average) relative to companies’ financial position, results of operations, and cash flows. For many years, the vast majority of defined benefit plans were underfunded, and more and more companies have been moving toward defined contribution plans.

2. Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. Defined contribution plans are plans that specify how contributions are determined rather than what benefits the individual will receive. They are accounted for in a manner similar to a cash basis. In contrast, defined benefit plans specify the benefits that the employee is entitled to receive. Defined benefit plans whose benefits vest or accumulate typically provide for the benefits to be a function of the employee’s years of service and, for pensions, compensation level. In general, the employer’s obligation for such a plan and the associated cost is accrued as an expense as the employee provides the service. An actuary usually determines the required amounts.

3. Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. The employer’s benefit obligation is the actuarial present value of the benefits that have been earned by employees for services they have provided up to the date of the statement of financial position. The vested benefit method, accumulated benefit method, and projected benefit method are three methods that could be used to measure companies’ obligations. The third method is the one used to determine the defined benefit obligation, basing the calculation of the deferred compensation amount on both vested and non-vested service using future salaries. This last method is used under both IFRS and ASPE. The defined benefit obligation (DBO) is increased by current service cost, net interest/finance cost, and plan amendments that usually increase employee entitlements for prior services, and by actuarial losses. It is reduced by payment of pension benefits and by actuarial gains.

4. Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Plan assets are increased by company and employee contributions and the actual return that is earned on fund assets (including realized and unrealized gains and losses), and are reduced by pension benefits paid to retirees. A plan’s surplus or deficit is the difference between the defined benefit obligation and the 19-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

plan assets at a point in time. It tells you the extent to which a company has a net obligation (underfunded) or a surplus (overfunded) relative to the benefits that are promised. All items that change the plan assets and DBO, with the exception of the payments to retirees, change the surplus or deficit.

5. Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Defined benefit cost is a function of: (1) current service cost, (2) finance cost including the net interest/finance cost on the net defined benefit liability/asset and the remeasurement gain or loss on plan assets, (3) past service costs, and (4) net actuarial gains or losses. Under ASPE, all are immediately included in current expense in their entirety. Under IFRS, pension costs relating to current service, past service, and net interest on the net defined benefit obligation are included in defined benefit expense. Actuarial gains and losses, and any return on plan assets excluding amounts included in the net interest on the net defined benefit obligation (asset), are recognized in other comprehensive income.

6. Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Under ASPE, any non-pension defined benefit plans with benefits that vest or accumulate are accounted for in the same way as defined benefit pension plans. Under IFRS, short-term employee benefits are generally recognized (without discounting) at the amount expected to be paid in exchange for the services provided. Other long-term benefits include items such as paid absences for long service, unrestricted sabbaticals, and long-term disability plans. IFRS requires that remeasurements of the net defined benefit liability (asset) related to these other long-term benefits be reflected in income (not OCI). For termination benefits, IFRS requires the cost of the benefits to be recognized at the earlier of when the company can no longer withdraw an offer of employment and when it recognizes the related restructuring costs.

7. Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. ASPE requires a description of the plans, major changes made in the plans, dates of the actuarial valuations, the fair value of the plan assets, the DBO, and the surplus or deficit and how this relates to the balance sheet account. ASPE also requires that, if not shown separately on the income statement, “remeasurements and other items” should be disclosed in the notes. IFRS requires substantial information, such as reconciliations of changes in the DBO and plan assets, details of amounts included in net income, underlying assumptions and sensitivity analysis, and other information related to determining cash flows.

8. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. IAS 19 is broader and covers more employee benefits than does CPA Canada Handbook, Part II, Section 3462. Under IFRS, most companies are expected to recognize the net defined benefit liability (or asset) on the statement of financial position with items such as current service cost, past service cost, and interest on the DBO and plan assets recognized in net income, and remeasurement

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

changes and actuarial gains and losses reported in other comprehensive income. ASPE is similar, except remeasurement changes and actuarial gains and losses are reported in net income.

9 Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan. The current service cost is a calculation of the present value of the benefits earned by employees that is attributable to the current period. The defined benefit obligation is the present value of the accumulated benefits earned to a point in time, according to the pension formula and using projected salaries. Past service cost is the present value of the additional benefits granted to employees in the case of a plan amendment.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer c b c d d d d a b a b c a d a a d b c d c a b b b d d a b d b b c b a a c b a c a c c

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Employee future benefits Types of post-employment benefits Categories of employee future benefit plans Pension funding and defined benefit expense recognition Pension plan design Nature of a defined contribution plan Nature of a defined contribution plan Recognition of past service costs Nature of a defined benefit plan Nature of defined benefit plan Objective of accounting for defined benefit plans Meaning of funding a pension plan Accounting problems in pension plans Main purpose of an actuary Types of pension plans in Canada Definition of defined benefit obligation Characteristics of vested benefits Increase in defined benefit obligation Definition of attribution period Definition of experience gain or loss Methods of measuring pension obligations Decrease in defined benefit obligation Nature of interest cost included in pension cost Actuarial gains and losses under ASPE Contributing factors to pension liabilities Calculate defined benefit obligation Economic risk of defined benefit plans Nature of plan assets Nature of return on plan assets Nature of plan assets Plan surplus/deficit Underfunded pension plan Pension plan surplus Calculate fair value of plan assets Calculate fair value of plan assets Calculate fair value of plan assets Calculate fair value of plan assets Calculate fair value of plan assets Calculate fair value of plan assets Calculate fair value of plan assets Adjustment for actuarial valuations Application of defined benefit expense Recognition of past service costs 19-4

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b a c Answer a c a b c c d a b b d b b c b d a a c d b c b c b c d c a d d c d b c c c

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. *82. *83.

Recognition of net defined benefit asset G/L accounts used Rationale for expensing past service costs Description Recognition differences between IFRS and ASPE Components of defined benefit expense Reporting net defined benefit liability/asset Calculate defined benefit expense Calculate defined benefit expense Calculate defined benefit expense Calculate defined benefit expense Calculate defined benefit expense Calculate net defined benefit liability/asset Calculate net defined benefit liability/asset Calculate defined benefit expense Calculate defined benefit expense Calculate defined benefit expense Calculate defined benefit obligation Calculate defined benefit expense Calculate defined benefit obligation Calculate net defined benefit liability/asset Calculate defined benefit expense Calculate defined benefit expense Calculate past service costs Calculate interest on accrued pension obligation Identify correct statement Post-employment benefits Post-employment benefits Recording/disclosure of post-employment benefit obligations Recognizing employee benefits Recognition of remeasurement of other employee future benefits Disclosure of post-employment benefits Disclosure analysis Disclosure requirements Disclosure requirements Disclosure requirements Items reported in OCI Projected benefit obligation Differences between IFRS and ASPE Calculate current service cost Calculate defined benefit obligation

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Item E19-84 E19-85 E19-86 E19-87 E19-88 E19-89 E19-90 E19-91 E19-92 E19-93 E19-94 E19-95 E19-96 E19-97 E19-98 E19-99 E19-100 E19-101 E19-102 E19-103 E19-104 *E19-105 *E19-106

Description Post-employment benefits Defined benefit plans Pension plan assets Pension plan calculations Pension plan calculations Pension plan calculations and journal entries Different methods of measuring pension obligation Defined benefit obligation continuity schedule Plan assets continuity schedule Calculate plan surplus or deficit Calculate plan surplus or deficit Components of defined benefit expense Measuring and recording defined benefit expense Measuring and recording defined benefit expense Measuring and recording defined benefit expense Measuring and recording defined benefit expense Measuring and recording defined benefit expense Differences between pensions and other post-employment health-care benefits Accounting for defined benefit plans other than pension plans under ASPE and IFRS Analyzing disclosure requirements Disclosure requirements Calculate current service costs Calculate current service costs

*This topic is dealt with in an Appendix to the chapter.

PROBLEMS Item P19-107 P19-108 P19-109 P19-110 P19-111 P19-112 P19-113

Description Measuring and recording defined benefit expense Calculating discount rate and actual return on plan assets Measuring and recording defined benefit expense – IFRS Measuring and recording defined benefit expense – ASPE Calculating defined benefit expense and pension plan surplus or deficit Preparation of a pension work sheet and pension entries Preparation of a pension work sheet and pension entries

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. Employee future benefits do NOT include a) post-employment pension plans. b) long-term severance benefits. c) regular vacation pay. d) unrestricted sabbatical leaves. Answer: c Difficulty: Medium Learning Objective: Understand the importance of pensions from a business perspective. Section Reference: Overview of Pensions and Their Importance from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. Examples of post-employment benefits that are provided after employment but before retirement include all of the following, except a) long-term disability income benefits. b) pension plans. c) long-term severance benefits. d) continuation of benefits such as health care. Answer: b Difficulty: Easy Learning Objective: Understand the importance of pensions from a business perspective. Section Reference: Overview of Pensions and Their Importance from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. Categories of employee future benefit plans include the a) future earnings plan. b) defined pension plan. c) defined contribution plan. d) health and benefits plan. Answer: c Difficulty: Easy Learning Objective: Understand the importance of pensions from a business perspective. 19-7 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Overview of Pensions and Their Importance from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. The relationship between the amount funded and the amount reported for defined benefit expense is that a) defined benefit expense must always equal the amount funded. b) defined benefit expense will be less than the amount funded. c) defined benefit expense will be more than the amount funded. d) defined benefit expense may be greater than, equal to, or less than the amount funded. Answer: d Difficulty: Easy Learning Objective: Understand the importance of pensions from a business perspective. Section Reference: Overview of Pensions and Their Importance from a Business Perspective Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. Companies generally design a pension plan to ensure that a) the plan is contributory. b) the plan is non-contributory. c) the benefits are insured. d) the contributions are tax deductible. Answer: d Difficulty: Easy Learning Objective: Understand the importance of pensions from a business perspective. Section Reference: Overview of Pensions and Their Importance from a Business Perspective Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

6. In a defined contribution plan, a formula is used that a) defines the benefits that the employee will receive at retirement. b) ensures that defined benefit expense and the cash funding amount will be different. c) requires an employer to contribute a sufficient sum each period based on the future benefit. d) ensures that employers are not at risk to make sure funds are available at retirement. Answer: d Difficulty: Medium Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. Section Reference: Types of Pension Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

7. The obligation for a defined contribution plan is calculated by a) discounting the benefit that the employee will receive at retirement. b) adding up contributions made plus interest earned less any benefits paid out. c) the cumulative contributions made to the pension plan. d) the amount the employer is obligated to contribute for the period. Answer: d Difficulty: Easy Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. Section Reference: Types of Pension Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

8. For ASPE and IFRS, the past service costs are a) recognized immediately in expense. b) deferred and amortized over the life of the pension. c) not included in expenses. d) restated in the year they are applicable to. Answer: a Difficulty: Easy Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. 19-9 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Types of Pension Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

9. In a defined benefit plan, a formula is used that a) requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee. b) defines the benefits that the employee will receive at retirement. c) requires that defined benefit expense and the cash funding amount be the same. d) defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees. Answer: b Difficulty: Easy Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. Section Reference: Types of Pension Plans CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. Which one of the following would NOT be considered a defined benefit plan? a) Benefit is based on years of service rendered and the investment earnings earned to date of retirement. b) Benefit is fixed and based on years of services rendered. c) Benefit is based on years of service and compensation earned by employee over entire period of service. d) Benefit is based on years of service and compensation over a specified number of years. Answer: a Difficulty: Easy Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. Section Reference: Types of Pension Plans CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

11. The objective of accounting for defined benefit plans is to a) calculate the actual amounts employees will receive at retirement. 19-10 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) recognize the appropriate expense and liability over the accounting periods in which the related services are provided by the employees. c) calculate the current service cost. d) determine which employees’ rights have vested. Answer: b Difficulty: Easy Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

12. In a defined benefit plan, for the employer, the term “funding” refers to a) being responsible for the assets of the pension plan. b) determining the defined benefit obligation. c) making periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. d) calculating the amount to report for defined benefit expense. Answer: c Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

13. All of the following items create accounting problems for pension plans, except for a) determining the level of individual premiums. b) reporting the status and effects of the plan in the financial statements. c) allocating the cost of the plan to the proper periods. d) measuring the amount of pension obligation. Answer: a Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures 19-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

14. In pension accounting, the actuary’s main purpose is to a) make predictions about mortality rates and employee turnover. b) calculate the current pension cost. c) calculate the interest cost of the pension plan. d) ensure the employer has established an appropriate funding pattern to meet its pension obligations. Answer: d Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

15. In Canada, employer-sponsored pension plans are a) increasingly defined contribution. b) increasingly defined benefit. c) decreasingly defined contribution. d) staying relatively the same. Answer: a Difficulty: Easy Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

16. Under IFRS, the defined benefit obligation for accounting purposes is 19-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) the present value of vested and non-vested benefits earned to the statement of financial position date, with the benefits measured using employees’ future salary levels. b) the present value of vested and non-vested benefits earned to the statement of financial position date, with the benefits measured using employees’ current salary levels. c) the present value of vested benefits only earned to the statement of financial position date, with the benefits measured using employees’ future salary levels. d) the present value of non-vested benefits only earned to the statement of financial position date, with the benefits measured using employees’ future salary levels. Answer: a Difficulty: Hard Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

17. Which statement is INCORRECT regarding vested benefits? a) There is usually a certain minimum number of years of service. b) The employee is entitled to receive such benefits even if they are terminated. c) Benefits are not contingent upon additional service under the plan. d) Benefits are lost when the employee is terminated. Answer: d Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

18. The defined benefit obligation is always increased by a) current service cost and payments to retirees. b) current service cost and interest cost. c) interest cost and actuarial gains. d) current service cost and past service costs. Answer: b 19-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

19. For defined benefit plans, the attribution period for employees is the time between a) the hire date and the vesting date. b) the vesting date and the date the employee becomes eligible for full benefits. c) the hire date and the date the employee becomes eligible for full benefits. d) the hire date and the date the employee reaches 65. Answer: c Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

20. An experience gain or loss (adjustment) is a) additional contributions made to the pension fund by the employer. b) additional contributions made to the pension fund by the employees. c) reduced payments made to retirees. d) the difference between what has occurred and the previous actuarial assumptions. Answer: d Difficulty: Easy Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

21. Methods of measuring the pension obligation include all of the following, except for the a) vested benefit method. b) accumulated benefit method. c) total benefit method. d) projected benefit method. Answer: c Difficulty: Easy Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

22. The defined benefit obligation is always decreased by a) benefits paid to retirees. b) past service costs. c) benefits paid to retirees and interest costs. d) past service costs and interest costs. Answer: a Difficulty: Easy Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

23. The interest cost included in the annual pension cost recorded by an employer sponsoring a defined benefit pension plan represents the a) difference between the expected and actual return on plan assets. b) increase in the defined benefit obligation due to the passage of time. c) increase in the fair value of plan assets due to the passage of time. d) interest earned on the plan assets for the year. Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

24. Which of the following reflects the treatment of actuarial gains/losses under ASPE? a) Actuarial gains/losses are amortized to defined benefit expense through the corridor approach. b) Actuarial gains/losses are recognized at 100% as incurred. c) A policy choice can be made to either amortize actuarial gains/losses through the corridor approach, or to recognize 100% as incurred. d) None of the choices are correct. Answer: b Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

25. Which of the following circumstances would normally be a contributing factor in the increase of a company’s pension liabilities? a) an increase in interest rates b) a decrease in interest rates c) a decrease in the number of employees covered by the plan d) an increase in the vesting period Answer: b Difficulty: Easy Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic 19-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

26. The following information pertains to Rembrandt Inc.'s pension plan for calendar 2023: Defined benefit obligation at Jan. 1 ................................... $96,000 Interest (discount) rate........................................................ 10% Current service costs ........................................................... $24,000 Pension benefits paid retirees ............................................ $20,000 The corporation uses IFRS. If no change in actuarial estimates occurred during 2023, Rembrandt's defined benefit obligation at December 31, 2023 would be a) $85,600. b) $100,000. c) $105,600. d) $109,600. Answer: d Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $96,000 + $24,000 + ($96,000 × 10%) – $20,000 = $109,600

27. Who assumes the economic risk for defined benefit pension plans? a) actuaries b) trustees c) employees d) employers Answer: d Difficulty: Easy Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

28. Pension plan assets include a) contributions made by the employer and the employees in a contributory pension plan. b) plan assets under the control of the employer. c) only assets reported on the employer’s statement of financial position as the net defined benefit liability/asset. d) contribution by the employer/employees, less the actual return, plus benefits paid to retirees. Answer: a Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

29. The return on plan assets a) is the change in the fair value of the plan assets during the year. b) includes interest, dividends, and gains or losses from the sale of investments. c) is the actual rate of return times the fair value of the plan assets at the beginning of the period. d) does not include unrealized gains and/or losses on the assets in the plan. Answer: b Difficulty: Easy Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

30. All of the following increase the value of plan assets, except the a) opening balance of plan assets. b) employer contributions. c) actual returns. d) benefits paid to retirees. Answer: d Difficulty: Easy 19-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

31. The difference between the defined benefit obligation and the pension assets’ fair value at any point in time is known as the plan’s a) return on plan assets. b) surplus or deficit. c) experience gain or loss. d) actual return. Answer: b Difficulty: Easy Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

32. When a pension plan is underfunded, a) it has more assets than liabilities. b) it has more liabilities than assets. c) it has higher net income. d) it has lower net income. Answer: b Difficulty: Easy Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

33. When the plan assets of a pension plan are greater than the defined benefit obligation, the pension plan is a) overstated. 19-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) understated. c) overfunded. d) underfunded. Answer: c Difficulty: Easy Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

34. Peach Corporation uses IFRS. Presented below is information related to Peach Corporation’s defined benefit pension plan for calendar 2023: Defined benefit obligation, January 1 ................................ $200,000 Fair value of plan assets, January 1 .................................... 180,000 Current service cost ............................................................. 27,000 Contributions to plan .......................................................... 25,000 Actual and expected return on plan assets ........................ 9,000 Benefits paid to retirees ...................................................... 40,000 Interest (discount) rate........................................................ 10% The fair value of the plan assets at December 31, 2023, is a) $ 187,000. b) $ 174,000. c) $ 165,000. d) $ 149,000. Answer: b Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application Feedback: $180,000 + $9,000 + $25,000 – $40,000 = $174,000 AACSB: Analytic

35. Kiwi Ltd. uses IFRS. Presented below is information related to Kiwi Ltd. for calendar 2023: Defined benefit obligation, January 1 ................................ $720,000 Fair value of plan assets, January 1 .................................... 700,000 Current service cost ............................................................. 90,000 19-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Contributions to plan .......................................................... Actual and expected return on plan assets ........................ Past service costs (effective January 1) .............................. Benefits paid to retirees ...................................................... Interest (discount) rate........................................................ The fair value of the plan assets at December 31, 2023, is a) $785,000. b) $805,000. c) $819,000. d) $875,000.

125,000 56,000 10,000 96,000 9%

Answer: a Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application Feedback: $700,000 + $56,000 + $125,000 – $96,000 = $785,000 AACSB: Analytic

36. Raphael Inc. provides a defined benefit plan for its employees, and reports using ASPE. The pension plan administrator for Raphael Inc. provided the following information for the year ended December 31, 2023: Fair value of plan assets, January 1 .................................... $760,000 Defined benefit obligation, January 1 ................................ 820,000 Current service cost ............................................................. 60,000 Employer contributions ...................................................... 85,000 Benefits paid to retirees ...................................................... 50,000 Actual and expected return ................................................. 12,000 Interest (discount) rate........................................................ 6% The fair value of the plan assets at December 31, 2023, would be a) $807,000. b) $867,000. c) $907,000. d) $967,000. Answer: a Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting 19-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application Feedback: $760,000 + $85,000 + $12,000 – $50,000 = $807,000 AACSB: Analytic

37. At January 1, 2023, Van Gogh Corp.’s defined benefit pension plan, under IFRS, had a defined benefit obligation of $100,000, while the fair value of the plan assets was $120,000. During 2023, the plan's current service cost was $150,000; past service costs were $80,000; Van Gogh contributed $110,000 to the plan; the actual and expected return on the plan assets was $9,000; and benefits paid to retirees were $95,000. What is the fair value of the plan assets at December 31, 2023? a) $239,000 b) $205,000 c) $144,000 d) $135,000 Answer: c Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application Feedback: $120,000 + $9,000 + $110,000 – $95,000 = $144,000 AACSB: Analytic

38. Bateman Corp. provides a defined benefit pension plan for its employees and uses IFRS. The trustee administering the plan provided the following information for the year ended December 31, 2023: Fair value of plan assets, Jan. 1 .......................................... $1,200,000 Defined benefit obligation, Jan. 1 ....................................... 1,270,000 Current service cost ............................................................. 300,000 Employer's contributions ................................................... 360,000 Past service cost (at Jan. 1) ................................................. 30,000 Benefits paid retirees .......................................................... 325,000 Actual and expected return ................................................ 60,000 Interest (discount) rate........................................................ 8% The fair value of the plan assets at December 31, 2023, would be a) $1,235,000. b) $1,295,000. c) $1,335,000. d) $1,535,000. Answer: b 19-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,200,000 + $60,000 + $360,000 – $325,000 = $1,295,000

39. Markham Corp. provides a defined benefit pension plan for its employees and uses IFRS. The trustee administering the plan provided the following information for the year ended December 31, 2023: Fair value of plan assets, December 31 .............................. $1,295,000 Defined benefit obligation, Jan. 1 ....................................... 1,270,000 Current service cost ............................................................. 300,000 Employer's contributions ................................................... 360,000 Past service cost (at Jan. 1) ................................................. 30,000 Benefits paid retirees .......................................................... 325,000 Actual and expected return ................................................ 60,000 Interest (discount) rate........................................................ 8% What was the fair value of the plan assets at January 1, 2023? a) $1,200,000 b) $1,315,000 c) $1,335,000 d) $1,390,000 Answer: a Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,295,000 – $60,000 – $360,000 + $325,000 = $1,200,000

40. Kumquat Ltd. uses IFRS. Presented below is information related to Kumquat Ltd. for calendar 2023: Defined benefit obligation, January 1 ................................ $ 720,000 Fair value of plan assets, December 31 .............................. 785,000 Current service cost ............................................................. 90,000 Contributions to plan .......................................................... 125,000 19-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Actual and expected return on plan assets ........................ Past service costs (effective January 1) .............................. Benefits paid to retirees ...................................................... Interest (discount) rate........................................................ The fair value of the plan assets at January 1, 2023, was a) $870,000. b) $812,000. c) $700,000. d) $604,000.

56,000 10,000 96,000 9%

Answer: c Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 785,000 – $56,000 – $125,000 + $96,000 = $700,000

41. Under IFRS, the defined benefit obligation is adjusted to its most recent actuarial valuation, and the adjustment flows through a) other comprehensive income. b) net income. c) either other comprehensive income or net income. d) retained earnings. Answer: a Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

42. Under IFRS, any difference between the defined benefit expense and the payments into the fund should be reflected in a) a contra account to the net defined benefit liability/asset. b) an accrued actuarial liability. c) the net defined benefit liability/asset. d) a note to the financial statements only. 19-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

43. Any past service costs should be included in the a) defined benefit expense of current and future periods. b) defined benefit expense of past periods. c) defined benefit expense of the current period. d) plan assets. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

44. Under IFRS, a net defined benefit asset is reported when a) the defined benefit obligation exceeds the fair value of pension plan assets. b) the fair value of pension plan assets exceeds the defined benefit obligation. c) the defined benefit expense for the period is the same as the contributions made to the pension plan for the same period. d) the vested benefits exceed the fair value of pension plan assets. Answer: b Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

45. Under IFRS, a) there is a general ledger account called Net Defined Benefit Liability/Asset. b) there is a general ledger account called Defined Benefit Obligation. c) there is a general ledger account called Pension Fund Assets. d) defined benefit expense is included in other comprehensive income. Answer: a Difficulty: Easy Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

46. All past service costs are expensed. The rationale for doing this is that a) the costs are usually immaterial. b) the costs relate to non-vested services, so there is no justification for deferring their recognition to future periods. c) the costs relate to past services, so there is no justification for deferring their recognition to future periods. d) CRA will not allow the costs to be deferred. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

47. A difference between IFRS and ASPE’s recognition of the defined benefit cost components is a) gains and losses from remeasurement of the net defined benefit liability or asset are reported in net income under ASPE. b) gains and losses from remeasurement of the net defined benefit liability or asset are reported in net income under IFRS. c) ASPE can use the defer and amortize approach. d) IFRS can use the defer and amortize approach. Answer: a 19-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

48. The items included in the defined benefit expense are a) service cost, net interest or finance cost, actuarial gains or losses. b) service cost, net interest or finance cost, past service costs, actuarial gains or losses. c) service cost, net interest or finance cost, remeasurement gain or loss on plan assets, past service costs, actuarial gains or losses. d) service cost, remeasurement gain or loss on plan assets, actuarial gains or losses. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

49. Magritte Inc. provides a defined benefit pension plan for its employees (for which the corporation uses IFRS). At December 31, 2023, the fair value of the plan assets is less than the defined benefit obligation. In its statement of financial position at December 31, 2023, Magritte should report a net defined benefit liability/asset of the a) excess of the defined benefit obligation over the fair value of the plan assets. b) excess of the plan assets over the defined benefit obligation. c) defined benefit obligation. d) fair value of the plan assets. Answer: a Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 19-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

50. Presented below is pension information related to Sofa Inc. for the calendar year 2023: Current service costs ........................................................... $288,000 Interest on accrued benefit obligation ............................... 216,000 Expected and actual return on plan assets ........................ 72,000 Past service costs ................................................................ 48,000 The defined benefit expense to be reported for 2023 is a) $432,000. b) $480,000. c) $576,000. d) $648,000. Answer: b Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $288,000 + $216,000 + $48,000 – $72,000 = $480,000

51. Presented below is pension information related to Banana Inc. for the calendar year 2023. The corporation uses ASPE. Current service costs ........................................................... $ 50,000 Contributions to the plan .................................................... 55,000 Actual return on plan assets ............................................... 45,000 Accrued benefit obligation (beginning of year) .................. 600,000 Fair value of plan assets (beginning of year) ...................... 400,000 Interest cost on the obligation ............................................ 10% The defined benefit expense to be reported for 2023 is a) $110,000. b) $70,000. c) $65,000. d) $50,000. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting 19-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: $50,000 + ($600,000 × 10%) – $45,000 = $65,000

52. Cantaloupe Ltd. uses ASPE. Presented below is pension information related to Cantaloupe Ltd. for the calendar year 2023: Current service costs ........................................................... $450,000 Actual return on plan assets ............................................... 105,000 Interest on accrued benefit obligation ............................... 195,000 Actuarial experience loss .................................................... 45,000 Past service costs ................................................................ 82,500 The defined benefit expense to be reported for 2023 is a) $757,500. b) $697,500. c) $667,500. d) $577,500. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $450,000 + $195,000 + $45,000 + $82,500 – $105,000 = $667,500

53. At the end of 2023, Lime Inc. has determined the following information related to its defined benefit pension plan Defined benefit obligation .................................................. $1,320,000 Fair value of pension plan assets ........................................ 1,220,000 The corporation uses IFRS. Assume the net defined benefit liability/asset account at January 1, 2023 was nil. If the contribution to plan assets in 2023 is $ 410,000, the defined benefit expense for 2023 is a) $100,000. b) $310,000. c) $410,000. d) $510,000. Answer: d Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. 19-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: funding minus defined benefit expense = accrued pension asset/liab. $410,000 – X = $1,220,000 – $1,320,000; X = $510,000

54. The following information is available for Figgy Enterprises Ltd. for calendar 2023. The corporation uses IFRS. Plan assets (at fair value), end of year ................................ $1,800,000 Defined benefit obligation, end of year .............................. 1,920,000 Defined benefit expense...................................................... 360,000 Contributions for year ......................................................... 324,000 The defined benefit expense to be reported for 2023 is a) $360,000. b) $346,000. c) $324,000. d) $120,000. Answer: a Difficulty: Easy Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $ 360,000 (given)

55. The following information is available for Figgy Enterprises Ltd. for calendar 2023. The corporation uses IFRS. Plan assets (at fair value), end of year ................................ $1,800,000 Defined benefit obligation, end of year .............................. 1,920,000 Defined benefit expense...................................................... 360,000 Contributions for year ......................................................... 324,000 The net defined benefit liability/asset that should be reported at December 31, 2023 is a) $120,000 asset. b) $120,000 liability. c) $204,000 asset. d) $360,000 liability. Answer: b 19-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

56. Presented below is pension information related to Mango Ltd. at December 31, 2023. The corporation uses IFRS. Defined benefit obligation .................................................. $3,500,000 Plan assets (at fair value) .................................................... 2,500,000 Past service costs ................................................................ 100,000 Contributions to plan .......................................................... 200,000 The amount to be reported as the net defined benefit liability at December 31, 2023, is a) $1,100,000. b) $1,000,000. c) $900,000. d) $700,000. Answer: b Difficulty: Easy Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $3,500,000 – $2,500,000 = $1,000,000

57. Presented below is pension information related to Squash Corp. for the calendar year 2023. The corporation uses IFRS. Current service cost ............................................................. $204,000 Discount (interest) rate ....................................................... 9% Defined benefit obligation, January 1 ................................ $1,800,000 Benefits paid to retirees ...................................................... 100,000 Past service cost (effective January 1)................................ 50,000 The defined benefit expense to be reported for 2023 is a) $266,000. b) $366,000. c) $416,000. d) $420,500. 19-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $204,000 + [($1,800,000 + $50,000) x 9%)] + $50,000 = $420,500

58. Presented below is pension information related to Watermelon Corp. for the calendar year 2023. The corporation uses IFRS. Current service cost ............................................................. $126,000 Discount (interest) rate ....................................................... 10% Defined benefit obligation, January 1 ................................ $900,000 Actual and expected return on plan assets ........................ 24,000 Actuarial loss ....................................................................... 28,000 The defined benefit expense to be reported for 2023 is a) $220,000. b) $192,000. c) $164,000. d) $130,000. Answer: b Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $126,000 + ($900,000 x 10%) – $24,000 = $192,000 Note: the actuarial loss is not part of defined benefit expense, but is charged to OCI.

59. Daikon Ltd. uses ASPE. Daikon Ltd. received the following information from its pension plan trustee concerning their defined benefit pension plan for calendar 2023: Jan. 1, 2023 Dec. 31, 2023 Fair value of plan assets $2,100,000 $2,250,000 Accrued benefit obligation 2,400,000 2,580,000 For 2023, the current service cost is $180,000. The interest rate on the liability is 10% and the actual rate of return on plan assets is 9%. The defined benefit expense to be reported for 2023 is 19-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) $265,500. b) $231,000. c) $216,000. d) $180,000. Answer: b Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $180,000 + ($2,400,000 × 10%) – ($2,100,000 × 9%) = $231,000

60. Peach Corporation uses IFRS. Presented below is information related to Peach Corporation’s defined benefit pension plan for calendar 2023: Defined benefit obligation, January 1 ................................ $ 200,000 Fair value of plan assets, January 1 .................................... 180,000 Current service cost ............................................................. 27,000 Contributions to plan .......................................................... 25,000 Actual and expected return on plan assets ........................ 9,000 Benefits paid to retirees ...................................................... 40,000 Interest (discount) rate........................................................ 10% The balance of the defined benefit obligation at December 31, 2023 is a) $185,000. b) $187,000. c) $207,000. d) $245,000. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $200,000 + $27,000 + ($200,000 x 10%) – $40,000 = $ 207,000

61. Kiwi Ltd. uses IFRS. Presented below is information related to Kiwi Ltd. for calendar 2023: Defined benefit obligation, January 1 ................................ $720,000 19-33 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Fair value of plan assets, January 1 .................................... Current service cost ............................................................. Contributions to plan .......................................................... Actual and expected return on plan assets ........................ Past service costs (effective January 1) .............................. Benefits paid to retirees ...................................................... Interest (discount) rate........................................................ The defined benefit expense to be reported for 2023 is a) $140,000. b) $109,700. c) $108,800. d) $60,000.

700,000 90,000 125,000 56,000 10,000 96,000 9%

Answer: b Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $90,000 + [($720,000 + $10,000) x 9%] + $10,000 – $56,000 = $109,700

62. Kiwi Ltd. uses IFRS. Presented below is information related to Kiwi Ltd. for calendar 2023: Defined benefit obligation, January 1 ................................ $720,000 Fair value of plan assets, January 1 .................................... 700,000 Current service cost ............................................................. 90,000 Contributions to plan .......................................................... 125,000 Actual and expected return on plan assets ........................ 56,000 Past service costs (effective January 1) .............................. 10,000 Benefits paid to retirees ...................................................... 96,000 Interest (discount) rate........................................................ 9% The balance of the defined benefit obligation at December 31, 2023 is a) $724,000. b) $779,700. c) $778,800. d) $789,700. Answer: d Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. 19-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $720,000 + $10,000 + $90,000 + [($720,000 + $10,000) x 9%] – $96,000 = $789,700

63. At December 31, 2023, the following information was provided by the defined benefit pension plan administrator for Leonardo Corp.: Fair value of plan assets ...................................................... $5,000,000 Defined benefit obligation .................................................. 6,200,000 The corporation uses IFRS. What is the net defined benefit liability/asset account that should be shown on Leonardo’s December 31, 2023, statement of financial position? a) $1,200,000 liability b) $1,200,000 asset c) $6,200,000 liability d) $5,000,000 asset Answer: a Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $6,200,000 – $5,000,000 = $1,200,000 liability

64. Thomson Corp. provides a defined benefit pension plan for its employees, and uses IFRS to account for it. The corporation's actuary has provided the following information for the year ended December 31, 2023: Defined benefit obligation, December 31........................... 525,000 Fair value of plan assets, December 31 .............................. 625,000 Current service cost ............................................................. 240,000 Interest on defined benefit obligation ................................ 24,000 Past service costs ................................................................ 60,000 Expected and actual return on plan assets ........................ 82,500 Contributions to plan .......................................................... 200,000 The defined benefit expense to be reported for 2023 is a) $241,500. b) $324,000. c) $406,500. d) $524,000. 19-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $240,000 + $24,000 – $82,500 + $60,000 = $241,500

65. Bateman Corp. provides a defined benefit pension plan for its employees, and uses IFRS to account for it. The trustee administering the plan provided the following information for the year ended December 31, 2023: Fair value of plan assets, January 1 .................................... $1,200,000 Defined benefit obligation, January 1 ................................ 1,270,000 Current service cost ............................................................. 300,000 Employer's contributions ................................................... 360,000 Past service cost (at January 1)........................................... 30,000 Benefits paid retirees .......................................................... 325,000 Actual and expected return ................................................ 60,000 Interest (discount) rate........................................................ 8% The defined benefit expense to be reported for 2023 is a) $270,000. b) $366,000. c) $374,000. d) $434,000. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 + $30,000 + [($1,270,000 + $30,000) x 8%] – $60,000 = $374,000

66. Presented below is pension information related to Lightning Ltd. for the calendar year 2023: Current service costs ........................................................... $288,000 Interest on accrued benefit obligation ............................... 216,000 Expected and actual return on plan assets ........................ 19-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

72,000 Defined benefit expense reported for 2023 ........................ The past service cost for 2023 is a) $336,000. b) $264,000. c) $120,000. d) $48,000.

480,000

Answer: d Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $480,000 – $288,000 –$216,000 + $72,000 = $48,000

67. Presented below is pension information related to Sofa Inc. for the calendar year 2023: Current service costs ........................................................... $ 288,000 Defined benefit expense for 2023 ....................................... 480,000 Expected and actual return on plan assets ........................ 72,000 Past service costs ................................................................ 48,000 The interest on the accrued pension obligation for 2023 is a) $312,000. b) $216,000. c) $168,000. d) $144,000. Answer: b Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $480,000 – $288,000 – $48,000 + $72,000 = $216,000

68. Which of the following statements is INCORRECT? a) Most pension plan employers report their pension assets or liabilities in the appropriate long-term classifications. 19-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) An employer with two or more defined benefit plans is required to measure the benefit cost of each plan separately. c) IFRS specifies how the components of pension benefit costs are to be reported on the income statement. d) Underlying assumptions, such as how the expected return on plan assets is determined, are required to be disclosed. Answer: c Difficulty: Medium Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

69. Post-employment benefits may include all of the following, except for a) dental care. b) severance pay to laid-off employees. c) legal and tax services. d) tuition assistance. Answer: b Difficulty: Easy Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Section Reference: Other Defined Benefit Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

70. Which of the following statements regarding post-employment health-care benefits is correct? a) Post-employment health-care benefit plans are generally funded. b) Post-employment health-care benefit plans are well-defined and level in dollar amount. c) Post-employment health-care benefit plan beneficiaries include the retiree, spouse, and other dependents. d) Post-employment health-care benefits are payable monthly. Answer: c 19-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Section Reference: Other Defined Benefit Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

71. Accrued post-employment benefit obligations are a) recorded at their present value. b) recorded in the same manner as pension benefit obligations. c) not recognized in the financial statements. d) disclosed in the notes to the financial statements only. Answer: b Difficulty: Easy Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Section Reference: Other Defined Benefit Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

72. How should employers recognize employee benefit plans that do NOT accumulate? a) Recognize the liability and cost over the life of the employee. b) Recognize the liability and cost over the length of service. c) Recognize the liability and cost when the event occurs to obligate the company to provide the benefit. d) Employers do not need to recognize them. Answer: c Difficulty: Easy Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Section Reference: Other Defined Benefit Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

73. Under IFRS for employee future benefits besides pension plans, remeasurements of the net 19-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

defined benefit a) should be reflected in OCI. b) should not be recorded. c) do not need to be remeasured. d) should be reflected in income. Answer: d Difficulty: Medium Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Section Reference: Other Defined Benefit Plans CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

74. Which of the following disclosures of post-employment benefits would NOT be required? a) the cost of post-employment benefits during the period b) a description of the accounting and funding policies followed c) the amount of the actuarial liability for short-term benefits such as paternity leave d) the assumptions and rates used in calculating the benefit obligation Answer: c Difficulty: Easy Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

75. Which of the following pieces of disclosure information would analysts NOT focus on? a) the name of the actuarial company that performed the calculations b) major assumptions used in the calculation of the defined benefit obligation c) the surplus or deficit of the plan d) the company’s future cash requirements Answer: a Difficulty: Easy Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics 19-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

76. Under ASPE, which of the following disclosures of post-employment benefits would NOT be required? a) a description of each type of plan b) the effective date of the most recent actuarial report c) the year-end surplus or deficit, including the fair value of the plan assets and defined benefit obligation d) the risks associated with the defined benefit plan Answer: d Difficulty: Medium Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

77. Under IFRS, which one of the following pension items is recognized in the employer’s accounts and financial statements? a) pension plan assets b) unrecognized actuarial gains/losses c) unrecognized past service costs d) the plan’s funded status Answer: d Difficulty: Easy Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

78. Under ASPE, which of the following disclosures would NOT be required for a defined benefit plan? 19-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) the year-end funded status b) a general description of the plan c) sensitivity information for actuarial assumptions d) the effective date of the most recent actuarial valuation Answer: c Difficulty: Easy Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

79. Under IFRS, all of the following are reported in OCI, except a) remeasurement changes. b) actuarial gains. c) actuarial losses. d) past service costs. Answer: d Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

80. According to standard setters, which of the following indicates a more realistic measure of the employer's obligation under a pension plan on a going-concern basis and should be used as the basis for determining service cost? a) vested benefit obligation b) projected benefit obligation c) accumulated benefit obligation d) None of the choices is correct. Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

81. The major difference in accounting for pensions under ASPE and IFRS is a) ASPE allows two approaches for accounting, immediate recognition approach and the deferral and amortization approach and IFRS only allows the immediate recognition approach. b) IFRS requires use of an actuarial and ASPE does not for calculation pension plans. c) ASPE includes the entire defined benefit expense in net income and IFRS includes actuarial gains and losses as well as remeasurements in OCI. d) IFRS includes the entire defined benefit expense in net income and ASPE includes actuarial gains and losses as well as remeasurements in OCI. Answer: c Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*82. Maggie Moo, age 40, begins employment with Farm Corporation on January 1, 2023, at a starting salary of $40,000. It is expected that Maggie will work for the company for 25 years, retiring on December 31, 2047, when Maggie is 65 years old. It is expected that her salary at retirement will be $140,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2047 is 12 years. Farm Corporation sponsors a defined benefit pension plan with the following formula: Annual pension benefit on retirement = 3% of salary at retirement for each year of service, or 3% final salary x years of service. Assume a discount rate of 6%. Determine the current service cost for Maggie Moo at December 31, 2023. a) $4,200 b) $8,212.66 c) $8,696.69 d. $35,212.12 Answer: c

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Hard Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan. Section Reference: Appendix 19A: Example of a One-Person Plan CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 3% x $140,000 x 1 year = $4,200 per year of retirement, PV of $4,200 annuity (n=12, i=6%) at December 31, 2047 = $4,200 x 8.38384 = $35,212.13, PV of amount of $35,212.13(n=24, i=6%) at December 31, 2023 = $35,212.13 x 0.24698 = $8,696.69

*83. Maggie Moo, age 40, begins employment with Farm Corporation on January 1, 2023, at a starting salary of $40,000. It is expected that Maggie will work for the company for 25 years, retiring on December 31, 2047, when Maggie is 65 years old. It is expected that her salary at retirement will be $140,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2047 is 12 years. Farm Corporation sponsors a defined benefit pension plan with the following formula: Annual pension benefit on retirement = 3% of salary at retirement for each year of service, or 3% final salary x years of service. Assume a discount rate of 6%. Determine the defined benefit obligation for Maggie Moo at December 31, 2024. a) $8,400 b) $17,416.01 c) $18,437.07 d) $70,415.86 Answer: c Difficulty: Hard Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan. Section Reference: Appendix 19A: Example of a One-Person Plan CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: PV of $8,400 annuity (n=12, i=6) at Dec 31, 2024 = $8,400 x 8.38384=$70,424.26 PV of $70,424.26 (n=23, i=6%) at Dec 31, 2024 = $70,424.26 x 0.26180 = $18,437.07

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 19-84 Post-employment benefits There are a variety of post-employment benefits that are earned by employees and that are expected to be provided to them on a long-term basis. Instructions a) Identify and explain what types of benefits an employee may be entitled to. b) How are these benefits funded? c) CRITICAL THINKING: Given the potential cost and long-term obligation to an employer, why to companies provide these types of benefits to employees? Solution 19-84 a) Post-employment benefits include: • Post-retirement plans such as pensions and plans that provide health care or life insurance benefits after an employee’s retirement. A pension plan specifically is an arrangement in which an employer provides benefits (payments) to employees after they retire, for services that the employees provided while they were working. • Post-employment plans with benefits that are provided after employment but before retirement. These include long-term disability income benefits, long-term severance benefits, and continuation of benefits such as health care and life insurance. • Plans covering accumulating and vested compensated absences. This type of benefit includes payments made while an employee is absent from work. It also includes unrestricted sabbatical leaves and accumulated sick days that vest or are taken as paid vacation. b) Benefits may be funded through contributory plans, where the employees pay part of the cost of the stated benefits or voluntarily make payments to increase their benefits. In non-contributory plans, the employer bears the entire cost. c) CRITICAL THINKING: The job market for skilled and trained employees can be very competitive. If a company or organization is unable to compete to attract talent on salaries alone, benefits packages provide further incentive for employees to either initially accept a position or alternatively to stay in the position once they are already working for a firm. Difficulty: Easy Learning Objective: Understand the importance of pensions from a business perspective. Section Reference: Overview of Pensions and Their Importance from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. 19-85 Defined benefit plans Pension plans can be broadly grouped into two categories: defined contribution plans and defined benefit plans. 19-45 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions a) What is a defined benefit plan? Include an explanation of the following terms in your answer: service cost, interest cost, past service costs, and vested benefits. b) What type of obligations are created for companies with defined benefit plans? How is this reflected on the statement of financial position? Solution 19-85 a) The (current) service cost component of defined benefit expense as part of the defined benefit plans is the cost of the benefits to be provided in future in exchange for services provided in the current period. The interest cost component of defined benefit expense is the interest for the period of the defined (accrued) benefit obligation outstanding during the period. To simplify the calculation, the amount of interest is calculated by applying a single rate to the beginning balance of the obligation. When a defined benefit plan is initiated or amended, credit that is given to employees for services provided before the date of initiation or amendment results in past service costs. If there is a reduction in the benefit plan, there is a decrease in the defined (accrued) benefit obligation. The amount of the past service costs is calculated by an actuary, and is added/deducted to the beginning balance of the obligation for calculating the interest cost for the year. Vested benefits are those the employee is entitled to receive even if they provide no additional services under the plan, e.g., if their employment is terminated. Vesting means that an employee keeps the rights to the benefit even if the employee no longer works for the entity. Typically, defined benefits vest with the employee based on the employee’s length of service. Normally, the benefits will vest after an employee has worked a specified number of years and the amount of the benefit typically increases with the length of service. b) A liability is only reported on the employer’s SFP if the required contribution has not been made in full for a defined benefit plan. An asset is only reported if the employer has contributed more than the required amount to be contributed for a defined benefit plan. Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 19-86 Pension plan assets The assets or liabilities related to pension plans must be captured on a company’s statement of financial position.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Insructions a) Explain how the actual returns on pension assets are generated. b) How are the expected returns on a pension plan asset determined? c) Can the pension plan assets generate gains or losses? If so, explain how. d) CRITICAL THINKING: What is the role of the actuary? Is this role crucial in a defined benefit versus a defined contribution plan? Why or why not? Solution 19-86 a) The actual return earned on plan assets is the income generated on the assets being held by the trustee, less the cost of administering the fund. This can vary considerably from year to year. b) The expected return on plan assets is the long-term rate of return (calculated by the actuary) multiplied by the fair value of the assets at the beginning of the period. A long-term rate is used to smooth out short-term fluctuations in interest rates, and is usually the rate for high-quality corporate bonds. The return on plan assets can be highly variable from one year to the next, so actuaries ignore short-term fluctuations when they develop a funding pattern to accumulate assets to pay benefits in the future. Under IFRS, the same rate is used for interest on the defined benefit obligation and the plan assets. c) An unexpected asset gain occurs when the actual return on plan assets is greater than the expected return on plan assets and an unexpected loss occurs when the actual return is less than the expected return. d) CRITICAL THINKING: An actuary’s chief purpose in pension accounting is to ensure that the company has established an appropriate funding pattern to meet its pension obligations. Actuaries make predictions called actuarial assumptions about mortality rates, employee turnover, interest and earnings rates, early retirement frequency, future salaries, and any other factors that need to be considered for pension plans. The role of the actuary is less crucial for a company with a defined contribution plan where the employee bears the risk of the plan’s performance. Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 19-87 Pension plan calculations The following information relates to the defined benefit pension plan for Strawberry Dale Ltd.: Dec. 31/22 Dec. 31/23 Defined benefit obligation $2,250,000 $3,000,000 Fair value of plan assets $2,300,000 $2,640,000 19-47 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Interest rate Expected rate of return

8% 7%

8% 6%

In 2023, the corporation contributed $390,000 to the plan, and the trustee paid $210,000 in benefits to retirees. Instructions For the year ended December 31, 2023, a) Calculate the interest on the obligation. b) Calculate the actual return on plan assets. c) Calculate the unexpected gain or loss (if any). Solution 19-87 a) $2,250,000 × 8% = $180,000 b)

Fair value of plan assets Dec. 31/23 .................................... $2,640,000 Fair value of plan assets Dec. 31/22 .................................... (2,300,000) 340,000 Contributions....................................................................... (390,000) Benefits paid ........................................................................ 210,000 Actual return on plan assets ............................................... $ 160,000

Actual return (see b)) ........................................................... Expected return ($2,300,000 × 6%) ..................................... Unexpected gain ..................................................................

$160,000 (138,000) $ 22,000

Ex. 19-88 Pension plan calculations The following information relates to the defined benefit pension plan for Strawberry Dale Ltd.: Dec. 31/22 Dec. 31/23 Defined benefit obligation $750,000 $900,000 Fair value of plan assets 800,000 840,000 Interest rate 7% 7% Expected rate of return 5% 5% In 2023, the corporation contributed $190,000 to the plan, and the trustee paid $187,000 in benefits to 19-48 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

retirees. Instructions For the year ended December 31, 2023, a) Calculate the interest on the obligation. b) Calculate the actual return on plan assets. c) Calculate the unexpected gain or loss (if any). d) CRITICAL THINKING: How is a discount rate determined under IFRS? Would this differ if a company is using ASPE? If so, explain how. Solution 19-88 a) $750,000 × 7% = $52,500 b)

Fair value of plan assets Dec. 31/23 .................................... Fair value of plan assets Dec. 31/22 .................................... Contributions....................................................................... Benefits paid ........................................................................ Actual return on plan assets ...............................................

$ 840,000 (800,000) 40,000 (190,000) 187,000 $ 37,000

Actual return (see b)) ........................................................... Expected return ($800,000 × 5%) ........................................ Unexpected loss ..................................................................

$ 37,000 (40,000) $ 3,000

CRITICAL THINKING: IFRS’ current rate can only be the current yield on high-quality debt instruments such as high-quality corporate bonds. The same discount rate is used for plan assets and the DBO. ASPE’s current rate can either be the current yield on debt instruments (such as high-quality corporate bonds) or a current settlement rate. The same discount rate is used for plan assets and the DBO.

Ex. 19-89 Pension plan calculations and journal entries On January 1, 2023, Prune Ltd. reported the following balances relating to their defined benefit pension plan: Defined benefit obligation .................................................. $ 3,200,000 Fair value of plan assets ...................................................... 3,200,000 19-49 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Other data related to the pension plan for 2023 are: Current service cost ............................................................. Contributions to the plan .................................................... Benefits paid ........................................................................ Actual return on plan assets ............................................... Interest (discount) rate .......................................................

140,000 204,000 220,000 192,000 9%

Instructions a) Calculate the defined benefit obligation at December 31, 2023. b) Calculate the fair value of plan assets at December 31, 2023. c) Calculate defined benefit expense for 2023. d) Prepare the journal entries to record the defined benefit expense and the contributions for 2023. Solution 19-89 a) Defined benefit obligation, January 1 ................................ $3,200,000 Current service cost ............................................................. 140,000 Interest cost (9% × $3,200,000) ........................................... 288,000 Benefits paid ........................................................................ (220,000) Defined benefit obligation, December 31........................... $3,408,000 b) Fair value of plan assets, January 1 ....................................... $3,200,000 Actual return ........................................................................ 192,000 Contributions....................................................................... 204,000 Benefits paid ........................................................................ (220,000) Fair value of plan assets, December 31 .............................. $3,376,000 c)

Current service cost ............................................................. Interest cost (9% × $3,200,000) ........................................... Actual return on plan assets ............................................... Defined benefit expense......................................................

$140,000 288,000 (192,000) $236,000

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

236,000

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

204,000

236,000

204,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

Ex. 19-90 Different methods of measuring pension obligation Discuss the different methods of measuring the pension obligation and identify which method is used for IFRS and ASPE. Solution 19-90 Actuaries calculate the vested benefit obligation using vested benefits only, at current salary levels, under the vested benefit method. The accumulated benefit method is based on both the vested and non-vested benefits and calculated on all years of employees’ service using the current salary levels. The projected benefit method calculates the deferred compensation using both vested and nonvested service, and incorporates future salaries projected to be earned over the period to retirement. IFRS and ASPE have both adopted the projected benefit method to calculate the defined benefit obligation (DBO). Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 19-91 Defined benefit obligation continuity schedule Provide the defined benefit obligation (DBO) continuity schedule. Solution 19-91 Defined benefit obligation (DBO), beginning of the period + Current service cost + Interest cost – Benefits paid to retirees +/– Past service costs of plan amendments during period +/– Actuarial gains (–) or losses (+) during the period = Defined benefit obligation (DBO), end of the period Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation 19-51 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 19-92 Plan assets continuity schedule Provide the plan assets continuity schedule. Solution 19-92 Plan assets, fair value at beginning of period + Contributions from employer company, and employees if applicable +/– Actual return – Benefits paid to retirees = Plan assets, fair value at end of period Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 19-93 Calculate plan surplus or deficit Star Company calculated its defined benefit obligation at December 31, 2023, to be $975,000. The fair value of the plan assets on the same date was $545,000. Instructions Calculate Star Company’s plan surplus or deficit and explain what the surplus or deficit means. Solution 19-93 DBO .......................................................................... Less: Fair value of the plan assets .......................... DBO > Plan assets ....................................................

$975,000 (545,000) $430,000

underfunded

Star Company’s plan is in a deficit, which means its liability is greater than its assets so the plan is underfunded. If Star Company’s financial performance is poor, there could be an issue with having enough funds to cover the future pension costs. Difficulty: Easy Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application 19-52 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Ex. 19-94 Calculate plan surplus or deficit Sunshine Company calculated its defined benefit obligation at December 31, 2023, to be $2,590,000. The fair value of the plan assets on the same date was $2,685,000. Instructions Calculate Sunshine Company’s plan surplus or deficit and explain what the surplus or deficit means. Solution 19-94 DBO ..................................................................... Less: Fair value of the plan assets ..................... DBO < Plan assets ...............................................

$ 2,590,000 (2,685,000) $ 95,000

overfunded

Sunshine Company’s plan is in a surplus, which means its assets are greater than its liability so the plan is overfunded. Sunshine Company can fully cover its pension obligation. Difficulty: Easy Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 19-95 Components of defined benefit expense Explain the five components of defined benefit expense under IFRS Solution 19-95 Current service costs – benefits earned by the employees during the current period. This is included in the defined benefit expense on the statement of comprehensive income. Net interest (or finance) cost – the discount rate used for the interest cost on the DBO and for the interest assumed to be earned on the plan assets. This is included in the defined benefit expense on the statement of comprehensive income. Remeasurement of the return on plan assets other than net interest costs on the DBO are recognized in OCI. Past service costs, curtailments, and settlements – plan amendments instantly change the amount of the employer’s obligation, and the total cost (or benefit) of the amendment is recognized immediately in the defined benefit expense on the statement of comprehensive income. Actuarial gains and losses – result from items such as changes in actuarial assumptions and 19-53 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

experience adjustments that increase or decrease the present value of the DBO. Actuarial gains and losses are recognized immediately in OCI. Difficulty: Medium Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 19-96 Measuring and recording defined benefit expense Pumpkin Ltd. received the following information from its pension plan trustee concerning their defined benefit pension plan for the year ended December 31, 2023 January 1, 2023December 31, 2023 Defined benefit obligation $3,500,000 $3,990,000 Fair value of plan assets 1,750,000 1,882,000 For 2023, the service cost is $210,000 and past service cost (effective Jan. 1) is $100,000. During 2023, Pumpkin contributed $595,000 to the plan. The actual and expected return on plan assets is 8%. Pumpkin uses IFRS. Instructions a) Calculate the defined benefit expense to be reported in 2023. b) Prepare the journal entries to record the defined benefit expense and the employer’s contribution for 2023. Solution 19-96 a) Current service cost .................................................................................. Interest on DBO ($3,500,000 + $100,000) × 8%) ....................................... Actual/expected return on plan assets ($1,750,000 × 8%) ...................... Past service costs ..................................................................................... Defined benefit expense—2023

$210,000 288,000 (140,000) 100,000 $458,000

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

458,000

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

595,000

458,000

595,000

Difficulty: Hard Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application 19-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Ex. 19-97 Measuring and recording defined benefit expense The following information relates to the defined benefit pension plan for Huckleberry Ltd. for 2023. The corporation uses IFRS. Current service cost ............................................................. $260,000 Contributions....................................................................... 250,000 Interest rate for obligation .................................................. 10% Expected and actual return on plan assets ........................ 9% Defined benefit obligation, Jan. 1 ....................................... 240,000 Fair value of plan assets, Jan. 1 .......................................... 180,000 Actuarial gain ....................................................................... 24,000 Instructions a) Calculate the defined benefit expense to be reported for 2023. b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023. Solution 19-97 a) Current service cost ............................................................. $260,000 Interest on defined benefit obligation ($240,000 × 10%) ... 24,000 Expected return on plan assets ($180,000 × 9%)................ (16,200) Defined benefit expense—2023 .......................................... $267,800 Note that the actuarial gain is not part of defined benefit expense, but would be booked through OCI. b)

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

267,800

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

250,000

267,800

250,000

Ex. 19-98 Measuring and recording defined benefit expense The following information relates to the defined benefit pension plan for Strawberry Ltd. for 2023. The corporation uses ASPE. 19-55 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Current service cost ............................................................. Contributions....................................................................... Interest rate for obligation .................................................. Expected and actual return on plan assets ........................ Defined benefit obligation, Jan. 1 ....................................... Fair value of plan assets, Jan. 1 .......................................... Actuarial loss .......................................................................

$348,000 321,000 9% 8% 367,000 225,000 10,000

Instructions a) Calculate the defined benefit expense to be reported for 2023. b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023. Solution 19-98 a) Current service cost ............................................................. Interest on defined benefit obligation ($367,000 × 9%) ..... Expected return on plan assets ($225,000 × 8%)................ Actuarial loss ....................................................................... Defined benefit expense—2023 .......................................... b)

$348,000 33,030 (18,000) 10,000 $373,030

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

373,030

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

321,000

373,030

321,000

Ex. 19-99 Measuring and recording defined benefit expense Tang Ltd. uses ASPE. The following information relates to the defined benefit pension plan for Tang Ltd. for 2023: Defined benefit obligation, Jan. 1 ....................................... $1,147,000 Fair value of plan assets, Jan. 1 .......................................... 1,225,000 Current service cost ............................................................. 314,000 Contributions....................................................................... 290,000 Interest rate for obligation .................................................. 7% Expected and actual return on plan assets ........................ 6% Actuarial gain ....................................................................... 26,000 19-56 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions a) Calculate the defined benefit expense to be reported for 2023. b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023. Solution 19-99 a) Current service cost ............................................................. $314,000 Interest on defined benefit obligation ($1,147,000 × 7%) .. 80,290 Expected return on plan assets ($1,225,000 × 6%)............. (73,500) Actuarial gain ....................................................................... (26,000) Defined benefit expense—2023 .......................................... $294,790 b)

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

294,790

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

290,000

294,790

290,000

Ex. 19-100 Measuring and recording defined benefit expense Orange Ltd. uses ASPE. The following information relates to the defined benefit pension plan for Orange Ltd. for 2023: Current service cost ............................................................. $590,000 Contributions....................................................................... 495,000 Interest rate for obligation .................................................. 10% Expected and actual return on plan assets ........................ 8% Past service costs – amendment to plan Dec. 31 ............... 100,000 Defined benefit obligation, Jan. 1 ....................................... 602,000 Fair value of plan assets, Jan. 1 .......................................... 550,000 Benefits paid ........................................................................ 470,000 Actuarial loss ....................................................................... 20,000 Instructions a) Calculate the defined benefit expense to be reported for 2023. b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023. 19-57 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 19-100 a) Current service cost ............................................................. $590,000 Interest on defined benefit obligation ($602,000 × 10%) ... 60,200 Expected return on plan assets ($550,000 × 8%)................ (44,000) Past service costs ................................................................ 100,000 Actuarial loss ....................................................................... 20,000 Defined benefit expense—2023 .......................................... $726,200 b)

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

726,200

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

495,000

726,200

495,000

Ex. 19-101 Differences between pensions and other post-employment health-care benefits Discuss the differences between pensions and other post-employment health-care benefits in terms of funding, benefits, beneficiary, benefits payable, and predictability. Solution 19-101 Item Funding Benefits Beneficiary Benefits payable Predictability

Pensions Generally funded Well-defined and level dollar amount Retiree (maybe some benefit to surviving spouse) Monthly Variables are reasonably predictable

Health-Care Benefits Generally not funded Generally uncapped and great variability Retiree, spouse, and other dependants As needed and used Utilization difficult to predict; level of cost varies geographically and fluctuates over time

Difficulty: Medium Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Section Reference: Other Defined Benefit Plans CPA: Financial Reporting 19-58 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Knowledge AACSB: Analytic

Ex. 19-102 Accounting for defined benefit plans other than pension plans under ASPE and IFRS How are pension and non-pension defined benefits plans that vest or accumulate accounted for under ASPE and under IFRS? Solution 19-102 Under ASPE, only one approach is permitted; the immediate recognition approach with defined benefit expense being recorded via net income. Any non-pension defined benefit plans that vest or accumulate are accounted for in the same way as defined benefit pension plans. Under IFRS, only one approach is permitted; with current and past service cost, and the net interest on the net employee benefit liability or asset being recorded in net income (and with gains and losses from remeasurements being recorded in OCI). The short-term employee benefits are generally recognized (without discounting) at the amount expected to be paid in exchange for the services provided. Other long-term benefits require the same recognition and measurement as for pension plans except all changes in liabilities relating to these benefits should be reflected in income, including remeasurement. IFRS requires the cost of the benefits to be recognized at the earlier of when the company can no longer withdraw an offer of employment and when it recognizes the related restructuring costs. Difficulty: Medium Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Section Reference: Other Defined Benefit Plans Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 19-103 Analyzing disclosure requirements Given there is a significant amount of information included in the notes to the financial statements on pensions, what should an analyst focus on and why? Solution 19-103 The most significant elements for review in the notes to the financial statements are the major assumptions that underlie the calculations, the surplus or deficit of the plan, and the company’s future cash requirements. If the major assumptions change, this can significantly change the amounts within the defined benefit obligation and the defined benefit expense. For example, a one percent point difference in the 19-59 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

discount rate could have a 10% to 20% effect on the discounted value. The rate used is disclosed so users can assess for reasonableness and compare to rates used by other companies. The cash flow related to pensions is important as it is often significantly different from the pension cost recognized on the income statement and analysts often try to determine the company’s future cash commitments. Difficulty: Medium Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. for 19-104 Disclosure requirements What disclosure requirements are necessary for pensions under ASPE? What disclosure requirements are necessary for pensions under IFRS? Solution 19-104 Disclosure requirements for ASPE 1. A description of each type of plan and any major changes in the terms of the plan during the year. 2. The effective date of the most recent actuarial valuation for funding purposes. 3. The year-end surplus or deficit, including the fair value of the plan assets and defined benefit obligation. 4. An explanation of any difference between the amount reported on the balance sheet and the plan’s surplus or deficit. 5. If not shown separately on the income statement, “remeasurements and other items” should be disclosed in notes. Disclosure requirements for IFRS 1. The characteristics of the defined benefit plans and risk associated with them. 2. The amounts in the statements arising from the plans. 3. How the defined benefit plans help them assess the amounts, timing, and likelihood of the cash flows that are associated with future benefits (IFRS 19.125). In addition to a description of each defined benefit plan, IFRS also requires: 1. Reconciliations of opening to closing balances of the present value of the net defined benefit liability/asset, plan assets, and the present value of the DBO. 2. Amounts included in the periodic net income, the amount included in expenses, such as current service cost, interest expense, and return on plan assets, along with amounts recognized in OCI such as actuarial gains and losses from changes in assumptions. 3. Sensitivity information for each significant actuarial assumption including the impact on the DBO and changes from the previous period in methods and assumptions used in the sensitivity analysis. 19-60 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. Section Reference: Presentation, Disclosure, and Analytics Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Ex. 19-105 Calculate current service costs Joe Smith, age 45, begins employment with Square Corporation on January 1, 2023, at a starting salary of $45,000. It is expected that Joe will work for the company for 20 years, retiring on December 31, 2042, when Joe is 65 years old. It is expected that his salary at retirement will be $120,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2042 is 12 years. Square Corporation sponsors a defined benefit pension plan with the following formula Annual pension benefit on retirement = 2% of salary at retirement for each year of service, or 2% final salary x years of service. Assume a discount rate of 6%. Instructions a) Determine the current service cost for Joe Smith at December 31, 2023. b) CRITICAL THINKING: The CFO is reviewing your calculations and thinks there must be an error. He believes that this value is too low given Joe’s salary of $45,000. Explain how the current service cost is calculated. Briefly explain how this is similar to the calculations for the defined pension obligation and past service costs. *Solution 19-105 a) Annual pension benefit on retirement = 2% x $120,000 x 1 year = $2,400 per year on retirement PV of $2,400 annuity (n=12, i=6) at December 31, 2042 = $2,400 x 8.38384 = $20,121.22 (Table A.4) PV of amount of $20,121.22 (n=19, i=6%) at December 31, 2023

= $20,121,22 x 0.33051 = $6,650.26 (Table A.2)

The current service cost for Joe Smith is $6,650.26. b) CRITICAL THINKING: The current service cost is a calculation of the present value of the benefits earned by employees that is attributable to the current period. The use of a discount rate is also applied to the calculation of the defined benefit obligation and past service costs. The defined benefit obligation is the present value of the accumulated benefits earned to a point in time, according to the 19-61 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

pension formula and using projected salaries, while past service cost is the present value of the additional benefits granted to employees in the case of a plan amendment. Difficulty: Hard Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan. Section Reference: Appendix 19A: Example of a One-Person Plan CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Ex. 19-106 Calculate current service costs Suzanne Hannah, age 55, begins employment with Young Corporation on January 1, 2023, at a starting salary of $65,000. It is expected that Suzanne will work for the company for 10 years, retiring on December 31, 2032, when Suzanne is 65 years old. It is expected that her salary at retirement will be $140,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2032 is 12 years. Young Corporation sponsors a defined benefit pension plan with the following formula Annual pension benefit on retirement = 2% of salary at retirement for each year of service, or 2% final salary x years of service. Assume a discount rate of 5%. Instructions Determine the current service cost for Suzanne Hannah at December 31, 2023. *Solution 19-106 Annual pension benefit on retirement = 2% x $140,000 x 1 year = $2,800 per year of retirement PV of $2,400 annuity (n=12, i=5) at December 31, 2032

= $ 2800 x 8.86325 = $24,817 (Table A.4)

PV of amount of $24,817 (n=9, i=5%) at December 31, 2023 = $24,817 x 0.64461 = $15,997.29 (Table A.2) The current service cost for Suzanne Hannah is $15,997.29. Difficulty: Hard Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan. Section Reference: Appendix 19A: Example of a One-Person Plan CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 19-107 Measuring and recording defined benefit expense On January 1, 2023, Wang Ltd. reported the following balances relating to its defined benefit pension plan: Dec. 31, 2023 Jan. 1, 2023 Defined benefit obligation .............................. (a) $1,200,000 Fair value of plan assets .................................. (b) 1,170,000 Current service cost ......................................... $ 95,000 Contributions to the plan ................................ 104,000 Benefits paid .................................................... 100,000 Actual return on plan assets ........................... 92,000 Interest (discount) rate.................................... 8% Defined benefit expense.................................. (c) Instructions a) Calculate the defined benefit obligation at December 31, 2023. b) Calculate the fair value of plan assets at December 31, 2023. c) Calculate the defined benefit expense for 2023. d) Prepare the journal entries to record the defined benefit expense and the contributions for 2023. Solution 19-107 a) Defined benefit obligation, January 1 ................................ $1,200,000 Current service cost ............................................................. 95,000 Interest cost (8% × $1,200,000) ........................................... 96,000 Benefits paid ........................................................................ (100,000) Defined benefit obligation, December 31........................... $1,291,000 b)

Fair value of plan assets, January 1 .................................... $1,170,000 Actual return ........................................................................ 92,000 Contributions....................................................................... 104,000 Benefits paid ........................................................................ (100,000) Fair value of plan assets, December 31 .............................. $1,266,000

Current service cost ............................................................. Interest cost (8% × $1,200,000) ........................................... Actual return on plan assets ............................................... Defined benefit expense......................................................

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

99,000

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

104,000

$95,000 96,000 (92,000) $99,000

99,000

104,000 19-63

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pr. 19-108 Calculating discount rate and actual return on plan assets On January 1, 2023, Lillibet Ltd. reported the following balances relating to its defined benefit pension plan: Dec. 31, 2023 Jan. 1, 2023 Defined benefit obligation .............................. $1,291,000 $1,200,000 Fair value of plan assets .................................. 1,266,000 1,170,000 Current service cost ......................................... $ 95,000 Contributions to the plan ................................ 104,000 Benefits paid .................................................... 100,000 Actual return on plan assets ........................... (b) Interest (discount) rate.................................... (a) Defined benefit expense.................................. (c) Instructions a) Calculate the discount rate. b) Calculate the actual return on plan assets. c) Calculate the defined benefit expense for 2023. d) Prepare the journal entries to record the defined benefit expense and the contributions for 2023. Solution 19-108 a)

Defined benefit obligation, December 31........................... $1,291,000 Defined benefit obligation, January 1 ................................ (1,200,000) Current service cost ............................................................. (95,000) Benefits paid ........................................................................ 100,000 Interest cost ......................................................................... 96,000

$96,000 / $1,200,000 = .08 or 8% b)

Fair value of plan assets, December 31 .............................. $1,266,000 Fair value of plan assets, January 1 .................................... (1,170,000) Contributions....................................................................... (104,000) Benefits paid…………………………………………………. 100,000 Actual return ........................................................................ 92,000 19-64

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

1,170,000 + X + 104,000 – 100,000 = 1,266,000 X = 1,266,000 – 1,170,000 – 104,000 + 100,000 = 92,000 c)

$95,000 96,000 (92,000) $99,000

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

99,000

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

104,000

99,000

104,000

Pr. 19-109 Measuring and recording defined benefit expense – IFRS Swiss Chard Ltd. uses IFRS. Presented below is information related to the defined benefit pension plan of Swiss Chard Ltd. for the year 2023: Defined benefit obligation, January 1 ................................ $ 375,000 Fair value of plan assets, January 1 .................................... 350,000 Current service cost ............................................................. 300,000 Interest (discount) rate........................................................ 10% Expected and actual return on plan assets ........................ 9% Past service cost (as of January 1) ...................................... 25,000 Actuarial loss ....................................................................... 14,900 Contributions to plan .......................................................... 290,000 Remeasurement loss on plan assets .................................. 11,500 Payments to retirees ........................................................... 250,000 Instructions a) Calculate the defined benefit expense to be reported on the income statement for 2023. b) Calculate the amount to be shown as OCI for 2023. c) Calculate the fair value of the plan assets at December 31, 2023. d) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ended December 31, 2023. 19-65 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 19-109 a) Current service cost ........................................................................ Interest on DBO [(10% × ($ 375,000 + $ 25,000)] ............................ Expected and actual return on plan assets (9% × $ 350,000) ....... Past service cost ............................................................................. Defined benefit expense.................................................................

$300,000 40,000 (31,500) 25,000 $333,500

Actuarial loss .................................................................................. Remeasurement loss on plan assets ............................................. Amount to be shown as OCI (Dr.) ...................................................

$14,900 11,500 $26,400

Fair value of plan assets, January 1 ............................................... Expected and actual return on plan assets ................................... Remeasurement loss on plan assets ............................................. Contributions to plan ..................................................................... Payments to retirees ...................................................................... Fair value of plan assets, December 31 .........................................

$350,000 31,500 (11,500) 290,000 (250,000) $410,000

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

333,500

Remeasurement Loss (OCI) ...................................................................... Net Defined Benefit Liability/Asset ..................................................

26,400

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

290,000

333,500

26,400

290,000

Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. Section Reference: Defined Benefit Obligation Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 19-110 Measuring and recording defined benefit expense – ASPE Swiss Kale Ltd. uses ASPE. Presented below is information related to the defined benefit pension plan 19-66 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

of Swiss Kale Ltd. for the year 2023: Defined benefit obligation, January 1 ................................ Fair value of plan assets, January 1 .................................... Current service cost ............................................................. Interest (discount) rate........................................................ Expected and actual return on plan assets ........................ Past service cost (as of January 1) ...................................... Actuarial loss ....................................................................... Contributions to plan .......................................................... Remeasurement loss on plan assets .................................. Payments to retirees ...........................................................

$375,000 350,000 300,000 10% 9% 25,000 14,900 290,000 11,500 250,000

Instructions a) Calculate the defined benefit expense to be reported on the income statement for 2023. b) Calculate the fair value of the plan assets at December 31, 2023. c) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ended December 31, 2023. Solution 19-110 a) Current service cost ........................................................................ Interest on DBO [(10% × ($ 375,000 + $ 25,000)] ............................ Expected and actual return on plan assets (9% × $ 350,000) ....... Past service cost ............................................................................. Actuarial loss .................................................................................. Remeasurement loss on plan assets .............................................

$300,000 40,000 (31,500) 25,000 14,900 11,500

Defined benefit expense.................................................................

$359,900

$350,000 31,500 (11,500) 290,000 (250,000) $410,000

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

359,900

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

290,000

359,900

290,000

Difficulty: Medium Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. 19-67 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Defined Benefit Obligation Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Section Reference: Plan Assets and Plan Surplus or Deficit Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Section Reference: Defined Benefit Cost Components CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 19-111 Calculating defined benefit expense and pension plan surplus or deficit Fernando’s Furniture Inc. sponsors a defined benefit pension plan for its employees. The plan’s trustee reports the following information for calendar 2023: Defined benefit obligation, January 1 ................................ $240,000 Fair value of plan assets, January 1 .................................... 180,000 Current service cost ............................................................. 80,000 Actual and expected return on plan assets ........................ 21,000 Contributions....................................................................... 70,000 Benefits paid to retirees ...................................................... 120,000 Interest (discount) rate........................................................ 10% Past service costs (as of January 1) .................................... 10,000 The corporation uses ASPE. Instructions a) Calculate the amount of the defined benefit expense for 2023, and prepare the required adjusting entries. b) Calculate the surplus or deficit of the plan on December 31, 2023. Solution 19-111 a) Defined benefit expense for 2023 Current service cost ............................................................. Interest on DBO [(10% x ($ 240,000 + $ 10,000)] ................. Actual and expected return on plan assets ........................ Past service cost .................................................................. Defined benefit expense......................................................

$80,000 25,000 (21,000) 10,000 $94,000

Defined Benefit Expense....................................... ........................................... Net Defined Benefit Liability/Asset…….................................... .......

94,000

Net Defined Benefit Liability/Asset.................................... .............................. Cash......................................................................... ..........................

70,000

94,000

70,000

Funded Status at December 31, 2023 19-68

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Defined Benefit Obligation (1) ............................................ Plan assets (2) ...................................................................... Underfunded .......................................................................

$(235,000) 151,000 $ (84,000)

(1) Defined benefit obligation Beginning balance ............................................................... Service cost .......................................................................... Interest cost ......................................................................... Past service cost .................................................................. Payments to retirees ........................................................... Ending balance ....................................................................

$240,000 80,000 25,000 10,000 (120,000) $235,000

(2) Plan assets Beginning balance ............................................................... Actual return ........................................................................ Contributions....................................................................... Payments to retirees ........................................................... Ending balance ....................................................................

$180,000 21,000 70,000 (120,000) $151,000

Pr. 19-112 Preparation of a pension work sheet and pension entries Vernhey Ltd., which follows ASPE, provides the following information about its defined benefit pension plan for the year 2023: Current service cost $ 144,000 Contribution to the plan

182,600

Past service cost, effective December 31, 2023

60,000

Actual return on plan assets

160,000

Benefits paid

95,000

Net defined benefit liability at January 1, 2023

20,000 19-69

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Plan assets at January 1, 2023

1,780,000

Defined benefit obligation at January 1, 2023

1,800,000

Interest/discount rate on the DBO and plan assets

Instructions a) Complete the pension work sheet below for 2023. Indicate credit entries by parentheses, e.g., (25,000). b) Prepare all journal entries. c) What is the amount of the plan’s surplus/deficit at December 31, 2023? VERHEY LTD. Pension Work Sheet Year ended December 31, 2023 General Journal Entry Annual Defined Benefit Expense

Cash

Memo Record

Net Defined Benefit Liability/ Asset

Defined Benefit Obligation

Plan Assets

(20,000)

(1,800,000)

1,780,000

Balance January 1, 2023 Current service cost Past service cost Net interest /finance cost Benefits paid Contribution Expense entry Contribution entry 2023 Balance December 31, 2023 Solution 19-112 a)

VERHEY LTD. Pension Work Sheet Year ended December 31, 2023 General Journal Entry Annual Defined Benefit Expense Balance January 1, 2023 Current service cost Past service cost

Cash

Memo Record

Net Defined Benefit Liability/ Asset (20,000)

144,000 60,000

Defined Benefit Obligation (1,800,000) (144,000) (60,000)

Plan Assets 1,780,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Net interest /finance cost1 Benefits paid Contribution Expense entry Contribution entry 2023 Balance December 31, 2023 1

2,000

(162,000) 95,000

160,000 (95,000) 182,600

(2,071,000)

2,027,600

182,600 206,000 (182,600)

(206,000) 182,600 (43,400)

($1,800,000 x 9%) = $ 162,000

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

206,000

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

182,600

Calculation of plan surplus/deficit, December 31, 2023: Defined benefit obligation.......................................... Plan assets at fair value .............................................. Plan deficit ..................................................................

206,000

182,600

$(2,071,000) 2,027,600 $ (43,400)

Pr. 19-113 Preparation of a pension work sheet and pension entries The accountant for Camberwell Ltd. has developed the following information regarding the company's defined benefit pension plan for calendar 2023: Service cost .......................................................................... $ 600,000 Actual return on plan assets ............................................... 315,000 Contributions....................................................................... 1,080,000 Benefits paid to retirees ...................................................... 72,000 Interest (discount) rate........................................................ 10% Instructions a) Using the above information, complete the pension work sheet below for 2023. Indicate credit entries by parentheses, e.g., (72,000). b) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ended December 31, 2023. CAMBERWELL LTD. 19-71 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pension Work Sheet Year ended December 31, 2023 General Journal Entries Memo Entries —————————————————————————————————————————— Annual Net Defined Defined Defined BenefitBenefit Benefit Plan Expense Cash Liability/Asset/ Obligation Assets —————————————————————————————————————————— Bal. December 31, 2022 (1,200,000) (4,500,000) 3,300,000 Service cost Interest cost Actual return Contributions Benefits paid Journal entry for 2023 ______ ______ ______ ______ ______ Bal. December 31, 2023 ______ ______ ______ ______ ______ Solution 19-113 a) CAMBERWELL LTD. Pension Work Sheet Year ended December 31, 2023 General Journal Entries Memo Entries —————————————————————————————————————————— Annual Net Defined Defined Defined BenefitBenefit Benefit Plan Expense Cash Liability/Asset Obligation Assets —————————————————————————————————————————— Bal. December 31, 2022 (1,200,000) (4,500,000) 3,300,000 Service cost 600,000 (600,000) Interest cost (1) 450,000 (450,000) Actual return (315,000) 315,000 Contributions (1,080,000) 1,080,000 Benefits paid __________ 72,000 (72,000) Expense entry 735,000 (735,000) Contribution entry (1,080,000) 1,080,000 Bal. December 31, 2023 (855,000) (5,478,000) 4,623,000 (1) $4,500,000 × 10% = $450,000 b)

Defined Benefit Expense .......................................................................... Net Defined Benefit Liability/Asset ..................................................

735,000

Net Defined Benefit Liability/Asset .......................................................... Cash ...................................................................................................

1,080,000

735,000

1,080,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 20 LEASES CHAPTER STUDY OBJECTIVES 1. Understand the importance of leases from a business perspective. Leases represent a significant source of financing for companies. One of the issues identified by the IASB, prior to the adoption of IFRS 16, was a lack of transparency in financial reporting of leases, leaving users like financial analysts having to guess the extent of debt and leverage of many companies. Accounting for leases is not just an accounting issue, but one of importance to users of financial statements, including financial institutions and leasing companies.

2. Explain the conceptual nature, economic substance, and advantages of lease transactions. A lease is a contract between two parties that gives the lessee the right to use property that is owned by the lessor. In situations where the lessee obtains the use of the majority of the economic benefits inherent in a leased asset, the transaction is similar in substance to acquiring an asset. Therefore, the lessee recognizes the asset and associated liability and the lessor transfers the asset under lease accounting. The major advantages of leasing for the lessee relate to the cost and flexibility of the financing, and protection against obsolescence. For the lessor, the finance income is attractive.

3. Calculate the lease payment that is required for a lessor to earn a specific return. The lessor determines the investment that it wants to recover from a leased asset. If the lessor has acquired an asset for the purpose of leasing it, the lessor usually wants to recover the asset’s cost. If the lessor participates in leases as a way of selling its product, it usually wants to recover the sales price. The lessor’s investment in the cost or selling price can be recovered in part through a residual value if the asset will be returned to the lessor, or through a bargain purchase price that it expects the lessee to pay, if a bargain purchase is part of the lease agreement. In addition to these sources, the lessor recovers its investment through the lease payments. The periodic lease payment, therefore, is the annuity amount whose present value exactly equals the amount to be recovered through lease payments.

4. Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Under IFRS, from the lessee’s standpoint, all leases are capitalized and included on the SFP except where the lessee elects not to apply the requirements for short-term leases or for leases where the underlying asset is of low value. Under ASPE a lease is classified as a capital or finance lease where the risks and benefits of owning the leased asset are transferred to the lessee, which is evidenced by one or more of the following: (1) the transfer of title or bargain purchase option (BPO), (2) the use of the majority of the asset services inherent in the leased asset, or (3) the recovery by the lessor of substantially all of its investment in the leased asset plus a return on that investment. If none of these criteria is met, the lease is classified as an operating lease. 20-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

5. Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. IFRS 16 typically results in a right-of-use asset being capitalized on the lessee’s SFP and a lease liability being recognized for the obligation owing to the lessor. The amount capitalized is (a) the PV of the lease payments included in the lease liability (b) lease payments at the commencement date (c) initial direct costs of the lessee and (d) the costs of dismantling/restoring the underlying asset. The right-ofuse asset is then depreciated in the same way as other capital assets owned by the lessee. Payments to the lessor are divided into an interest portion and a principal payment, using the effective interest method.

6. Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). When a lessee guarantees a residual value, it is obligated to return either the leased asset or cash, or a combination of both, in an amount that is equal to the guaranteed value. The lessee includes the guaranteed residual (or amounts expected to be payable by the lessee under a residual value guarantee for IFRS) in the lease obligation/lease liability and leased asset/right-of-use asset calculation. The asset is depreciated to the guaranteed residual (or purchase option) value by the end of the lease term. If the residual value is unguaranteed (no amount is expected to be payable), the lessee takes no responsibility for the residual and it is excluded from the lessee’s calculations.

7. Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. A lessee recognizes the lease payments that are made as rent expense in the period that is covered by the lease, usually based on the proportion of time. Over the term of a lease, the total amount that is charged to expense is the same whether the lease has been treated as a direct financing lease or as an operating lease under ASPE. Differences relates to (1) the timing of recognition for the expense (more is charged in the early years for a direct financing lease), (2) the type of expense that is charged (depreciation and interest expense for a financing lease versus rent expense for an operating lease), and (3) the recognition of an asset and liability on the SFP for a financing lease versus non-recognition for an operating lease. Aside from any income tax differences, the cash flows for a lease are the same whether it is classified as an operating or financing lease. Accounting for short-term leases and exempt leases for low-value assets under IFRS 16 is similar to accounting for operating leases under ASPE, except that rental expenses would be considered short-term lease expense or low-value lease expense, respectively

8. Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. The current portion of the obligation is the principal that will be repaid within 12 months from the SFP date. The current portion also includes the amount of interest that has accrued up to the SFP date. The long-term portion of the obligation or net investment is the principal balance that will not be paid within 12 months of the SFP date. Lessees disclose the same information as is required for capital assets and long-term debt in general. In addition, details are required of the future minimum lease payments for each of the next five years, and under IFRS, information about leasing arrangements is required. 20-2 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

9. Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. If a lease, in substance, transfers the risks and benefits of ownership of the leased asset to the lessee and revenue recognition criteria related to collectability and ability to estimate any remaining non-reimbursable costs are met, the lessor accounts for the lease as either a direct financing or a sales-type lease. Under IFRS, it is classified as either a financing or a manufacturer or dealer lease. The existence of a manufacturer’s or dealer’s profit on the amount to be recovered from the lessee is the difference between a manufacturer/dealer or sales-type lease and a direct financing lease, because the objective is only to generate finance income in the latter. If any one of the capitalization or revenue recognition criteria is not met, the lessor accounts for the lease as an operating lease

10. Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. In a finance lease, the lessor removes the cost of the leased asset from its books and replaces it with its net investment in the lease. This is made up of two accounts: (1) the gross investment or lease receivable, offset by (2) the portion of these amounts that represents unearned interest. The net investment represents the PV of the lease payments and the residual value or BPO amounts. As the lease payments are received, the receivable is reduced. As time passes, the unearned interest is taken into income based on the implicit rate of return that applies to the net investment. Under a manufacturer/dealer or sales-type lease, the accounting is similar except that the net investment represents the sales amount being recovered by the lessor. The lessor also transfers the inventory “sold” to cost of goods sold

11. Account for and report financing and manufacturer/dealer or sales-type leases, with guaranteed residual values or a purchase option, by a lessor. For each type of finance or capital lease accounted for by lessors, the net investment in the lease includes the estimated residual value whether it is guaranteed or not, or the BPO amount. Under a manufacturer/dealer or sales-type lease, both the sale and cost of goods sold amounts are reduced by any unguaranteed residual values

12. Account for and report operating leases by a lessor. The lessor records the lease payments received from the lessee as rental income in the period covered by the lease payment. Because the leased asset remains on the lessor’s books, the lessor records depreciation expense. Separate disclosure is required of the cost and accumulated amortization of property held for leasing purposes, and the amount of rental income earned.

13. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Under the classification approach, ASPE and IFRS 16 have substantially the same requirements for lessors. Different terminology is used and the classification requirements that differentiate between a capital/finance lease and an operating lease under IFRS are based more on principles and judgement than ASPE. Under IFRS 16 a contract-based or right-of-use approach is used by the lessee

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

14. Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. A sale and leaseback is accounted for by the lessee as if the two transactions were related. If the transfer of the asset does not meet the criteria to be classified as a sale under IFRS 15, then no sale is recognized by the seller-lessee and no purchase is recognized by the buyer-lessor. On the other hand, when a seller-lessee leases back only a portion of the asset sold, then the right-of-use asset arising from the leaseback transaction would be measured at the proportion of the previous carrying amount of asset retained by the seller-lessee. For an operating lease under ASPE, the seller-lessee takes the deferred gain or loss into income in proportion to the rental payments made. For a lease meeting the capital lease criteria under ASPE, any profit or loss is deferred and amortized on the same basis as the depreciation of the leased asset. Because the capitalization of land by the lessee in a capital or finance lease that does not transfer title results in an unwanted and unintended effect on the lessee’s financial statements, the portion of such leases that relates to land is accounted for as an operating lease. If the relative value of the land is minor, however, the minimum lease payments are fully capitalized as a building.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE Answer b d b c c a d c a d c d b b c d d b a c c b c c c a c d a c c a c d a a d c a a b d b b

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.

Description Why accounting for leases is controversial Who is accounting for leases important to? Essential element of a lease agreement Identification of executory costs Calculating executory costs Advantages of leasing Current standards in lease accounting Types of lessor companies Journal entries for Capital/Finance leases by the lessor Variables in deciding rate of return Calculate minimum annual lease payment Calculate total annual lease payment Calculate lease payment by lessor Calculate lease payment return ASPE capitalization criteria Components of minimum lease payments Interest/discount rate used by lessee ASPE capitalization criteria IFRS 16 finance lease exclusions Identification of lease type for lessee Identification of lease type for lessee Identification of lease type for lessee Calculate the PV of the lease payments Identify incorrect statement Lessee accounting for a capital (finance) lease Depreciation of a leased asset by lessee Items included in lease payments Lease liability amortization Determine reduction of lease obligation for lessee Calculate interest expense and depreciation expense for lessee Calculate depreciation expense for lessee Calculate depreciation and interest expense for lessee Calculate reduction of lease obligation for lessee Calculate interest expense for lessee Calculate depreciation expense for lessee Calculate the lease liability of a lessee Calculate the lease liability of a lessee Calculate lease payment by lessor Calculate annual least payment by lessor Calculate lease payment by lessor Effect on accounting of capital lease vs. operating lease Capital versus operating leases Capital versus operating leases Expense recorded by lessee/operating lease 20-5

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b d d Answer c c a c c a d b a a a d a d a b a c a d a c a d b d c b b d a d b c d d a c b b b a d

45. 46. 47. No. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. *81. *82. *83. *84. *85. *86. *87. *88. *89. *90.

Calculate rent expense Calculate rent expense with inducement Calculate operating lease expense Description Calculate operating lease income/expense Disclosing obligations under leases Right-of-use lease disclosures Minimum lease payment disclosure Objective of accounting for direct financing leases by lessor Sales-type lease Financing-type lease Financing-type lease interest income Financing-type lease receivable Identification of lease type for lessor Identification of lease type for lessor Components of gross investment in lease Recognition of unearned interest income Lease receivable Unearned interest income Calculate gross profit for lessor Calculate interest income for lessor Calculate gross profit for lessor Calculate interest income for lessor Calculate lease receivable Calculate income realized by lessor Accounting for a sales-type lease (manufacturer or dealer lease) Sales-type or Manufacturer/Dealer leases Sales-type of Manufacture/Dealer leases Direct/Indirect costs for Sales-type or Manufacturer/Dealer leases Accounting for initial direct costs Operating leases under ASPE Operating leases under IFRS 16 Operating leases under IFRS 16 Revenues and expenses recorded by lessor/operating lease Calculate income before taxes from operating lease. Lease classification – ASPE vs IFRS 16 Discount rate used – ASPE vs IFRS 16 Gain/loss recognition in a sale-leaseback Sale-leaseback transactions Reporting gain on a sale-leaseback Classification of lease of land Classification of lease of land Rent expense with sale-leaseback Accounting for deferred profit in a sale-leaseback Determine interest rate implicit in lease payments Calculate lease-related expenses recognized by lessee Determine long-term lease obligation for lessee 20-6

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*91.

Lease-related income in sale-leaseback

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Item E20-92 E20-93 E20-94 E20-95 E20-96 E20-97 E20-98 E20-99 E20-100 E20-101 E20-102 E20-103 E20-104 E20-105 E20-106 E20-107 E20-108 E20-109 E20-110 E20-111 E20-112 *E20-113 *E20-114

Description Types of lessors IFRS leases and how to account for them Initial direct costs and rental amounts Calculate lease payment by lessor Lessor accounting—sales-type lease Lease criteria under IFRS versus ASPE Bargain purchase option Discount rates Classification approach vs. contract-based approach Guaranteed versus unguaranteed residual values Capital lease amortization and journal entries Initial measurement of right-of-use asset and lease liability Difference between capital and operating leases under ASPE Operating lease calculations IFRS additional disclosures Risks and benefits of ownership Recording a Manufacturer/Dealer lease by the lessor Calculation of lease amounts for lessors for Manufacturer/Dealer leases with unguaranteed residuals Calculation of lease amounts for lessors for Manufacturer/Dealer leases with guaranteed residuals Operating lease journal entries for the lessor Differences between ASPE and IFRS 16 Lessee and lessor accounting (sale-leaseback) Lessee and lessor accounting (sale-leaseback)

PROBLEMS Item P20-115 P20-116 P20-117 P20-118 P20-119 P20-120 P20-121 *P20-122

Description Lessee accounting—capital lease ASPE Lessee accounting—capital lease ASPE Lessee accounting – IFRS Lease accounting – IFRS Lease accounting—Lessee and Lessor—IFRS Manufacturer/Dealer or sales-type lease versus financing-type lease Lessor accounting—lease with IFRS criteria Sale and leaseback

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. Why has accounting for leases been controversial? a) Leasing is uncommon. b) Companies have structured leases in a way that the lease liabilities remain “off-balance sheet”. c) All leases are structured the same way and treated the same way. d) Most leases are immaterial. Answer: b Difficulty: Easy Learning Objective: Understand the importance of leases from a business perspective. Section Reference: Importance of Leases from a Business Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

2. Accounting for leases is important to all the following statements users except for a) investors. b) leasing companies. c) financial institutions. d) companies who purchase assets outright. Answer: d Difficulty: Easy Learning Objective: Understand the importance of leases from a business perspective. Section Reference: Importance of Leases from a Business Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

3. An essential element in a lease agreement is that the a) lessee transfers less than the total interest in the property. b) lessor transfers less than the total interest in the property. c) lease must contain a bargain purchase option. d) rental (lease) payments must be constant for the duration of the lease. Answer: b Difficulty: Easy Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment 20-9 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

4. Executory costs include a) maintenance, interest and property taxes. b) interest, property taxes and depreciation. c) insurance, maintenance and property taxes. d) maintenance, insurance and income taxes. Answer: c Difficulty: Easy Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. Company A is leasing equipment from Company B. Company B has quoted a total payment of $50,000 a month, which includes $2,000 a month for ongoing maintenance that will be provided by Company B. What is the executory cost of this transaction? a) $50,000 b) $48,000 c) $2,000 d) $22,000 Answer: c Difficulty: Medium Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

6. Which of the following is NOT a potential advantage of leasing? a) no tax advantages for the lessor b) cheaper financing c) 100% financing at fixed rates d) protection against obsolescence

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Easy Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

7. Which of the following best describes current standards in accounting for leases under IFRS? a) Leases are not capitalized. b) Leases similar to instalment purchases are capitalized. c) Only long-term leases are capitalized. d) All leases are capitalized, unless the lease is considered a low value lease. Answer: d Difficulty: Easy Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

8. In Canada, lessors are usually these following types of companies, except for a) manufacturer finance companies. b) independent finance companies. c) crown financings corporations. d) traditional financial institutions. Answer: c Difficulty: Easy Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

9. The journal entries for a capitalized lease for the lessee include entries for all except a) rent expense. 20-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) setting up the lease asset and liability. c) depreciation of the asset. d) interest paid on the lease. Answer: a Difficulty: Easy Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

10. What is NOT a key variable considered in deciding on the rate of return? a) the lessee’s credit standing b) the length of the lease c) the status of the residual value (guaranteed or unguaranteed) d) the type of asset being leased Answer: d Difficulty: Easy Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

11. On January 1, 2023, Jeckyll Ltd. signs an 8-year non-cancellable lease agreement to lease a storage building from Hyde Inc. Hyde is in the business of leasing/selling property. Collectability of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs). Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement: 1. The agreement requires equal payments at the end of each year. 2. At January 1, 2023, the fair value of the building is $1,350,000 and Hyde’s book value is $1,125,000. 3. The building has an estimated economic life of 8 years, with no residual value. Jeckyll uses straight-line depreciation for all its depreciable assets. 4. At the termination of the lease, title to the building will transfer to the lessee. 5. Jeckyll’s incremental borrowing rate is 10%. Hyde Inc. set the annual rental to ensure a 9% rate of return. The lessor’s implicit rate is known to Jeckyll. 6. The yearly lease payment includes $4,500 executory costs related to taxes on the property. Rounded to the nearest dollar, the amount of the minimum annual lease payment is a) $203,252. 20-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) $239,402. c) $243,902. d) $248,402. Answer: c Difficulty: Medium Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,350,000 ÷ 5.535 = $243,902 (PV of Ordinary Annuity Table)

12. On January 1, 2023, Jeckyll Ltd. signs an 8-year non-cancellable lease agreement to lease a storage building from Hyde Inc. Hyde is in the business of leasing/selling property. Collectability of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs). Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement: 1. The agreement requires equal payments at the end of each year. 2. At January 1, 2023, the fair value of the building is $1,350,000 and Hyde’s book value is $1,125,000. 3. The building has an estimated economic life of 8 years, with no residual value. Jeckyll uses straight-line depreciation for all its depreciable assets. 4. At the termination of the lease, title to the building will transfer to the lessee. 5. Jeckyll’s incremental borrowing rate is 10%. Hyde Inc. set the annual rental to ensure a 9% rate of return. The lessor’s implicit rate is known to Jeckyll. 6. The yearly lease payment includes $4,500 executory costs related to taxes on the property. Rounded to the nearest dollar, the amount of the total annual lease payment is a) $203,252. b) $239,402. c) $243,902. d) $248,402. Answer: d Difficulty: Medium Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $243,902 + $4,500 = $248,402

13. Assume Red Corp. (a company reporting under IFRS) wants to earn an 4% return on its investment 20-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

of $600,000 in an asset that is to be leased to Blue Corp. for ten years with an annual rental due in advance each year. How much should Red charge for annual rental assuming there is no purchase option that is reasonably certain to be exercised by Blue Corp.? a) $172,073 b) $71,130 c) $73,974 d) $189,274 Answer: b Difficulty: Medium Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $600,000 ÷ 8.4353 = $71,130 (PV of an Annuity Due Table)

14. Assume Red Corp. (a company reporting under IFRS) charges rent of $71,130 annually to Blue Corp. for the use of its asset. Red invested $600,000 in the asset that is to be leased to Blue Corp. for ten years with the annual rental due at the beginning of each year. Blue’s incremental borrowing rate is 6%. Assuming there is no purchase option that is reasonably certain to be exercised by Blue Corp, what is Red’s rate of implicit return on the investment? a) 3.22% b) 4.0% c) 5.5% d) 6.0% Answer: b Difficulty: Medium Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: BGN FV 0, PMT –71,130, N 10, PV 600,000, I/Y 4.0%

15. Which of the following is a correct statement regarding one of the ASPE capitalization criteria? a) The lease transfers ownership of the property to the lessor. b) The lease must contain a bargain purchase option. c) The lease term is 75% or more of the leased property’s estimated economic life. d) The fair value of the minimum lease payments is equal to 90% or more of the present value of the leased asset.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

16. For a lessee, the minimum lease payments may include a) the minimum rental payments and a guaranteed residual value only. b) the minimum rental payments and a bargain purchase option only. c) a bargain purchase option and a guaranteed residual value. d) the minimum rental payments, a bargain purchase option, and a guaranteed residual value. Answer: d Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

17. In calculating the present value of the minimum lease payments, IFRS requires the lessee should a) use its incremental borrowing rate in all cases. b) use either its incremental borrowing rate or the interest rate implicit in the lease, whichever is higher. c) use either its incremental borrowing rate or the interest rate implicit in the lease, whichever is lower. d) use the interest rate implicit in the lease whenever this is reasonably determinable, otherwise use the lessee’s incremental borrowing rate. Answer: d Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting 20-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

18. Which of the following is NOT a criteria to determine a capital lease under ASPE? a) There is a bargain purchase option included in the lease. b) The implicit interest rate in the lease is greater than the incremental borrowing rate. c) The lease term is 75% or more of the leased property’s economic life. d) The present value of the minimum lease payments is equal to 90% or more of the fair value of the leased asset. Answer: b Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

19. What type of lease may be EXCLUDED from being recognized as a capitalized lease under IFRS 16? a) low value b) vehicle leases c) significant value leases d) leases including bargain purchase options Answer: a Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

20. Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 85% of the estimated economic life of the leased property. Using ASPE criteria, how should the lessee classify these leases? Lease A Lease B a) Operating lease Capital lease 20-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c) d)

Operating lease Capital lease Capital lease

Operating lease Capital lease Operating lease

Answer: c Difficulty: Medium Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

21. On January 1, 2023, Dionne Ltd. signs a 10-year non-cancellable lease agreement to lease a storage building from Seline Inc. Seline is in the business of leasing/selling property. Collectability of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs). Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement: 1. The agreement requires equal payments at the end of each year. 2. At January 1, 2023, the fair value of the building is $900,000 and Seline’s book value is $750,000. 3. The building has an estimated economic life of 10 years, with no residual value. Dionne uses straight-line depreciation for all its depreciable assets. 4. At the termination of the lease, title to the building will transfer to the lessee. 5. Dionne's incremental borrowing rate is 11%. Seline Inc. set the annual rental to ensure a 10% rate of return. The lessor’s implicit rate is known to Dionne. 6. The yearly lease payment includes $3,000 executory costs related to taxes on the property. From the lessee's viewpoint, what type of lease is this? a) sales-type lease b) sale-leaseback c) capital lease d) operating lease Answer: c Difficulty: Medium Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

22. On January 1, 2023, Fern Corp. enters into an agreement with Nicki Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1. The term of the non-cancellable lease is three years with no renewal option. Payments of $543,244 are due on December 31 of each year. 2. The fair value of the machine on January 1, 2023, is $1,400,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3. Fern depreciates all its machinery on a straight-line basis. 4. Fern’s incremental borrowing rate is 10%. Fern does not have knowledge of the 8% implicit rate used by Nicki. 5. Immediately after signing the lease, Nicki discovers that Fern is the defendant in a lawsuit that is sufficiently material to make collectability of future lease payments doubtful. From Fern’s viewpoint, what type of lease is this? a) operating lease b) finance lease c) manufacturer or dealer lease d) other finance lease Answer: b Difficulty: Medium Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $543,244 × 2.48685 = $1,350,966; $1,350,966 / $1,400,000 = 96% > 90%

23. On January 1, 2023, Fern Corp. enters into an agreement with Nicki Rentals Inc. to lease a machine from Nicki Rentals. Both corporations adhere to ASPE. The following data relate to the agreement: 1. The term of the non-cancellable lease is three years with no renewal option. Payments of $543,244 are due on December 31 of each year. 2. The fair value of the machine on January 1, 2023, is $1,600,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3. Fern depreciates all its machinery on a straight-line basis. 4. Fern’s incremental borrowing rate is 10%. Fern does not have knowledge of the 8% implicit rate used by Nicki. From Fern’s perspective, what is the present value of the lease payments? (Round to the nearest whole number.) a) $1,399 933 b) $1,512,011 c) $1,350,996 20-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) $1,486,043 Answer: c Difficulty: Medium Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $543,244 × 2.48685 = $1,350,966 24. Regarding a basic capital (finance) lease for a lessee, which of the following statements is INCORRECT? a) The lessee records the leased asset at the lower of the minimum lease payments and the fair value of the asset at the lease’s inception. b) The lessee accounts for the lease as if an asset is purchased and a long-term obligation is entered into. c) The lessor uses the lease as a source of funding. d) The lessee uses the lease as a source of funding. Answer: c Difficulty: Easy Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

25. When a lessee is accounting for a capital (finance) lease a) a guaranteed residual value is excluded from the “minimum lease payments.” b) an unguaranteed residual value is included in the “minimum lease payments.” c) a guaranteed residual value is basically an additional lease payment due at the end of the lease. d) the present value of any guaranteed residual is deducted from the leased asset cost in determining the depreciable amount. Answer: c Difficulty: Easy Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. 20-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

26. In calculating depreciation of a leased asset, the lessee should subtract a(n) a) guaranteed residual value and depreciate over the term of the lease. b) unguaranteed residual value and depreciate over the term of the lease. c) guaranteed residual value and depreciate over the economic life of the asset. d) unguaranteed residual value and depreciate over the economic life of the asset. Answer: a Difficulty: Easy Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

27. Which item is NOT included in amount of the lease payment under IFRS 16? a) guaranteed residual values b) renewal or purchase options c) executory costs d) contingent rentals Answer: c Difficulty: Easy Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

28. The lease liability under IFRS 16 is amortized using a) the straight-line amortization method. b) the discounted amortization method. c) the present value interest method. d) the effect interest method. Answer: d 20-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

29. A lessee reported a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal a) the current liability shown for the lease at the end of year 1. b) the current liability shown for the lease at the end of year 2. c) the reduction of the lease obligation in year 1. d) one-tenth of the original lease liability. Answer: a Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

30. On January 1, 2023, X-Man Corp. signed a ten-year non-cancellable lease for new machinery. The terms of the lease called for X-Man to make annual payments of $100,000 at the end of each year for ten years, with title to pass to X-Man at the end of the lease period. X-Man accordingly accounted for this lease transaction as a finance lease. The machinery has an estimated useful life of 15 years and no residual value. X-Man uses straight-line depreciation for all its property, plant and equipment. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. It was also determined that the fair value of the machinery on January 1, 2023 was $674,000. With respect to this lease, for the year ending December 31, 2023, X-Man should report (rounded to the nearest dollar) a) lease expense of $100,000, and depreciation expense of $44,734. b) interest expense of $53,681 and depreciation expense of $67,101. c) interest expense of $53,681 and depreciation expense of $44,734. d) interest expense of $53,920 and depreciation expense of $44,933. Answer: c Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. 20-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $671,008 × .08 = $53,681; $671,008 ÷ 15 = $44,734

31. On January 1, 2023, Jeckyll Ltd. signs an 8-year non-cancellable lease agreement to lease a storage building from Hyde Inc. Hyde is in the business of leasing/selling property. Collectability of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs). Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement: 1. The agreement requires equal payments at the end of each year. 2. At January 1, 2023, the fair value of the building is $1,350,000 and Hyde’s book value is $1,125,000. 3. The building has an estimated economic life of 8 years, with no residual value. Jeckyll uses straight-line depreciation for all its depreciable assets. 4. At the termination of the lease, title to the building will transfer to the lessee. 5. Jeckyll’s incremental borrowing rate is 10%. Hyde Inc. set the annual rental to ensure a 9% rate of return. The lessor’s implicit rate is known to Jeckyll. 6. The yearly lease payment includes $4,500 executory costs related to taxes on the property. Rounded to the nearest dollar, how much depreciation expense would Dionne record on this asset for calendar 2023? a) $0 b) $108,000 c) $168,750 d) $140,625 Answer: c Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,350,000 ÷ 8 = $168,750

32. On July 1, 2023, Justin Ltd., a dealer in machinery and equipment, leased equipment to Trudeau Inc. The lease is for ten years, and at the end of the lease period, title will pass to Trudeau. Justin requires ten equal annual payments of $62,100 on July 1 of each year, and Trudeau made the first payment on July 1, 2023. Justin had purchased the equipment for $390,000 on January 1, 2023, and established a selling price of $500,000 (which was fair value at July 1, 2023). Assume that, at July 1, 2023, the present value of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $450,000. The useful life of the equipment is 12 years. 20-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

For the year ended December 31, 2023, and assuming that Trudeau uses straight-line depreciation, how much depreciation and interest expense should Trudeau record? a) $18,750 and $15,516 b) $18,750 and $24,840 c) $22,500 and $15,516 d) $22,500 and $24,840 Answer: a Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $450,000 / 12 x 50% = $18,750 ($450,000 – $62,100) × .08 X 6 / 12 = $15,516

33. On January 1, 2023, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1. The term of the non-cancellable lease is three years with no renewal option. Payments of $271,622 are due on December 31 of each year. 2. The fair value of the machine on January 1, 2023, is $700,640. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3. Marlene depreciates all its machinery on a straight-line basis. 4. Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich. 5. Immediately after signing the lease, Dietrich discovers that Marlene is the defendant in a lawsuit that is sufficiently material to make collectability of future lease payments doubtful. Assume the present value of the lease payments is $700,000 at January 1, 2023. If Marlene accounts for this lease as a finance lease, what is the amount of the reduction in the lease obligation in calendar 2024? (Round to the nearest dollar.) a) $201,622 b) $215,622 c) $221,784 d) $232,873 Answer: c Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting 20-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: $700,000 – [$271,622 – ($700,000 × .1)] = $498,378 $271,622 – ($498,378 × .1) = $221,784

34. On January 2, 2023, Cruise Ltd. signed a ten-year non-cancellable lease for a heavy-duty drill press. The lease required annual payments of $52,500, starting December 31, 2023, with title passing to Cruise at the end of the lease. Cruise is accounting for this lease as a capital (finance) lease. The drill press has an estimated useful life of 20 years, with no residual value. Cruise uses straight-line depreciation for all its plant assets. The lease payments were determined to have a present value of $352,279, based on an implicit interest rate of 8%. On its 2023 income statement, how much interest expense should Cruise report in connection with this lease? a) $0 b) $14,091 c) $42,000 d) $28,182 Answer: d Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $352,279 × .08 = $28,182

35. On January 2, 2023, Cruise Ltd. signed a ten-year non-cancellable lease for a heavy-duty drill press. The lease required annual payments of $52,500, starting December 31, 2023, with title passing to Cruise at the end of the lease. Cruise is accounting for this lease as a capital (finance) lease. The drill press has an estimated useful life of 20 years, with no residual value. Cruise uses straight-line depreciation for all its plant assets. The lease payments were determined to have a present value of $352,279, based on an implicit interest rate of 8%. On its 2023 income statement, how much depreciation expense should Cambridge report in connection with this lease? a) $17,614 b) $10,500 c) $21,000 d) $35,228 Answer: a Difficulty: Medium 20-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $352,279 ÷ 20 = $17,614

36. On December 31, 2023, Eastern Inc. leased machinery with a fair value of $420,000 from Northern Rentals. The agreement is a six-year non-cancellable lease requiring annual payments of $80,000 beginning December 31, 2023. The lease is appropriately accounted for by Eastern as a finance lease. Eastern’s incremental borrowing rate is 11%; however, it also knows that the interest rate implicit in the lease payments is 10%. Eastern adheres to IFRS. On its December 31, 2023 statement of financial position, Eastern should report a lease liability of (rounded to the nearest dollar) a) $303,264. b) $340,000. c) $375,672. d) $383,264. Answer: a Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases Learning Objective: Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. Section Reference: Presentation and Disclosure CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($80,000 × 4.7908) – $80,000 = $303,264

37. On December 31, 2022, Northern Skies Corp. leased a machine from Eastern Star Ltd. for a fiveyear period. Annual lease payments are $315,000 (including $15,000 annual executory costs), due on December 31 each year. The first payment was made on December 31, 2022, and the second payment on December 31, 2023. The appropriate interest rate for this type of lease is 10%. The present value of the minimum lease payments at the inception of the lease (before the first payment) was $1,251,000. The lease is being accounted for as a finance lease by Northern Skies. On its December 31, 2023 statement of financial position, Northern Skies should report a lease liability of a) $951,000. b) $936,000. c) $855,900. d) $746,100. 20-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases Learning Objective: Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. Section Reference: Presentation and Disclosure CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,251,000 – $300,000 = $951,000 (2022) $951,000 – [$300,000 – ($951,000 × .10)] = $746,100 (2023)

38. Frank Corporation has an asset with a fair market value of $400,000 that it wants to lease. Frank’s wants to recover its net investment in the leased asset and earn a 5% return. The asset will revert back to Frank’s at the end of a 5-year lease term. If Frank’s charges rent annually at the beginning of the year, what should amount should the annual rent be (rounded to whole dollars)? a) $20,000 b) $21,997 c) $87,989 d) $92,400 Answer: c Difficulty: Medium Learning Objective: Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). Section Reference: Accounting for Residual Values and Purchase Options in a Leased Asset CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $400,000 ÷ 4.5460 = $87,989 (PV of an Annuity Due Table)

39. Frank Corporation has an asset that cost $425,000 with a fair market value of $400,000 that it wants to lease. Frank wants to recover its net investment in the leased asset and earn a 5% return. The asset will revert back to Frank’s at the end of a 5-year lease term. What is the difference in the annual payment Frank would receive if Frank charged rent at the end of the year rather than at the beginning of the year? (Round to whole dollars.) a) $4,400 more annually b) $4,400 less annually c) $4,675 more annually d) $4,675 less annually 20-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Medium Learning Objective: Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). Section Reference: Accounting for Residual Values and Purchase Options in a Leased Asset CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $400,000 ÷ 4.5460 = $87,989 (PV of an Annuity Due Table); $400,000 ÷4.3295 = $92,389; $92,389 – $87,989 = $4,400 more

40. Rabbit Inc. has an asset with a fair market value of $450,000 that it wants to lease. Rabbit’s wants to recover its net investment in the leased asset and earn an 8%. The asset will revert back to Rabbit’s at the end of a 5-year lease term and it is expected that the residual value of the asset will be $20,000 at the end of the lease. If Rabbit wants to charge rent semi-annually starting at the beginning of the lease, what amount should the lease payments be (rounded to whole dollars)? a) $51,745 b) $62,096 c) $101,200 d) $104,367 Answer: a Difficulty: Medium Learning Objective: Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). Section Reference: Accounting for Residual Values and Purchase Options in a Leased Asset CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $450,000 – ($20,000 x 0.67556) = $436,489; $436,489 ÷ 8.43533 = $51,745 (PV of $table and PV of an Annuity Due Table)

41. In the earlier years of a lease, from the lessee's perspective, accounting for a leased asset as a) a capital lease will enable the lessee to report higher income in the earlier years, compared to accounting for it as an operating lease. b) a capital lease will cause debt to increase, compared to accounting for it as an operating lease. c) an operating lease will cause income to decrease in the earlier years, compared to accounting for it as a finance lease. d) an operating lease will cause debt to increase, compared to accounting for it as a finance lease. Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting for lessees. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

42. Which statement is CORRECT in comparing capital leases to operating leases? a) A capital lease will have a higher asset turnover compared to an operating lease. b) A capital lease will increase the return on total assets compared to an operating lease. c) A capital lease will have a lower debt-to-equity ratio compared to an operating lease. d) A capital lease will have a higher debt-to-equity ratio compared to an operating lease. Answer: d Difficulty: Easy Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

43. A capital lease, as compared to an operating lease, has a higher likelihood of which of the following? a) default payment b) violation of loan covenants c) stronger ratios d) higher overall expenses Answer: b Difficulty: Easy Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

44. On January 1, 2023, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1. The term of the non-cancellable lease is three years with no renewal option. Payments of $271,622 are due on December 31 of each year. 2. The fair value of the machine on January 1, 2023, is $700,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3. Marlene depreciates all its machinery on a straight-line basis. 4. Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich. 5. Immediately after signing the lease, Dietrich discovers that Marlene is the defendant in a lawsuit that is sufficiently material to make collectability of future lease payments doubtful. If Marlene accounts for the lease as an operating lease, what expense(s) will be reported in calendar 2023 in relation to this lease? a) Depreciation Expense b) Rent Expense c) Interest Expense d) Depreciation Expense and Interest Expense Answer: b Difficulty: Medium Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

45. On December 1, 2023, Greens Corp. leased office space for 10 years at a monthly rental of $40,000, under an operating lease. On that date Greens paid the landlord the following amounts: Rent deposit..................................................... $40,000 First month's rent ............................................ 40,000 Last month's rent ............................................ 40,000 Installation of new walls and offices .............. 150,000 $270,000 Greens debited the entire $270,000 payment to Prepaid Rent. How much should Greens Corp recognize as rent expense for the year ended December 31, 2023? a) $40,000 b) $41,250 c) $27,000 d) $154,000 Answer: b 20-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

46. Laurel Ltd. leased an office building to Hardy Inc. for a three-year, non-renewable term. This was properly classified as an operating lease by both parties. The monthly rental is set at $12,000 per month. However, as an added inducement, Laurel agreed to grant Hardy a four-month rent-free period at the beginning of the lease, and a further two-month rent-free period at the end of the lease. How much rent expense should Hardy record each month during the three-year period? a) $12,000 b) $11,250 c) $10,667 d) $10,000 Answer: d Difficulty: Medium Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($12,000 x 30) ÷ 36 = $10,000

47. On May 1, 2023, Charles Corp. leased equipment to Darwin Inc. for one year under an operating lease. Instead of leasing it, Darwin could have bought the equipment from Charles for $800,000 cash. At this time, Charles's accounting records showed a book value for the equipment of $700,000. Depreciation on the equipment in 2023 was $90,000. During 2023, Darwin paid $22,500 per month rent to Charles for the 8-month period, and Charles incurred maintenance and other related costs under the terms of the lease of $16,000. The pre-tax expense reported by Darwin from this lease for the year ended December 31, 2023, should be a) $74,000. b) $90,000. c) $164,000. d) $180,000.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: d Difficulty: Medium Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $22,500 x 8 = $180,000

48. On July 1, 2022, Huey Corp. leased heavy equipment to Duey Inc. for one year, at $60,000 a month. Duey returned the equipment on June 30, 2023, and the next day, Huey Corp. leased this equipment to Luey Ltd. for three years, at $75,000 a month. The original cost of the equipment was $3,200,000. The equipment, which has been continually on lease since July 1, 2020, is being depreciated on a straight-line basis over ten years with no residual value. Assuming that both the lease to Duey and the lease to Luey are appropriately recorded as operating leases for accounting purposes, how much net income (loss) before income taxes that each company would record as a result of the above facts for the year ended December 31, 2023? Huey Duey Luey a) $810,000 $(360,000) $(450,000) b) $450,000 $(450,000) $(360,000) c) $490,000 $(360,000) $(450,000) d) $490,000 $(360,000) $(900,000) Answer: c Difficulty: Medium Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Huey: ($60,000 × 6) + ($75,000 × 6) – ($3,200,000 ÷ 10) = $490,000 Duey: ($60,000) × 6 = $(360,000) Luey: ($75,000) × 6 = $(450,000)

49. Obligations under leases should be disclosed as a) all current liabilities. b) all noncurrent liabilities. 20-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) the current portion in current liabilities and the remainder in noncurrent liabilities. d) deferred credits. Answer: c Difficulty: Easy Learning Objective: Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. Section Reference: Presentation and Disclosure CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

50. Under IFRS 16, the right-of-use lease requires similar disclosure to which statement of financial position items? a) long-term liabilities b) common shares c) investments d) interest payable Answer: a Difficulty: Easy Learning Objective: Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. Section Reference: Presentation and Disclosure CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

51. How many years do companies have to disclose the minimum lease payments in the leases note disclosure? a) 1 b) 2 c) 5 d) 10 Answer: c Difficulty: Easy Learning Objective: Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. Section Reference: Presentation and Disclosure CPA: Financial Reporting Bloomcode: Comprehension 20-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

52. For companies engaged in direct financing leases (ASPE) or finance leases (IFRS), a) they are generally manufacturers or retail stores. b) their profits are derived from leasing their inventory at a profit. c) their objective is to earn interest income on the financing arrangement with the lessee. d) such leases are frequently operating leases. Answer: c Difficulty: Easy Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

53. Under ASPE, a lease in which the lessor wants to include a profit in the rental amount as well as the asset cost is called a a) sales-type lease. b) manufacturer lease. c) direct financing lease. d) finance lease. Answer: a Difficulty: Easy Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

54. Under IFRS 16, a lease in which the lessor is involved in mostly financing operations, such as leasefinance companies is called a a) sales-type lease. b) manufacturer lease. c) direct financing lease. d) finance lease. Answer: d

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

55. A lease financing company will purchase an asset and then lease it to another entity in order to earn interest income. If an asset costs the financing company $500,000 (fair value), and the asset is leased out on January 1st, what is the interest income to be recognized at the end of the first year on December 31st if the financing company has an implicate rate of 6%? a) Can not be determined. b) $30,000 c) $500,000 d) The lease payments received in the first year. Answer: b Difficulty: Medium Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Since it’s the 1st year, FV of the asset $500,000 x 6% = $30,000

56. A lease financing company will purchase an asset and then lease it to another entity in order to earn interest income. If an asset costs the financing company $500,000 (fair value), and the asset is leased out on January 1st, at a lease payment of $9,500 per month for 60 months, what is the lease receivable that the financing company will record at the inception of the lease? a) $570,000 b) $500,000 c) $9,500 d) $114,000 Answer: a Difficulty: Medium Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Financial Reporting Bloomcode: Application 20-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: $9,500 x 60 = $570,000

57. On January 1, 2023, Dionne Ltd. signs a 10-year non-cancellable lease agreement to lease a storage building from Seline Inc. Seline is in the business of leasing/selling property. Collectability of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs). Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement: 1. The agreement requires equal payments at the end of each year. 2. At January 1, 2023, the fair value of the building is $900,000 and Seline’s book value is $750,000. 3. The building has an estimated economic life of 10 years, with no residual value. Dionne uses straight-line depreciation for all its depreciable assets. 4. At the termination of the lease, title to the building will transfer to the lessee. 5. Dionne's incremental borrowing rate is 11%. Seline Inc. set the annual rental to ensure a 10% rate of return. The lessor’s implicit rate is known to Dionne. 6. The yearly lease payment includes $3,000 executory costs related to taxes on the property. From the lessor's viewpoint, what type of lease is this? a) sales-type lease b) sale-leaseback c) direct financing lease d) operating lease Answer: a Difficulty: Medium Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: FV exceeds cost (profit element)

58. On January 1, 2023, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1. The term of the non-cancellable lease is three years with no renewal option. Payments of $271,622 are due on December 31 of each year. 2. The fair value of the machine on January 1, 2023, is $700,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3. Marlene depreciates all its machinery on a straight-line basis. 4. Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich. 5. Immediately after signing the lease, Dietrich discovers that Marlene is the defendant in a lawsuit that is sufficiently material to make collectability of future lease payments doubtful. 20-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

From Dietrich’s viewpoint, what type of lease is this? a) operating lease b) finance lease c) manufacturer or dealer lease d) other finance lease Answer: a Difficulty: Medium Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Fails to meet all requirements for lessor

59. For a lessor, which of the following would NOT be included in the Gross Investment in Lease (Lease Receivable)? a) guaranteed residual value b) unguaranteed residual value c) bargain purchase option d) executory costs Answer: d Difficulty: Easy Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

60. In a lease that is appropriately recorded as a direct financing lease (ASPE) or finance lease (IFRS) by the lessor, the unearned interest income is a) amortized and taken into income over the lease term using the effective interest method. b) amortized and taken into income over the lease term using the straight-line method. c) taken into income at the inception of the lease. d) taken into income at the end of the lease. Answer: a Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type 20-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

61. For the lessor, what is included in the lease receivable account? a) the discounted lease payments less any guaranteed or unguaranteed residual value or any bargain purchase option b) the discounted lease payments plus any guaranteed or unguaranteed residual value or any bargain purchase option c) the undiscounted lease payments minus any guaranteed or unguaranteed residual value or any bargain purchase option d) the undiscounted lease payments plus any guaranteed or unguaranteed residual value or any bargain purchase option Answer: d Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

62. For the lessor, what is included in the Unearned Interest Income account? a) the difference between the lease receivable and the fair value of the leased property b) the lease receivable plus the fair value of the leased property c) the difference between the lease receivable and the interest expected to be earned d) the lease receivable plus the interest expected to be earned Answer: a Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

63. On July 1, 2023, Justin Ltd., a dealer in machinery and equipment, leased equipment to Trudeau Inc. The lease is for ten years, and at the end of the lease period, title will pass to Trudeau. Justin 20-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

requires ten equal annual payments of $62,100 on July 1 of each year, and Trudeau made the first payment on July 1, 2023. Justin had purchased the equipment for $390,000 on January 1, 2023, and established a selling price of $500,000 (which was fair value at July 1, 2023). Assume that, at July 1, 2023, the present value of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $450,000. The useful life of the equipment is 12 years. For the year ended December 31, 2023, what is the amount of gross profit that Justin should record regarding this lease? a) $0 b) $60,000 c) $110,000 d) $231,000 Answer: b Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $450,000 – $390,000 = $60,000

64. On July 1, 2023, Justin Ltd., a dealer in machinery and equipment, leased equipment to Trudeau Inc. The lease is for ten years, and at the end of the lease period, title will pass to Trudeau. Justin requires ten equal annual payments of $62,100 on July 1 of each year, and Trudeau made the first payment on July 1, 2023. Justin had purchased the equipment for $390,000 on January 1, 2023, and established a selling price of $500,000 (which was fair value at July 1, 2023). Assume that, at July 1, 2023, the present value of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $450,000. The useful life of the equipment is 12 years. For the year ended December 31, 2023, what is the amount of interest income that Justin should record regarding this lease? a) $15,516 b) $13,116 c) $17,516 d) $24,840 Answer: a Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 20-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: ($450,000 – $62,100) × .08 X 6 / 12 = $15,516

65. On July 1, 2023, Nickel Ltd. leases equipment from Dime Corp., under an eight-year capital (finance) lease. Equal annual payments of $100,000 are required, payable on July 1 of each year. The first payment is made on July 1, 2023. The appropriate rate of interest for this lease is 9%, and title will transfer to Nickel at the end of the lease contract. The fair value of the equipment is $620,000 and the cost in Dime's accounting records is $550,000. The present value of the lease payments is $620,637. What is the amount of gross profit and interest income that Dime would record for the year ended December 31, 2023? a) $(637) b) $0 c) $70,000 d) $70,637 Answer: c Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $620,000 – $550,000 = $70,000

66. On July 1, 2023, Nickel Ltd. leases equipment from Dime Corp., under an eight-year capital (finance) lease. Equal annual payments of $100,000 are required, payable on July 1 of each year. The first payment is made on July 1, 2023. The appropriate rate of interest for this lease is 9%, and title will transfer to Nickel at the end of the lease contract. The fair value of the equipment is $620,000 and the cost in Dime's accounting records is $550,000. The present value of the lease payments is $620,637. What is the amount of gross profit and interest income that Dime would record for the year ended December 31, 2023? a) $23,400 b) $20,250 c) $36,000 d) $46,800 Answer: a Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application 20-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: ($620,000 – $100,000) × .09 X 6/12 = $23,400

67. On January 1, 2023, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1. The term of the non-cancellable lease is three years with no renewal option. Payments of $271,622 are due on December 31 of each year. 2. The fair value of the machine on January 1, 2023, is $700,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3. Marlene depreciates all its machinery on a straight-line basis. 4. Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich. If Dietrich records this lease as a finance lease, what amount would be recorded as Lease Receivable at the inception of the lease? a) $271,622 b) $675,483 c) $700,000 d) $814,866 Answer: d Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $271,622 × 3 = $814,866

68. Cary Corp. manufactures equipment for sale or lease. On December 31, 2023, Cary leased equipment to Grant Sales Inc. for five years, with ownership of the equipment being transferred to Grant at the end of the lease. Annual lease payments are $252,000 (including $12,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2023. Collectability of the remaining lease payments is reasonably assured, and there are no additional costs (other than executory costs) to be incurred by Cary. The normal sales price of the equipment (fair value) is $924,000, and Cary’s cost is $720,000. The present value of the lease payments is equal to the fair value of the equipment. For the year ended December 31, 2023, what amount of income should Cary report from this lease? a) $204,000 b) $264,000 c) $276,000 d) $396,000 20-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $924,000 – $720,000 = $204,000

69. For a sales-type lease (ASPE) or manufacturer or dealer lease (IFRS), a) the sales price includes the present value of the unguaranteed residual value. b) the present value of the guaranteed residual value is deducted to determine the cost of goods sold. c) the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d) cost of goods sold is not recognized. Answer: c Difficulty: Easy Learning Objective: Account for and report financing and manufacturer/dealer or sales-type leases, with guaranteed residual values or a purchase option, by a lessor. Section Reference: Accounting for Residual Values and Purchase Options in a Financing or Manufacturer/Dealer or Sales-Type Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

70. For a sales-type lease (ASPE) or manufacturer or dealer lease (IFRS), a) the sales price and cost of goods sold are only recognized for the portion of the asset that is sure to be realized. b) the sales price and cost of goods sold are recognized on the entire asset including unguaranteed residuals. c) the present value of the guaranteed residual value is deducted to determine the cost of goods sold. d) the present value of the guaranteed residual value is added to determine the cost of goods sold. Answer: a Difficulty: Easy Learning Objective: Account for and report financing and manufacturer/dealer or sales-type leases, with guaranteed residual values or a purchase option, by a lessor. Section Reference: Accounting for Residual Values and Purchase Options in a Financing or Manufacturer/Dealer or Sales-Type Lease CPA: Financial Reporting Bloomcode: Comprehension 20-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

71. Mord Inc. produces vehicles and considers itself in the business of manufacturing-type leases, in addition to simply selling the vehicle. If a vehicle that Mord sells retails for $50,000, is produced at a cost of $35,000, but is leased rather than sold, what is the amount of gross profit that is realized upon the sale of this vehicle. Assume that due to the residual, only 90% of the gross profit will be realized. a) $50,000 b) $35,000 c) $15,000 d) $13,500 Answer: d Difficulty: Medium Learning Objective: Account for and report financing and manufacturer/dealer or sales-type leases, with guaranteed residual values or a purchase option, by a lessor. Section Reference: Accounting for Residual Values and Purchase Options in a Financing or Manufacturer/Dealer or Sales-Type Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($50,000 – $35,000) x 90% = $13,500

72. For a sales-type lease (ASPE) or manufacturer or dealer lease (IFRS), a) direct costs are recognized over the term of the lease. b) direct costs are recognized as an expense in the year they are incurred. c) direct costs are treated identically under ASPE and IFRS. d) direct costs treatment does not apply the matching concept. Answer: b Difficulty: Easy Learning Objective: Account for and report financing and manufacturer/dealer or sales-type leases, with guaranteed residual values or a purchase option, by a lessor. Section Reference: Accounting for Residual Values and Purchase Options in a Financing or Manufacturer/Dealer or Sales-Type Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

73. Initial direct costs are a) costs incurred by a lessee that are directly associated with negotiating and arranging a lease. b) expensed in the year of incurrence by the lessor in a financing-type lease. c) spread over the term of a sales-type lease by the lessee. 20-42 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) deferred and allocated over the term of an operating lease in proportion to the amount of rental (lease) income that is recognized. Answer: d Difficulty: Easy Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

74. When is a lease recognized as an operating lease under ASPE? a) if it is of low value to the corporation b) if it is less than one year c) if it doesn’t meet the criteria of a capital lease d) if the company elects to record as an operating lease Answer: c Difficulty: Easy Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

75. When is a lease recognized as an operating lease under IFRS? a) if it is deemed so by the lessor b) if it is less than one year c) if it doesn’t meet the criteria of an operating lease d) if the company elects to record as an operating lease Answer: b Difficulty: Easy Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

76 When is a lease recognized as an operating lease under IFRS? a) if it is deemed so by the lessor 20-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) if it is a small amount c) if it doesn’t meet the criteria of an operating lease d) if the company elects to record as an operating lease Answer: b Difficulty: Easy Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

77. On January 1, 2023, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement: 1. The term of the non-cancellable lease is three years with no renewal option. Payments of $271,622 are due on December 31 of each year. 2. The fair value of the machine on January 1, 2023, is $700,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease. 3. Marlene depreciates all its machinery on a straight-line basis. 4. Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich. 5. Immediately after signing the lease, Dietrich discovers that Marlene is the defendant in a lawsuit that is sufficiently material to make collectability of future lease payments doubtful. If Dietrich accounts for the lease as an operating lease, what revenue(s) and/or expense(s) will be reported in calendar 2023 in relation to this lease? a) Rental Revenue b) Interest Income c) Interest Expense and Depreciation Expense d) Rental Revenue and Depreciation Expense Answer: d Difficulty: Medium Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

78. On May 1, 2023, Charles Corp. leased equipment to Darwin Inc. for one year under an operating lease. Instead of leasing it, Darwin could have bought the equipment from Charles for $800,000 cash. At this time, Charles's accounting records showed a book value for the equipment of $700,000. Depreciation on the equipment in 2023 was $90,000. During 2023, Darwin paid $22,500 per month rent 20-44 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

to Charles for the 8-month period, and Charles incurred maintenance and other related costs under the terms of the lease of $16,000. The net income before income taxes reported by Charles from this lease for the year ended December 31, 2023, should be a) $74,000. b) $90,000. c) $164,000. d) $180,000. Answer: a Difficulty: Medium Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($22,500 x 8) – $16,000 – $90,000 = $74,000

79. Under ASPE, leases are either capital or an operating lease to a lessee; under IFRS 16, a) leases are treated the same as under ASPE. b) all leases are considered operating. c) all leases are considered capital. d) all leases are considered capital except for short-term leases and leases of low-value assets. Answer: d Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

80. Under IFRS 16, the lessee uses the rate implicit in the lease to calculate leases; under ASPE, a) the same treatment is used. b) the lower of the lessee’s incremental borrowing rate and the rate implicit in the lease is used. c) the higher of the lessee’s incremental borrowing rate and the rate implicit in the lease is used. d) the incremental borrowing rate is used. Answer: b Difficulty: Easy

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*81. If a corporation adhering to IFRS sells machinery at fair value and then leases it back (saleleaseback) as a finance lease, any gain on the sale should be a) recognized in the year of “sale.” b) recorded as other comprehensive income. c) deferred and amortized to income over the term of the lease. d) deferred and recognized as income at the end of the lease. Answer: c Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*82. A sale-leaseback transaction is a) a lease that has a profit component that is recognized as sales revenue. b) when a company buys an asset and then leases it to someone else other than the seller. c) a transaction in which a property owner sells a property to another party and, and at the same time leases a similar asset. d) a transaction in which a property owner sells a property to another party and, at the same time, leases the same asset back from the new owner. Answer: d Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*83. Madrigal Corp. sold its headquarters building at a gain, and simultaneously leased back the building from the buyer. The lease was reported as a capital (finance) lease. At the time of the sale, the 20-46 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

gain should be reported as a) operating income. b) other comprehensive income. c) a separate component of shareholders' equity. d) a deferred gain. Answer: d Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*84. Under ASPE, if land is the sole property being leased, and title does NOT transfer at the end of the lease, it should be accounted for as a(n) a) operating lease. b) capital lease. c) sales-type lease. d) direct-financing lease. Answer: a Difficulty: Easy Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*85. Under IFRS, if land is the sole property being leased, and title does transfer at the end of the lease, it should be accounted for as a(n) a) operating lease. b) capital lease. c) sales-type lease or financing lease. d) rental agreement. Answer: c Difficulty: Easy Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. 20-47 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*86. On June 30, 2023, Sharma Corp. sold equipment for its fair value of $300,000. The equipment had a book value of $500,000 and a remaining useful life of 10 years. The same day, Sharma leased back the equipment at $6,000 per month for 5 years with no option to renew the lease or repurchase the equipment. Sharma's equipment rent expense for this equipment for the year ended December 31, 2023, should be a) $72,000. b) $36,000. c) $30,000. d) $24,000. Answer: b Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $6,000 × 6 = $36,000

*87. On December 31, 2023, Lewis Ltd. sold a machine to Martin Inc. and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price ........................................................ $180,000 Book value of machine .................................... 165,000 Present value of reasonable lease rentals ($1,500 for 12 months @ 12%)................. 16,883 Machine’s estimated remaining useful life ..... 12 years On Lewis’s December 31, 2023 statement of financial position, the deferred profit from the sale of this machine should be reported as a) $17,000. b) $15,000. c) $2,000. d) $0. Answer: b Difficulty: Medium 20-48 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $180,000 – $165,000 = $15,000 *88. Ball Ltd. purchased land and constructed a service station, at a total cost of $450,000. On January 2, 2022, when construction was completed, Ball sold the service station and land to a major oil company for $500,000, and immediately leased it back from the oil company. Fair value of the land at the time of the sale was $50,000. The lease is a 10-year, non-cancellable lease. Ball uses straight-line amortization for its other assets. The economic life of the station is 15 years with zero residual value. Title to the property will revert back to Ball at the end of the lease. A partial amortization schedule for this lease follows: Payments Interest Amortization Balance Jan 02, 2022 $500,000.00 Dec 31, 2022 $81,372.66 $50,000.00 $31,372.66 468,627.34 Dec 31, 2023 81,372.66 46,862.74 34,509.92 434,117.42 Dec 31, 2024 81,372.66 43,411.74 37,960.92 396,156.50 What is the interest rate implicit in the amortization schedule presented above? a) 12% b) 10% c) 8% d) 6% Answer: b Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application Feedback: $50,000 ÷ $500,000 = 10% AACSB: Analytic

*89. Ball Ltd. purchased land and constructed a service station, at a total cost of $450,000. On January 2, 2022, when construction was completed, Ball sold the service station and land to a major oil company for $500,000, and immediately leased it back from the oil company. Fair value of the land at the time of the sale was $50,000. The lease is a 10-year, non-cancellable lease. Ball uses straight-line amortization for its other assets. The economic life of the station is 15 years with zero residual value. Title to the property will revert back to Ball at the end of the lease. Payments Interest Amortization Balance Jan 02, 2022 $500,000.00 20-49 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Dec 31, 2022 $81,372.66 $50,000.00 $31,372.66 468,627.34 Dec 31, 2023 81,372.66 46,862.74 34,509.92 434,117.42 Dec 31, 2024 81,372.66 43,411.74 37,960.92 396,156.50 The total lease-related expenses recognized by the lessee during 2023 are (rounded to the nearest dollar) a) $76,863. b) $80,000. c) $81,373. d) $91,863. Answer: a Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: [($500,000 – $50,000) ÷ 15] + $46,863 = $76,863

*90. Ball Ltd. purchased land and constructed a service station, at a total cost of $450,000. On January 2, 2022, when construction was completed, Ball sold the service station and land to a major oil company for $500,000, and immediately leased it back from the oil company. Fair value of the land at the time of the sale was $50,000. The lease is a 10-year, non-cancellable lease. Ball uses straight-line amortization for its other assets. The economic life of the station is 15 years with zero residual value. Title to the property will revert back to Ball at the end of the lease. Payments Interest Amortization Balance Jan 02, 2022 $500,000.00 Dec 31, 2022 $81,372.66 $50,000.00 $31,372.66 468,627.34 Dec 31, 2023 81,372.66 46,862.74 34,509.92 434,117.42 Dec 31, 2024 81,372.66 43,411.74 37,960.92 396,156.50 What is the amount of the lessee's obligation to the lessor after the December 31, 2022 payment? (Round to the nearest dollar.) a) $500,000 b) $468,627 c) $434,117 d) $396,157 Answer: d Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting 20-50 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic Feedback: $396,157 (See amortization table.)

*91. Ball Ltd. purchased land and constructed a service station, at a total cost of $450,000. On January 2, 2022, when construction was completed, Ball sold the service station and land to a major oil company for $500,000, and immediately leased it back from the oil company. Fair value of the land at the time of the sale was $50,000. The lease is a 10-year, non-cancellable lease. Ball uses straight-line amortization for its other assets. The economic life of the station is 15 years with zero residual value. Title to the property will revert back to Ball at the end of the lease. A partial amortization schedule for this lease follows: Payments Interest Amortization Balance Jan 02, 2022 $500,000.00 Dec 31, 2022 $81,372.66 $50,000.00 $31,372.66 468,627.34 Dec 31, 2023 81,372.66 46,862.74 34,509.92 434,117.42 Dec 31, 2024 81,372.66 43,411.74 37,960.92 396,156.50 The total lease-related income recognized by the lessee during 2023 is a) $0. b) $5,000. c) $3,333. d) $50,000. Answer: b Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($500,000 – $450,000) ÷ 10 = $5,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 20-92 Types of lessors Explain the difference between a manufacturer finance company and an independent finance company. Solution 20-92 A manufacturer finance company, also called a captive leasing company, is a subsidiary whose main business is to provide leasing services for a parent company. Examples are General Motors Acceptance Company of Canada (GMAC), which provides lease financing for General Motors dealers, and Chrysler Finance Service Canada, which provides lease financing for Chrysler dealers. An independent finance company, on the other hand, acts as financial intermediary by providing lease financing for a wide range of manufacturers, distributors and other dealers. The dealer will sell the customer the product(s) and then outsource the financing to an independent finance company. This is commonly seen in the construction industry. Difficulty: Easy Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 20-93 IFRS leases and how to account for them a) Under IFRS 16 what are leases classified as and how are they accounted for? b) What are the two exceptions to this standard? c) Provide an example of the journal entries used when accounting for a Capital lease for both the lessee and lessor. Solution 20-93 a) All leases use the contract-based approach and are classified as capitalized leases. The contractbased approach is based on the view that “lease contracts create assets and liabilities that should be recognized in the financial statements of lessee”. b) The two exceptions to capitalizing leases are short-term leases and leases for low-value items. c) Lessee: Dr. Equipment under Lease Cr. Obligations under Lease Dr. Depreciation Expense 20-52 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cr. Accumulated Depreciation Obligation under Lease: Dr. Interest Expense Cr. Cash Lessor: Dr. Lease Receivable Cr. Equipment Dr. Cash Cr. Interest Income Cr. Lease Receivable Difficulty: Medium Learning Objective: Explain the conceptual nature, economic substance, and advantages of lease transactions. Section Reference: The Leasing Environment CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-94 Initial direct costs and rental amounts a) Identify the types of initial direct costs that are incurred by the lessor and provide three examples of these costs. b) Explain how a lessor determines a rental amount to charge in a lease arrangement. Solution 20-94 a) The initial direct costs are generally defined as costs incurred by a lessor that are directly associated with negotiating and arranging a specific lease. These costs are included in the amount invested in the lease to be recovered by the lessor. Examples of such costs are commissions, legal fees, and costs of preparing and processing lease documents. b) The lessor determines the rental amount to charge a lessee based on the rate of return—the implicit rate—that the lessor needs to receive in order to justify leasing the asset. The key variables considered in deciding on the rate of return are the lessee’s credit standing, the length of the lease, and the status of the residual value (guaranteed or unguaranteed). Difficulty: Easy Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication 20-53 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ex. 20-95 Calculate lease payment by lessor Howdy Corporation (a private company using ASPE) has a $500,000 piece of machinery that its wants to lease to Doody Corporation. Howdy wants to earn a 9% return on its lease. The machinery will be leased for 7 years and the annual rental payment will be due at the beginning of each year. The lease doesn’t include a bargain purchase option or residual value at the end of the lease. Instructions

a) b)

Calculate the annual lease payment Howdy Corporation should charge to Doody Corporation. CRITICAL THINKING: Why would a company officer a 0% financing lease, like those advertised by car dealerships? Does 0% financing actually exist or are there hidden costs associated with the lease? If so, provide examples.

Solution 20-95 Investment to be recovered ............................................................................. $500,000 Less: PV of BPO or residual value at end of lease............................................ 0 PV to be recovered through the lease payments ............................................ $500,000 Seven beginning-of-the-year lease payments to yield a 9% return: ($500,000 ÷ 5.48592*) ....................................................................................... $91,142.42 *PV of an annuity due (Table A-5); i=9%, n=7 b) CRITICAL THINKING: Typically, car dealerships have hidden costs or upfront payments required in order to qualify for 0% financing. The upfront payments can include freight costs and pre-delivery expenses, plus taxes on these items. Normally, an initial down payment on the car and the first month’s rental payment is required in advance. Customers may also be charged an administration fee for acquiring the vehicle and processing the paperwork. The price of the car typically includes an interest charge since a lower price purchase price may be negotiated rather than leasing at 0% financing. The hidden costs and the hidden interest included in the price of the car could be more than the cost of borrowing money elsewhere to purchase the car. Difficulty: Medium Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-96 Lessor accounting—sales-type lease Albert Corp., a private corporation that adheres to ASPE, is a manufacturer of truck trailers. On January 1, 2023, Albert leases ten trailers to Einstein Inc. under a six-year non-cancellable lease agreement. The following information about the lease and the trailers is provided: 1. Equal annual payments (due on December 31 each year) will be payable, to provide Albert with an 8% return on their investment. 2. Title to the trailers will pass to Einstein at the end of the lease. 20-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

3. 4.

At January 1, 2023, the fair value of each trailer is $50,000. The cost of each trailer to Albert Corp. is $45,000. Each trailer has an expected useful life of nine years. Collectability of the lease payments is reasonably assured, and any non-reimbursable costs under the lease that are likely to be incurred by Albert can be reasonably estimated.

Instructions a) Identify and explain what type of lease this is for the lessor. b) Calculate the annual lease payment. Present value factor for 6 periods at 8% is 4.62288. Round to the nearest dollar. c) Prepare a lease amortization schedule for Albert Corp. for the first three years. d) Prepare the journal entries for the lessor for 2023 and 2024 to record the lease agreement, the receipt of the lease rentals, and the recognition of income. Assume the use of a perpetual inventory system and round all amounts to the nearest dollar. Solution 20-96 a) This is a sales-type lease to the lessor, Albert Corp. Albert's gross profit on this sale is $50,000, which is recognized in the year of sale (2023). It is not an operating lease because title to the assets passes to the lessee, the present value ($500,000) of the minimum lease payments equals or exceeds 90% ($450,000) of the fair value of the leased trailers, collectability is reasonably assured, and any reimbursable costs under the lease that are likely to be incurred can be reasonably estimated. b)

($50,000 × 10) ÷ 4.62288 = $108,158 or 6 N 8 i 500000 PV CPT PMT => $108,158

Date 1/1/23 12/31/23 12/31/24 12/31/25

Lease Amortization Schedule (ALBERT CORP.) Net Annual Interest on Investment Lease Rental Net Investment Recovery_ $108,158 108,158 108,158

$40,000 34,547 28,658

$68,158 73,611 79,500

d) Jan 1, 2023 Lease Receivable ($108,158 x 6) ............................................................... Cost of Goods Sold ................................................................................... Sales Revenue ................................................................................... Inventory ........................................................................................... Unearned Interest Income ...............................................................

Net Investment $500,000 431,842 358,231 278,731

648,948 450,000 500,000 450,000 148,948

Dec 31, 2023 Cash........................................................................................................... Lease Receivable...............................................................................

108,158

Unearned Interest Income .......................................................................

40,000

108,158

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Interest Income ................................................................................. Dec 31, 2024 Cash........................................................................................................... Lease Receivable............................................................................... Unearned Interest Income ....................................................................... Interest Income .................................................................................

40,000

108,158 108,158 34,547 34,547

Difficulty: Medium Learning Objective: Calculate the lease payment that is required for a lessor to earn a specific return. Section Reference: Determination of Rental Payments CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-97 Lease criteria under IFRS versus ASPE a) Identify and explain the cited by IFRS 16 to support classifying a lease as a finance lease. b) How do these criteria differ from ASPE? What criteria must be used to classify a lease as a direct financing of sales type lease? Solution 20-97 a) Under IFRS 16 companies must assess whether each contract they enter into is (or contains) a lease. “A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration” (IFRS 16.9). While the goal was initially to recognize assets and liabilities for the rights and obligations of all leases, exceptions are recognized in IFRS 16 for short-term leases of 12 months or less, and for leases where the underlying asset is of low-value. b) In order for a lessor to classify a lease as a direct financing or a sales-type lease under ASPE, the lease at the date of inception must satisfy one or more of the following Group I criteria (a, b, and c) and both of the following Group II criteria (a and b): Group I a) There is reasonable assurance that the lessee will obtain ownership of the property at the end of the lease term. b) The lease term is equal to 75% or more of the estimated economic life of the leased property. c) The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property. Group II a) Collectability of the payments required from the lessee is reasonably assured. b) Any non-reimbursable costs under the lease that are likely to be incurred by the lessor can be reasonably estimated. 20-56 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ex. 20-98 Bargain purchase option Star Company (a private company that reports under ASPE) leases a piece of equipment for $2,500 per month for 30 months with an option to purchase the equipment for $10,000 at the end of the 30month period. Instructions

a) b)

If the equipment’s estimated fair market value is $40,000 at the end of the 30 months, is this considered a bargain purchase option? Explain why or why not.

Solution 20-98 a) Star Co. can purchase the equipment at the end of the lease for $10,000 when the estimated fair market value is $40,000. The fair market value would be considered significantly higher than the purchase price option and it can be assumed that the option is a bargain and will be acted on. b) A bargain purchase option is a provision that allows the lessee to purchase the leased asset for a price that is significantly lower than the asset’s expected fair value when the lessee can exercise this option. Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex 20-99 Discount rates For the lessee discuss what discount rates should be used and the rationale behind the rate for ASPE and IFRS. Solution 20-99 For ASPE, the lower of the interest rate implicit in the lease and the incremental borrowing rate should be used to calculate the present value of the minimum lease payments. The lesser of the two rates helps to ensure that the lessee does not use an artificially high incremental borrowing rate that would 20-57 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

cause the present value of the minimum lease payments to be less than 90% of the property’s fair value, making it an operating versus capital lease. Under IFRS, the interest rate implicit in the lease is to be used whenever reasonably determinable; otherwise, the incremental borrowing rate is used for present value calculations. The lessor’s implicit rate is generally a more realistic rate to use in determining the amount to report as the asset and related liability for the lessee. Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 20-100 Classification approach vs. contract-based approach Explain the difference between classification approach vs contract-based approach for capitalizing leases. Solution 20-100 The classification approach says that transactions should be classified and accounted for according to its economic substance. This would justify capitalizing leases that have similar characteristics to instalment purchases. On the other hand, the contract-based approach (also called a right-of-use approach) views the lease as conveying a contractual right to use the property (not the physical property itself). This approach would justify capitalizing the fair value of the rights and obligations of just about all leases, even those currently accounted for as operating leases. Exceptions would be leases that actually transfer control of the asset or almost all of the risks and benefits associated with ownership, such as leases where title will transfer at the end of the contract, or where there is a bargain purchase option. Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees CPA: Commuinication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 20-101 Guaranteed versus unguaranteed residual values Explain the difference between a guaranteed residual value (expected to be payable by the lessee 20-58 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

under residual value guarantees) and an unguaranteed residual value and the economic and accounting consequences of using a guaranteed residual value in a lease arrangement. Solution 20-101 The guaranteed residual value from the lessee’s perspective is the maximum amount the lessor can require the lessee to pay at the end of the lease. The unguaranteed residual value is the portion of the residual value that is not guaranteed by the lessee or is guaranteed solely by a party that is related to the lessor. Often, no part of the residual is guaranteed. The guaranteed residual value is used in lease arrangements for good reason: it protects the lessor against any loss in estimated residual value, and so ensures that the lessor will get its desired rate of return on its investment. If the residual value is guaranteed by the lessee, there are both economic and accounting consequences. The accounting difference is that the lease payments that are capitalized as the leased asset are defined to include the guaranteed residual value. Unguaranteed residual values are excluded from the lease payments (or the ASPE “minimum lease payments”). If the residual value is not guaranteed by the lessee, the lessee has no responsibility or obligation for the asset’s condition at the end of the lease. The unguaranteed residual value, therefore, is not included in the calculation of the lease obligation by the lessee. Difficulty: Easy Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-Use Asset and Capital Leases Learning Objective: Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). Section Reference: Accounting for Residual Values and Purchase Options in a Leased Asset CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 20-102 Capital lease amortization and journal entries Erica Corp., who reports under ASPE, leases machinery on January 1, 2023, and records this as a capital lease. Seven annual lease payments of $140,000 are required the end of each year, starting December 31, 2023. The present value of the lease payments at 10% is $681,600. Title passes to Erica at the end of the lease. Erica uses the effective interest method of amortization for the lease. The company uses straight-line depreciation over the equipment’s expected useful life of eight years, with no residual value.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Instructions (Round values to the nearest dollar.) a) Prepare a lease amortization table for 2023 and 2024. b) Prepare the general journal entries relating to this lease for 2023. c) CRITICAL THINKING: Explain how Erica would determine how to account for this lease. Would this change if the company was using IFRS as opposed to ASPE? If so, explain how. Solution 20-102 a) Date Jan 1/23 Dec 31/23 Dec 31/24

Payments

Interest_

10% Reduction Obligation

$140,000 140,000

$68,160 60,976

$71,840 79,024

Lease Obligation $681,600 609,760 530,736

b) Jan 1, 2023 Equipment under Lease ........................................................................... Obligations under Lease ................................................................... Dec 31, 2023 Interest Expense ....................................................................................... Obligations under Lease .......................................................................... Cash ................................................................................................... Depreciation Expense ($681,600 / 8) ....................................................... Accumulated Depreciation—Machinery ..........................................

681,600 681,600

68,160 71,840 140,000 85,200 85,200

c) CRITICAL THINKING: When the capital lease method is used, the lessee treats the lease transactions as if the asset were being purchased. The asset and obligation are recorded at the lower of (1) the present value of the minimum lease payments (excluding executory costs) or (2) the fair value of the asset at the inception of the lease. Under ASPE, the present value of the lease payments is calculated using the lessee's incremental borrowing rate, unless the implicit rate used by the lessor is lower and the lessee has knowledge of it. Under IFRS, the present value is calculated using the interest rate implicit in the lease whenever this is reasonably determinable, otherwise by using the lessee’s incremental borrowing rate. The effective interest method is used to allocate each lease payment between interest expense and a reduction of the lease obligation. If the lease transfers ownership or contains a bargain purchase option, the asset is depreciated in a manner consistent with the lessee's normal depreciation policy over the economic life of the asset and allowing for residual value. If the lease does not transfer ownership, the leased asset is depreciated over the lease term. Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under 20-60 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-103 Initial measurement of right-of-use asset and lease liability Larry Co. leases a fleet of vehicles to Curly Co. for 5 years. The annual lease payment, due at the beginning of the year is $75,000 and the rate implicit in the lease is 8%. Curly Co. records leases under IFRS 16. Instructions a) What is the initial journal entry to set up the lease on Curly Co.’s books? b) CRITICAL THINKING: What does Larry need to take into consideration when it is determining the lease liability? Solution 20-103 a) Present value of the amount payable under the lease contract i=8%; $75,000 annuity due x 4.31213 (n=5) =$323,409.75 Journal entry to set up lease: Right-of-Use Asset ............................................................................................ Lease Liability ................................................................................... Cash ...................................................................................................

323,410 248,410 75,000

b) CRITICAL THINKING: IFRS 16 uses the contract-based approach, the assets and liabilities arise and are recognized at the start of the lease contract. IFRS 16 calls these right-of-use assets. The liability recognized at the start of the lease is measured at the present value of the lease payments. The amount to be discounted depends on a number of decisions and factors: 1. Do contingent rentals have to be considered? 2. How are any guarantees of residual values at the end of the lease factored into the calculations? 3. Lease contracts often contain renewal or purchase options, sometimes at bargain prices and other times at market rates, or options to end the lease early. Are these considered? 4. What discount rate is used? Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex 20-104 Differences between capital and operating leases under ASPE 20-61 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) b)

What are the differences between capital and operating leases under ASPE? What argument do managers present to support an operating versus a capital lease?

Solution 20-104 a) In theory, the total charges to operations are the same over the lease term whether a lease is accounted for as a capital lease or as an operating lease, but the timing of recognition is different. A capital lease has higher charges in the earlier years and lower charges in later years, versus an even and consistent charge under operating leases. The most important and significant difference; however, is the effect on the balance sheet. A capital lease reports an asset and a liability related to the lease; whereas, an operating lease does not. Capitalizing leases results in higher debt to equity ratios, reduced total asset turnover, and a reduced rate of return on total assets. b) When arguing against capitalization, managers often state that capitalization can:

• • •

More easily lead to violation of loan covenants Affect the amount of compensation that is received (for example, a stock compensation plan is tied to earnings); and Lower rates of return and increase debt to equity relationships, thus making the company less attractive to present and potential investors.

Difficulty: Easy Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Ex. 20-105 Operating lease calculations On January 1, 2023, Lewis Corp. purchased a building for $900,000, with the intention of leasing it. The building is expected to have a 20-year life, no residual value, and will be depreciated on a straight-line basis. On April 1, 2023, under a cancellable lease, Lewis leased the building to Clark Company for $300,000 a year ($25,000 a month) for a four-year period ending March 31, 2027. Clark paid $300,000 to Lewis on April 1, 2023. During calendar 2023, Lewis incurred $30,000 in maintenance and other executory costs under the provisions of the lease. This lease is properly classified as an operating lease by both parties. Instructions a) How much income before income taxes will Lewis report from this lease for calendar 2023? b) How much rent expense will Clark report in connection with this lease for calendar 2023? c) What disclosures are required under IFRS 16 for leases that are exempt from right-of-use lease accounting? Solution 20-105 a) Revenue Apr 1–Dec 31, 2023 ($25,000 × 9) ...............................................

$225,000 20-62

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Expenses: Depreciation ($900,000 ÷ 20) × 9 ÷ 12).............................................. Maintenance, etc............................................................................... Income before taxes .................................................................................

$33,750 30,000

63,750 $161,250

Rent expense, Apr 1–Dec 31, 2023 ($25,000 × 9) ......................................

$225,000

For those following IFRS 16, companies are required to disclose the expense relating to short term lease exemptions, the expense relating to low-value lease exemptions, and the amount of lease commitments for short-term leases if the short-term leases committed to are dissimilar from the portfolio to which short-term lease expense relates.

Difficulty: Medium Learning Objective: Account for operating leases by lessees under ASPE (and short-term leases and low-value leases under IFRS 16) and compare the operating and capitalization methods of accounting by lessees. Section Reference: Accounting for an Operating Lease Learning Objective: Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. Section Reference: Presentation and Disclosure Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-106 IFRS additional disclosures A right-of-use or capital lease has similar disclosures as in the standards for long-term liabilities and some additional disclosures. What are the additional disclosures? Solution 20-106 IFRS requires additional disclosures related to: 1. The carrying amount of right-of-use assets at the end of the reporting period by class or underlying asset. 2. A maturity analysis of lease liabilities, separately from the maturity analyses of other financial liabilities. 3. Additional qualitative and quantitative information about leasing activities to help users assess the nature of the company’s leasing activities, future cash outflows, restrictions or covenants imposed by leases and sale and leaseback transactions. Difficulty: Easy Learning Objective: Determine the statement of financial position presentation of right-of-use assets (and ASPE capital leases) and identify other disclosures required. Section Reference: Presentation and Disclosure CPA: Financial Reporting Bloomcode: Comprehension 20-63 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Ex. 20-107 Risks and benefits of ownership Under ASPE, a lease is classified as a capital lease if it substantially transfers the risks and rewards of ownership from the lessor to the lessee and classified as an operating lease if the risks and rewards are not substantially transferred. Given this, explain the risks and rewards of ownership. Solution 20-107 Rewards of ownership are the ability to use the asset to generate profits over its useful life, benefit from any appreciation in the asset’s value, and realize its residual value at the end of its economic life. The risks, on the other hand, are the exposure to uncertain returns, loss from use or idle capacity, and technological obsolescence. Difficulty: Easy Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 20-108 Recording a Manufacturer/Dealer lease by the lessor On January 1, Lexy Corp. leases a truck it has manufactured to Roxy Corp. Lexy has calculated the lease payments to Roxy to be $40,000 per year for 4 years and the sales price of the truck is $130,000. It cost Lexy $100,000 to manufacture the truck. Instructions a) Record the journal entries to set up the lease on January 1 on Lexy’s books. b) Explain the procedures Lexi would use to account for a sales-type lease (ASPE) or manufacturer or dealer lease (IFRS). How does this differ from the procedures used to account for a direct financing lease (ASPE) or finance lease (IFRS) by the lessor? Solution 20-108 a) Lexy Corp. is the lessor. January 1 Lease Receivable (40,000 x 4)........................................................................... Unearned Interest Income ....................................................................... Sales Revenue ........................................................................................... Cost of Goods Sold ........................................................................................... Truck Inventory ........................................................................................

160,000 30,000 130,000 100,000 100,000

b) The accounting for a sales-type lease is similar to a financing-type lease with the major difference 20-64 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

being that the lessor typically has manufactured or acquired the asset in order to sell it and is looking to make a profit on the sale as well as earn interest. So, the cost or carrying value of the amount on the lessor’s books is usually less than the asset’s fair value to the customer, so the lessor will also record a sale and related cost of goods sold in addition to the lease accounting entries. The lessor records the gross amounts of the minimum lease payments (excluding executory costs) and the unguaranteed residual value (a guaranteed residual value is included in the minimum lease payments) as Lease Receivable. The difference between the gross investment in lease (Lease Receivable) and the asset's sale price, also called the net investment in lease, is recorded as Unearned Interest Income. This is a contra-account to Lease Receivable. The sales price of the asset is recorded as sales revenue. The lessor also records the cost of goods sold and inventory amount at the asset’s carrying value or cost. The lessor records payments received as a reduction in the receivable. Unearned income is recognized periodically as interest income, using the effective interest method and the implicit interest rate used to calculate the lease payments. Difficulty: Medium Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-109 Calculation of lease amounts for lessors for Manufacturer/Dealer leases with unguaranteed residuals Cow Co. is a farming equipment dealer who reports using IFRS. It plans to lease a piece of farming equipment to Horse Inc. and wants to earn a profit on the equipment as well as earn interest. The details of the lease are as follows: • It will be a 5 year lease and will have annual rental payments due at the beginning of the year. • The rate of return Cow Co. wants to earn on the equipment is 7%. • The estimated residual value (unguaranteed) is $10,000 (the present value of which is $7,130). • The annual lease payments are $55,359 (the present value of which is $242,870); and • The leased equipment has a $200,000 cost to the dealer, Cow Co. Instructions Calculate the following for Cow Co: a) gross investment b) unearned interest income c) sales revenue d) cost of good sold e) gross profit Solution 20-109 20-65 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) Gross investment [(55,359 x 5) + 10,000] .....................................................

$286,795

b) Unearned interest income [286,795 – (242,870 + 7130)] ............................

36,795

c) Sales revenue ...............................................................................................

242,870

d) Cost of goods sold (200,000 – 7,130) ...........................................................

192,870

e) Gross profit (242,870 – 192,870)...................................................................

50,000

Difficulty: Medium Learning Objective: Account for and report financing and manufacturer/dealer or sales-type leases, with guaranteed residual values or a purchase option, by a lessor. Section Reference: Accounting for Residual Values and Purchase Options in a Financing or Manufacturer/Dealer or Sales-Type Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-110 Calculation of lease amounts for lessors for Manufacturer/Dealer leases with guaranteed residuals Cow Co. is a farming equipment dealer who reports using IFRS. It plans to lease a piece of farming equipment to Horse Inc. and wants to earn a profit on the equipment as well as earn interest. The details of the lease are as follows: • It will be a 5-year lease and will have annual rental payments due at the beginning of the year. • The rate of return Cow Co. wants to earn on the equipment is 7%. • The estimated residual value (guaranteed) is $10,000 (the present value of which is $7,130). • The annual lease payments are $55,359 (the present value of which is $242,870); and • The leased equipment has an $200,000 cost to the dealer, Cow Co. Instructions Calculate the following for Cow Co: a) gross investment b) unearned interest income c) sales revenue d) cost of good sold e) gross profit Solution 20-110 a) Gross investment [(55,359 x 5) + 10,000] .....................................................

$286,795

b) Unearned interest income [286,795 – (242,870 + 7130)] ............................

36,795

c) Sales revenue (242,870 + 7,130) ...................................................................

250,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) Cost of goods sold ........................................................................................

200,000

e) Gross profit (250,000 – 200,000)...................................................................

50,000

Ex. 20-111 Operating lease journal entries for the lessor On January 1, 2023 Green Company, a lessor, provides an operating lease of a car to Red Inc. The annual lease payments are $6,000 and the car is on Green’s books at a cost of $25,000, the expected useful life of the car is 5 years. Instructions

a) b)

Record the 2023 journal entries for Green Company. Explain how lessors account for operating leases including the lease payments, depreciation and other direct costs. Identify any necessary disclosure requirements under ASPE and IFRS 16.

Solution 20-111 a) January 1, 2023 Cash .................................................................................................................. Rent Revenue ............................................................................................ December 31, 2023 Depreciation Expense ($25,000 / 5-year useful life) ........................................ Accumulated Depreciation ......................................................................

6,000 6,000

5,000 5,000

b) If a lease is classified as operating by the lessor, the lease payments are recognized as rental income and the asset will stay on the books of the lessor. The rental income is recognized on a straight-line basis over each accounting period unless there is a pattern that is a better reflection of how the asset provides benefits. Depreciation, maintenance and other operating costs are expensed in the period they incur. Initial direct costs are deferred and amortized over the lease terms in proportion to the rental income recognized. ASPE disclosure requirements for operating leases are limited to the cost and related accumulated depreciation of property that is held for leasing purposes, along with the carrying amount of any impaired lease receivables and related allowance provided for impairment. IFRS disclosure requirements for operating leases are similar to those of finance leases. Lessors report the future minimum lease payments in total as well as the amounts due within one year, between 20-67 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

years two and five, and beyond five years. The contingent rental income for the period and general information about the entity’s leasing arrangements are also reported. Difficulty: Medium Learning Objective: Account for and report operating leases by a lessor. Section Reference: Accounting for an Operating Lease CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 20-112 Differences between ASPE and IFRS 16 Explain how leases are recognized by the lessees and lessors under both IFRS versus ASPE. Solution 20-112 Lessees: ASPE requires leases to be classified as capital when the risks and benefits of ownership are transferred to the lessee. The classification criteria include numerical thresholds that are often used. Whereas, under IFRS the lessee recognizes its contractual right to use the leased asset as a right-ofuse asset, and its obligation to make rental payments as a lease liability. There are exemptions to this for short-term leases and low-value assets. Lessors: ASPE uses classification criteria including numerical thresholds plus two revenue recognition criteria to qualify as a sale-type lease or a direct financing lease. Whereas for IFRS 16 uses the same criteria as the lessee does and then classifies it as a finance lease or a manufacturer/dealer lease depending on the structure. Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*Ex. 20-113 Lessee and lessor accounting (sale-leaseback) On January 1, 2023, Baritone Inc. sells machinery to Contralto Corp. at its fair value of $1,200,000 and immediately leases it back. The machinery’s original cost was $2,000,000, and its book value at January 1, 2023 was $1,050,000. The lease is for 10 years and the implicit interest rate is 10%. The lease payments of $177,500 start on January 1, 2023. Baritone uses straight-line depreciation and assumes there will be no residual value at the end of the 10 years. Assume this lease will be accounted for as a capital (finance) lease by both parties. Instructions a) Prepare all of Baritone's 2023 entries to reflect the above sale and lease transactions. 20-68 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c)

Prepare all of Contralto's 2023 entries to reflect the above sale and lease transactions. CRITICAL THINKING: The Vice President of Sales for Baritone is confused by why the sales and financing departments agreed to this transaction. Explain the rationale for this type of transaciton.

*Solution 20-113 a) BARITONE INC. (Lessee) Jan 1, 2023 Cash........................................................................................................... Accumulated Depreciation—Machinery .................................................. Machinery .......................................................................................... Deferred Profit on Sale-Leaseback...................................................

1,200,000 950,000 2,000,000 150,000

Machinery under Lease ............................................................................ Obligations under Lease ...................................................................

1,200,000

Obligations under Lease .......................................................................... Cash ...................................................................................................

177,500

Dec 31, 2023 Depreciation Expense............................................................................... Accumulated Depreciation—Leased Machinery ..............................

1,200,000

177,500

120,000 120,000

Deferred Profit on Sale-Leaseback .......................................................... Depreciation Expense—Leased Machinery ......................................

15,000

Interest Expense [$10% × ($1,200,000 – $177,500)] ................................ Interest Payable ................................................................................

102,250

b) CONTRALTO CORP. (Lessor) Jan 1, 2023 Machinery Acquired for Lessee ................................................................ Cash ...................................................................................................

15,000

102,250

1,200,000 1,200,000

Lease Receivable ($177,500 x 10) ............................................................. Machinery Acquired for Lessee ........................................................ Unearned Interest Income ...............................................................

1,775,000

Cash........................................................................................................... Lease Receivable...............................................................................

177,500

Dec 31, 2023 Unearned Interest Income ....................................................................... Interest Income .................................................................................

1,200,000 575,000

177,500

102,250 102,250

c) CRITICAL THINKING: A company may sell and leaseback an asset for financing purposes. If the asset purchase had been financed and subsequently the interest rates have decreased, a sale20-69 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

leaseback transaction can allow the seller to refinance the purchase at a lower rate. It can also provide additional working capital if the company has tight liquidity. Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Ex. 20-114 Lessee and lessor accounting (sale-leaseback) On January 1, 2023, Kirk Corp. sells land to Spock Inc. for $2,000,000, and immediately leases the land back. Both companies follow ASPE. The following information relates to this transaction: 1. The term of the non-cancellable lease is 20 years and the title transfers to Kirk at the end of the lease term. 2. The land has a cost basis of $1,600,000 to Kirk. 3. The lease agreement calls for equal rental payments of $203,704 at the end of each year. 4. The land has a fair value of $2,000,000 on January 1, 2023. 5. The incremental borrowing rate of Kirk Corp. is 10%. Kirk is aware that Spock set the annual rentals to ensure a rate of return of 8%. 6. Kirk pays insurance costs, which total $170,000 in 2023. 7. Collectability of the rentals is reasonably assured, and any non-reimbursable costs under the lease that are likely to be incurred can be reasonably estimated by the lessor. Instructions a) Prepare all the 2023 journal entries on the books of Kirk Corp. to reflect the above sale and lease transactions (include a partial amortization schedule and round all amounts to the nearest dollar.) b) Prepare all the 2023 journal entries on the books of Spock Inc. to reflect the above purchase and lease transactions. c) Assume that Kirk only leases land to Spock and that at the end of the lease the land does not transfer to Spock, what kind of lease would this be and why? *Solution 20-114 a) KIRK CORP. (Lessee) Jan 1, 2023 Cash........................................................................................................... Land ................................................................................................... Deferred Profit on Sale-Leaseback................................................... Land under Lease ..................................................................................... Obligations under Lease ...................................................................

2,000,000 1,600,000 400,000 2,000,000 2,000,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Insurance Expense.................................................................................... Accounts Payable or Cash ................................................................

170,000 170,000

Dec 31, 2023 Deferred Profit on Sale-Leaseback ($400,000 ÷ 20)................................. Gain from Sale-Leaseback* .............................................................. * a revenue account is used since there is no Depreciation Expense here

20,000 20,000

Interest Expense ....................................................................................... Obligations under Lease .......................................................................... Cash ...................................................................................................

Date Jan 1, 2023 Dec 31, 2023

160,000 43,704 203,704

Partial Lease Amortization Schedule Annual Interest Reduction of Lease Payment 8% Lease Obligation $203,704

$160,000

$43,704

b) SPOCK INC. (Lessor) Jan 1, 2023 Land…………………………………………………………. ...................... Cash…………………………………………………. .......................... Lease Receivable ($203,704 × 20)………………... ................................... Unearned Interest Income…………………………. ......................... Land………………………………………………… ........................... Dec 31, 2023 Cash........................................................................................................... Lease Receivable............................................................................... Unearned Interest Income ....................................................................... Interest Income .................................................................................

Balance_ $2,000,000 1,956,296

2,000,000 2,000,000 4,074,080 2,074,080 2,000,000

203,704 203,704 160,000 160,000

c) If title does not transfer, the lessor and the lessee will both account for the lease as an operating

lease as there is no transfer of ownership to Spock, and Kirk would not recognize any expenses such as depreciation over the life of the lease, so the full value of the land would transfer back to Kirk. Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 20-115 Lessee accounting—capital lease ASPE Long Ltd., a private corporation adhering to ASPE, enters into a non-cancellable lease agreement on July 1, 2023, to lease equipment from Fong Ltd. The following data are relevant to the lease agreement: 1. The term of the lease is 4 years, with no renewal option. Payments of $126,807 are due on June 30 of each year, with the first payment due June 30, 2024. 2. The fair value of the equipment on July 1, 2023 is $420,000. The equipment has an economic life of 6 years with no residual value. 3. Long depreciates similar equipment it owns on the double declining-balance basis. 4. Long's incremental borrowing rate is 10%. The lessee is aware that the lessor used an implicit rate of 8% in calculating the lease payments. 5. Present value factor for 4 periods at 8% is 3.31213; at 10%, 3.16986. Instructions a) What type of lease is this for Long? What is your rationale? b) Prepare the journal entries on Long's books that relate to the lease agreement for the following dates. Round all amounts to the nearest dollar. Include a partial amortization schedule. i) July 1, 2023 ii) December 31, 2023 ii). June 30, 2024 iv) December 31, 2024 Solution 20-115 a) Present value of minimum lease payments: $126,807 × PV of an ordinary annuity for 4 periods at 8% (use the lessor’s implicit rate, since it is known) $126,807 × 3.31213 = $420,000 Because the present value of the lease payments ($420,000) equals the fair value of the leased property, it is a capital lease. b) i)

ii)

July 1, 2023 Equipment under Lease ........................................................................... Obligations under Lease ...................................................................

420,000

Dec 31, 2023 Depreciation Expense [($420,000 × 2 ÷ 4) × 6 ÷ 12] .................................. Accumulated Depreciation—Leased Equipment ............................

105,000

Interest Expense ($33,600 × 6 ÷ 12) .......................................................... Interest Payable ................................................................................

Annual

Lease Amortization Schedule Interest on Reduction of

420,000

105,000 16,800 16,800

Balance of 20-72

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Date Lease Payment Jul 1/23 Jun 30/24 $126,807 Jun 30/25 126,807 iii)

iv)

Unpaid Obligation

Lease Obligation

$33,600 26,143

$ 93,207 100,664

Jun 30, 2024 Interest Expense ....................................................................................... Obligations under Capital Leases ............................................................ Cash ................................................................................................... (Interest payable entry assumed to have been reversed Jan 1/20) Dec 31, 2024 Depreciation Expense ............................................................................... Accumulated Depreciation—Leased Equipment............................. {($420,000 × 2 ÷ 4) + [($420,000 – $210,000) × 2 ÷ 4] × 6 ÷ 12} Interest Expense ($26,143 × 6 ÷ 12) ........................................................... Interest Payable ................................................................................

Lease Obligation $420,000 326,793 226,129

33,600 93,207 126,807

157,500 157,500

13,072 13,072

Difficulty: Medium Learning Objective: Identify and apply the factors that are used to determine if a contract is or contains a lease under IFRS and whether leases are capital or operating leases under the ASPE classification approach. Section Reference: IFRS and ASPE Approach – Lessees Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 20-116 Lessee accounting—capital lease ASPE On January 1, 2023, Fargo Corp. enters into a ten-year non-cancellable lease with Wells Ltd. for equipment having an estimated useful life of 11 years and a fair value of $6,000,000. Fargo's incremental borrowing rate is 8%, but they do not know Wells’ implicit rate. Fargo uses the straightline method to depreciate assets. The lease contains the following provisions: 1. Semi-annual lease payments of $438,000 (including $38,000 for property taxes), payable on January 1 and July 1 of each year. 2. A guarantee by Fargo Corp. that Wells Ltd. will realize $200,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $120,000. Both companies adhere to ASPE. Instructions a) Calculate the undiscounted minimum lease payments over the life of the lease. b) Calculate the present value of the minimum lease payments. PV factor for annuity due of 20 semiannual payments at 8% annual rate, 14.13394; PV factor for $1 due in 20 interest periods at 8% 20-73 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) d)

annual rate, .45639. Round to nearest dollar. What kind of lease is this to Fargo Corp.? Why? Present the journal entries that Fargo would record during the first year of the lease. Include an amortization schedule through January 1, 2024 and round values to the nearest dollar.

Solution 20-116 a) The undiscounted minimum lease payments are: Semi-annual rental payments .............................................................................. $ 438,000 Less executory costs ............................................................................................. (38,000) 400,000 Number of payments over lease term ................................................................. 20 8,000,000 Residual guarantee ............................................................................................... 200,000 Minimum lease payments ............................................................................................ $8,200,000 b)

The present value of the minimum lease payments is: Factor for present value of an annuity due, 20 periods, 4% ................... Semi-annual payments, less executory costs ......................................... (OR 20 N 4 i 400000 PMT CPT PV => 5,653,576) ........................................ Factor for present value of $1 due in 20 semi-annual interest periods at 4% .................................................................................... . Guaranteed residual ................................................................................. (OR 20 N 4 i 200000 FV CPT PV => 91,277) Present value of lease payments .............................................................

14.13394 $ 400,000 $5,653,576 0.45639 $200,000

91,278 $5,744,854

This lease is a capital lease to Fargo Corp. because its 10-year term exceeds 75% of the equipment's estimated useful life. In addition, the present value of the minimum lease payments exceeds 90% of the current fair value of the equipment ($6,000,000).

Date Initial PV Jan 1/23 Jul 1/23 Jan 1/24

Semi-Annual Lease Payment $400,000 400,000 400,000

Lease Amortization Schedule Interest Reduction of 4%__ Lease Obligation — $213,794 206,346

$400,000 186,206 193,654

Jan 1, 2023 Equipment under Lease ........................................................................... Obligations under Lease ................................................................... AND Obligations under Lease .......................................................................... Property Tax Expense ............................................................................... Cash ................................................................................................... (These two entries can be combined)

Balance $5,744,854 5,344,854 5,158,648 4,964,994

5,744,854 5,744,854 400,000 38,000 438,000

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Jul 1, 2023 Obligations under Lease…....................................................................... Property Tax Expense ............................................................................... Interest Expense ....................................................................................... Cash ...................................................................................................

186,206 38,000 213,794

Dec 31, 2023 Depreciation Expense............................................................................... Accumulated Depreciation—Leased Equipment ............................

554,485*

438,000

554,485 206,346 206,346

Difficulty: Medium Learning Objective: Account for right-of-use assets by lessees under IFRS and capital leases under ASPE. Section Reference: Accounting for a Right-of-use Asset and Capital Leases Learning Objective: Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). Section Reference: Accounting for Residual Values and Purchase Options in a Leased Asset CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 20-117 Lessee accounting – IFRS On January 1, 2023, Shrek Inc. enters into a seven-year non-cancellable lease with Fiona Ltd. for machinery having an estimated useful life of nine years and a fair value of $4,300,000. Shrek’s incremental borrowing rate is 8% and Fiona’s implicit rate is 6%. Shrek uses the straight-line depreciation method to depreciate assets. Shrek will make annual lease payments on January 1 of each year. The lease includes a guarantee by Shrek Inc. that Fiona Ltd. will realize $100,000 from selling the asset at the expiration of the lease, which Shrek expects to pay. Both companies adhere to IFRS. Instructions a) Calculate the lease payment Fiona Ltd. will charge Shrek (assuming no mark-up of the machinery from fair value). Round to the nearest dollar. b) Calculate the present value of the lease payments. Round to the nearest dollar. c) What kind of lease is this to Shrek Inc.? Why? d) Present the journal entries that Shrek Inc. would record during the first year of the lease. Round to the nearest dollar. Solution 20-117 a) Investment to be recovered ..................................................................... $4,300,000 Less: amount to be recovered through residual amount PV of residual value ($100,000 x 0.66506) ................................................ 66,506 20-75 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

(i=6, n=7 using Table A-2) Amount to be recovered........................................................................... 7 periodic lease payments (4,233,494 / 5.91732) .................................... (i=6, n=7 using Table A-5) b)

4,233,494 $715,441

The present value of the lease payments is: PV of annuity due, 7 periods, 6% is (715,441 x 5.91732) ......................... $4,233,494 PV of the guaranteed residual, 7 periods, 6% (100,000x 0.66506) .......... 66,506 Present value of the lease payments ....................................................... $4,300,000 Note: Under IFRS as both the lessor and lessee are using the same implicit rate, the PV of the lease payments equals the fair value of the asset.

This is a right-of-use lease and should be capitalized. It does not fall under either exclusion under IFRS of a short-term lease or low-value lease. The lease is a contract that conveys the right to control the use of the identifiable asset for a period of time in exchange for consideration.

d) Jan 1, 2023 Right-of-Use Asset ............................................................................................ Lease Liability ........................................................................................... Cash...........................................................................................................

4,300,000

Dec 31, 2023 Depreciation Expense (4,300,000 / 7years) ..................................................... Accumulated Depreciation—Right-of-Use Asset .....................................

614,286

Interest Expense ((4,300,000 – 715,441) x 6%) ................................................ Lease Liability ...........................................................................................

3,584,559 715,441

614,286 215,074 215,074

Difficulty: Medium Learning Objective: Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). Section Reference: Accounting for Residual Values and Purchase Options in a Leased Asset CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 20-118 Lease accounting – IFRS On January 1, 2023, Brady Inc. enters into a 5-year non-cancellable lease with Brees Ltd. for equipment that has an estimated useful life of 5 years and a fair value of $2,000,000. Brady’s incremental borrowing rate is 8% and Brees’ implicit rate is 6%. Brady uses the straight-line depreciation method to depreciate assets. Brady will make annual lease payments on January 1 of each year (with the first payment due at the beginning of the lease) based on the fair value of the equipment. The lease agreement includes a guarantee that Brady will take over ownership of the 20-76 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

equipment from Brees for a final payment of $100,000. In addition to the equipment, Brees convinced Brady to also lease some small office equipment. For a $300 a month lease payment, for a term of 1 year, Brady gets the equipment it needs to run a small office with 3 staff. Both companies adhere to IFRS. Instructions a) Calculate the lease payment Brees Ltd. will charge Brady Inc. assuming that there is no mark up on the fair value of the equipment. Round to the nearest dollar. b) Calculate the present value of the minimum lease payments. Round to the nearest dollar. c) Present the journal entries that Brady Inc. would record during the first year of the equipment lease. Round to the nearest dollar. d) Prepare the journal entries that Brady Inc. would record in the first two months of the office equipment lease. Round to the nearest dollar. e) CRITICAL THINKING: Are these two lease agreements accounted for differently. If so, why is there a difference? Solution 20-118 a) Investment to be recovered ..................................................................... Less: amount to be recovered through guaranteed residual amount PV of residual value ($100,000 x 0.7473) .................................................. (i=6, n=5 using Table A-2) Recoverable amount ................................................................................ 5 periodic lease payments (1,925,270 / 4.4651) ...................................... (i=6, n=5 using Table A-5) b)

The present value of the lease payments is: PV of annuity due, 5 periods, 6% is (431,182 x 4.4651)............................ PV of the guaranteed residual, 5 periods, 6% (100,000x 0.7473) ............ Present value of the lease payments .......................................................

$2,000,000 74,730 $1,925,270 $431,182

$1,925,270 74,730 $2,000,000

Note: Under IFRS as both the lessor and lessee are using the same implicit rate, the PV of the lease payments equals the fair value of the asset. c) Jan 1, 2023

Right-of-Use Asset ............................................................................................ Lease Liability ........................................................................................... Cash........................................................................................................... Dec 31, 2023 Depreciation Expense ($2,000,000 / 5years) ................................................... Accumulated Depreciation—Right-of-Use Asset ..................................... Interest Expense (($2,000,000 – 431,182) x 6%) .............................................. Lease Liability ........................................................................................... d)

2,000,000 1,568,818 431,182

400,000 400,000 94,129 94,129

The lease payment under this agreement would be expensed. 20-77

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Month 1 Low-Value Lease Expense ................................................................................ Cash...........................................................................................................

300

Month 2 Low-Value Lease Expense ................................................................................ Cash...........................................................................................................

300

Under IFRS, this office equipment lease agreement would qualify as a small amount as its 12 months or less and is of low value. Any agreement that does not fall within these characteristics would not meet the exemption and would be automatically capitalized. One reason that this difference exists is the cost/benefit trade off with respect to relevance and decision usefulness of information. Leases that are small amounts, and for a short term would likely not affect a user’s final decision about the organization. However, there would still be disclosures in the notes about these leases should the user want this type of additional detail.

Pr. 20-119 Lease accounting—Lessee and Lessor—IFRS On January 1, 2023, Fields Inc. enters into a 5-year non-cancellable lease with Wilson Ltd. for equipment that has an estimated useful life of 5 years and a fair value of $2,000,000. Fields has an incremental borrowing rate of 8% and Wilson’s implicit rate is 6%. Fields uses the straight-line depreciation method to depreciate assets. Fields will make annual lease payments on January 1 of each year (with the first payment due at the beginning of the lease) based on the fair value of the equipment. The lease agreement includes a guarantee that Fields will take over ownership of the equipment from Wilson for a final payment of $100,000. Both companies adhere to IFRS. Instructions a) Calculate the lease payment Wilson Ltd. will charge Fields Inc assuming that there is no mark up on the fair value of the equipment. Round to the nearest dollar. b) Calculate the present value of the minimum lease payments. Round to the nearest dollar. c) Present the journal entries that Fields Inc. would record during the first year of the equipment lease. Round to the nearest dollar. d) Prepare the journal entries that Wilson Ltd. would record in the first year assuming that this is a finance lease. Round to the nearest dollar. Solution 20-119 a) Investment to be recovered ..................................................................... Less: amount to be recovered through guaranteed residual amount PV of residual value ($100,000 x 0.7473) ..................................................

$2,000,000 74,730 20-78

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

(i=6, n=5 using Table A-2) Recoverable amount ................................................................................ 5 periodic lease payments (1,925,270/4.4651) ........................................ (i=6, n=5 using Table A-5) b)

The present value of the lease payments is: PV of annuity due, 5 periods, 6% is ($431,182 x 4.4651).......................... PV of the guaranteed residual, 5 periods, 6% (100,000x 0.7473) ............ Present value of the lease payments .......................................................

$1,925,270 $431,182

$1,925,270 74,730 $2,000,000

Note: Under IFRS as both the lessor and lessee are using the same implicit rate, the PV of the lease payments equals the fair value of the asset. c) Jan 1, 2023 Right-of-use Asset ............................................................................................ Lease Liability ........................................................................................... Cash...........................................................................................................

2,000,000

Dec 31, 2023 Depreciation Expense ($2,000,000 / 5years) ................................................... Accumulated Depreciation—Right-of-Use Asset .....................................

400,000

Interest Expense (($2,000,000 – 431,182) x 6%) .............................................. Lease Liability ........................................................................................... d) Jan 1, 2023 Lease Receivable [($431,182 x 5) + 100,000] .................................................... Equipment Acquired for Lessee ............................................................... Unearned Interest Income ....................................................................... Cash .................................................................................................................. Lease Receivable ...................................................................................... Dec 31, 2023 Unearned Interest Income ............................................................................... Interest Income.........................................................................................

1,568,818 431,182

400,000 94,129 94,129

2,255,910 2,000,000 255,910 431,182 431,182

120,000* 120,000

*FV of equip $2,000,000 x 6% = $120,000 Difficulty: Medium Learning Objective: Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE). Section Reference: Accounting for Residual Values and Purchase Options in a Leased Asset CPA: Financial Reporting Bloomcode: Application 20-79 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

Pr. 20-120 Manufacturer/Dealer or sales-type lease versus financing-type lease How do you distinguish between a manufacturer/dealer or sales-type lease and a financing-type lease? Solution 20-120 Distinguishing between a manufacturer/dealer or sales-type lease and a financing-type lease depends on the specific situation. Some manufacturers enter into lease agreements either directly or through a subsidiary captive leasing company to facilitate the sale of their product. These transactions are usually manufacturer/dealer or sales-type lease arrangements. Other companies are in business to provide financing to the lessee to acquire a variety of assets in order to generate financing income. They usually enter into direct financing (ASPE) or finance leases (IFRS). The difference between these classifications is the presence or absence of a manufacturer’s or dealer’s profit (or loss). A sales-type lease (a manufacturer or dealer lease) includes in the rental amount the recovery of a manufacturer’s or dealer’s profit as well as the asset’s cost. The profit (or loss) to the lessor is the difference between the fair value of the leased property at the beginning of the lease, and the lessor’s cost or carrying amount (book value). Manufacturer/dealer or sales-type leases normally arise when manufacturers or dealers use leasing as a way of marketing their products. Direct financing leases (or finance leases), on the other hand, generally result from arrangements with lessors that are engaged mostly in financing operations, such as leasefinance companies and a variety of financial intermediaries, such as banks or their finance subsidiaries. These lessors acquire the specific assets that lessees have asked them to acquire. Their business model is to earn interest income on the financing arrangement with the lessee. Difficulty: Easy Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Communication

Pr. 20-121 Lessor accounting—lease with IFRS criteria On January 1, 2023, Regal Air Inc. enters into an eight-year, non-cancellable lease agreement to lease an aircraft to Atlantic Airlines, with payments required at the end of each year. The following information relates to this agreement: 1. Atlantic Airlines has the option to purchase the aircraft for $7,000,000 at the end of the lease, at which time the aircraft’s fair value is expected to be $12,000,000. 2. The aircraft cost Regal Air $30,000,000. It has an estimated useful life of fifteen years, and a residual value of zero at the end of that time (due to technological obsolescence). 3. Atlantic will pay all executory costs related to the leased airplane. 20-80 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Annual year-end lease payments of $4,562,337 will allow Regal Air to earn an 8% return on its investment.

Instructions a) What type of lease is this for the lessor? Justify your answer. Assume Regal Air adheres to IFRS. b) Prepare a lease amortization schedule for Regal Air for the first two years (2023 and 2024). Round all amounts to the nearest dollar. c) Prepare the journal entries on Regal Air’s books to record the lease agreement, to reflect payments received under the lease, and to recognize income, for the years 2023 and 2024. Solution 20-121 a) As this is not a short-term lease or a low-value lease, this would be a right-of-use lease under IFRS. The lease is a contract that conveys the right to control the use of the identifiable asset for a period of time in exchange for consideration. b) Date Jan 1/23 Dec 31/23 Dec 31/24

Regal Air's Lease Amortization Schedule Annual Interest on Net Investment Lease Rental Net Investment Recovery $4,562,337 4,562,337

$2,400,000 2,227,013

$2,162,337 2,335,324

Net Investment $30,000,000 27,837,663 25,502,339

c) Jan 1, 2023 Lease Receivable [($4,562,337 × 8) + $7,000,000] .................................... 43,498,696 Aircraft ............................................................................................... 30,000,000 Unearned Interest Income ............................................................... 13,498,696 Dec 31, 2023 Cash........................................................................................................... Lease Receivable............................................................................... Unearned Interest Income ....................................................................... Interest Income ................................................................................. Dec 31, 2024 Cash........................................................................................................... Lease Receivable............................................................................... Unearned Interest Income ....................................................................... Interest Income .................................................................................

4,562,337 4,562,337 2,400,000 2,400,000

4,562,337 4,562,337 2,227,013 2,227,013

Difficulty: Medium Learning Objective: Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach. Section Reference: IFRS and ASPE Approach – Lessors Learning Objective: Account for and report basic financing and manufacturer/dealer or sales-type 20-81 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

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leases by a lessor. Section Reference: Accounting for Financing and Manufacturer/Dealer or Sales-Type Leases CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Pr. 20-122 Sale and Leaseback Simian Valley Corp. owns both the land and building that it uses for a banana plantation. The original cost of the building was $412,500 and had a book value of $225,000 at January 1, 2023. On this date the building was sold to Bonobo Leasing Inc. for $250,000 and simultaneously leased back to Simian Valley. The lease had a guaranteed 10-year term and required annual payments of $47,250 on December 31 each year. The lease allows the property to revert to the lessee at the end of the lease. Simian Valley’s incremental borrowing rate is 12%, but they do not know Bonobo’s implicit rate. Bonobo will pay property taxes on the building of $6,000 per year; however, this cost is included in the lease payment. Simian Valley will pay maintenance and other operating costs. The building will be depreciated straight line over its remaining 10-year life. The lease qualifies as a capital (finance) lease since the lease term is equal to the economic life of the building. Simian Valley Corp. follows ASPE. Instructions a) Prepare entries on Simian Valley’s books to record the sale and leaseback of the building. b) Prepare year-end adjusting entries for Simian Valley for 2023. *Solution 20-122 a) Cash........................................................................................................... Accumulated Depreciation, Building ....................................................... Building ............................................................................................. Deferred Profit on Sale-Leaseback...................................................

250,000 187,500* 412,500 25,000

*($412,500 – $225,000) Building under Lease ................................................................................ Obligations under Lease ...................................................................

250,000

Interest Expense ($250,000 x 12%) .......................................................... Obligations under Lease ...................................................................

30,000

Obligations under Lease .......................................................................... Property Tax Expense ............................................................................... Cash ...................................................................................................

41,250 6,000

Depreciation Expense ($250,000 ÷ 10) ..................................................... Accumulated Amortization—Leased Building .................................

25,000

250,000

b) 30,000

47,250

25,000 20-82

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Deferred Profit on Sale-Leaseback ($25,000 ÷ 10)................................... Depreciation Expense .......................................................................

2,500 2,500

Difficulty: Medium Learning Objective: Describe and apply the lessee’s accounting for sale-leaseback transactions and the accounting treatment for leases that involve real estate. Section Reference: Other Lease Issues (Appendix 20A) CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 21 ACCOUNTING CHANGES AND ERROR ANALYSIS CHAPTER STUDY OBJECTIVES 1. Identify and differentiate among the types of accounting changes and explain how to account for them. There are three types of accounting changes. (1) Change in accounting policy: a change in the specific principles, bases, rules, or practices that an entity applies in the preparation of its financial statements. (2) Change in an accounting estimate: a change in the carrying amount of an asset or liability or the amount of an asset’s periodic consumption from reassessing the current status of the asset or liability or the expected future benefits or obligations associated with it. (3) Correction of a prior period error: a change caused by an omission from or misstatement in prior years’ financial statements from the misuse of or failure to use reliable information that existed at the time the statements were completed and that could have been used in their preparation and presentation. Accounting changes could be accounted for retrospectively, currently, or prospectively. The retrospective method requires restatement of prior periods as if the accounting change had been used from the beginning, or the error had never been made. The current method calculates a catch-up adjustment related to the effect on all prior years, and reports it in the current period. Prospective treatment requires making no adjustment for past effects, but instead, beginning to use the new method in the current and future periods. A change in accounting policy due to the initial application of a new primary source of GAAP is accounted for according to the transitional provisions of that standard. If none is provided, or if it is a voluntary change, retrospective application is used. A change in an accounting estimate is accounted for prospectively. Errors are corrected through full retrospective restatement. Comparative periods are presented as if the new accounting policy had always been applied. The opening balance of each affected component of equity is adjusted for the earliest prior period presented, and all other affected comparative amounts for each prior period provided are restated. When the effects on particular prior periods are impracticable to determine, the cumulative effect of the change is shown as an adjustment to the beginning retained earnings of the earliest prior period possible. Required disclosures therefore include identifying the nature of the change, the effect on each financial statement item affected, the amounts relating to periods prior to those that are presented, and why full retrospective application was not applied, if applicable. If the change resulted from applying transitional provisions, information about the standards and the provisions is provided, including, if under IFRS, the effects on future periods. If it is a voluntary change, excluding specific ASPE accounting changes, the reasons why the new policy results in more relevant information are disclosed. Information about the future effect of changes in primary sources of GAAP that are issued but not yet effective is also required under IFRS. An opening SFP is required under IFRS for the earliest comparative period presented. Comparative amounts for prior periods affected by errors are restated, unless under IFRS it is not practicable to identify the effect on specific past periods. If the error is in a period before the earliest comparative statements included, the opening balances of the earliest comparative period are restated. An opening SFP is required under IFRS for the earliest comparative period presented as is information about the nature of any impracticality. The nature of the error and the amount of the 21-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

adjustment to each comparative financial statement line item and to EPS are all required disclosures. Under prospective treatment of accounting for changes in estimates, only the current and future fiscal periods are affected. There is no adjustment of current-year opening balances and no attempt is made to “catch up” for prior periods. The nature and amount of a change in an accounting estimate that affects the current period or, under IFRS, is expected to affect future periods, is required to be disclosed.

2. Identify economic motives for changing accounting methods and interpret financial statements where there have been retrospective changes to previously reported results. Some of the aspects that affect decisions about the choice of accounting methods are (1) political costs, (2) the capital structure, (3) bonus payments, and (4) the desire to smooth earnings. Financial statement users should analyze the information presented about accounting changes and adjust any trend information affected.

3. Identify differences in accounting between IFRS and APSE. The accounting standards under ASPE are very similar to those under IFRS. Minor differences exist, such as IAS 8’s permitting partial retrospective treatment for the correction of an accounting error, ASPE allowing specific voluntary changes without justification on a “reliable and more relevant” basis, and IFRS requiring additional disclosures.

4. Correct the effects of errors and prepare restated financial statements. Three types of errors can occur: (1) errors that affect only the SFP, (2) errors that affect only the income statement, and (3) errors that affect both the SFP and the income statement. This last type of error is classified either as (a) a counterbalancing error, where the effects are offset or corrected over two periods; or (b) a noncounterbalancing error, where the effects take longer than two periods to correct themselves.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer b d c c a c b d a d c a a b d b c c b b c d b b c c a c a c d c a d c b a b b c d c d

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. *37. *38. *39. *40. *41. *42. *43.

Description Identify accounting changes Voluntary change in accounting policy Identify changes in accounting policy Identify accounting errors Identify changes in accounting policy Identify a correction of an error Accounting policy changes and errors Cumulative effect of accounting policy changes Alternative accounting methods allowed for accounting changes Transitional provisions Identify correct statement Retrospective application Change accounted for prospectively Change in accounting estimate Accounting for retrospective change Underlying principle of retrospective application Change in inventory costing method Disclosures for accounting errors Adjustments required when transitioning to IFRS Use of retrospective treatment Disclosures required under IFRS Change in depreciation method Identify a change in accounting estimate Change in asset service life Calculate net income with change in inventory costing method Cumulative effect of inventory costing change Cumulative effect of inventory costing change Calculate effect on retained earnings of error in recording asset Calculate cumulative effect of error on income statement Calculate revised depreciation expense Calculate revised depreciation expense Calculate net income with change in depreciation method Calculate effect on net income with change in an accounting estimate Calculate depreciation expense after a change in estimated life Balance of accumulated depreciation after a change in estimate Calculate carrying value of a patent with a change in estimate Correcting counterbalancing errors Identifying counterbalancing errors Counterbalancing errors Impact of failure to record purchase and count in ending inventory Impact of incorrectly recording depreciation Impact of failure to accrue insurance costs Effect of errors on net income

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c c a Answer a b c a b

*44. *45. *46. No. *47. *48. *49. *50. *51.

Effect of errors on working capital Effect of errors on retained earnings Effect of errors on net income and retained earnings Description Effect of errors on net income Effect of errors on retained earnings Effect of errors on working capital Retained earnings balance with multiple errors Depreciation expense to be recorded following an error

*This topic is dealt with in an Appendix to the chapter.

EXERCISES Item E21-52 E21-53 E21-54 E21-55 E21-56 E21-57 E21-58 E21-59 E21-60 *E21-61 *E21-62

Description Conditions and disclosures for a change in accounting policy under IFRS and ASPE Matching accounting changes to situations Matching disclosures to situations Change in estimate, voluntary change in accounting policy, correction of errors Recognition of accounting changes or corrections Effects of errors on financial statements Effects of errors on net income Factors in choosing accounting methods and procedures IASB and accounting policies and estimates Error corrections Non-counterbalancing error correction

*This topic is dealt with in an Appendix to the chapter.

PROBLEMS Item P21-63 P21-64 P21–65 P21-66 *P21-67

Description Corrections of errors in prior years Accounting for accounting changes and error corrections Changes in estimates Accounting policies under IFRS and ASPE Error corrections and adjustments

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. Which of the following is NOT considered to be an accounting change? a) change in accounting estimate b) change in the composition of the board of directors c) change in accounting policy d) correction of a prior period error Answer: b Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. One condition required by IFRS is that a voluntary change in accounting policy must result in information that is a) more reliable than before. b) more reliable, but equally as relevant as before. c) both more reliable and more relevant. d) more relevant, but equally as reliable as before. Answer: d Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. Which of the following is NOT considered to be a change in accounting policy? a) changing from weighted average to FIFO for valuing inventories b) initial adoption of a new accounting standard c) reclassifying items on the financial statements of prior periods to make the statements more comparable d) changing from the cost basis to the fair value model for measuring investments Answer: c 21-5 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

4. All of the following are considered to be accounting errors except for a) changing from the cash basis to the accrual basis. b) expensing the cost of a new machine. c) changing depreciation methods from declining balance to straight line. d) failing to accrue wages payable at year end. Answer: c Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

5. All the following are considered to be changes in accounting policy except for a) a change in depreciation method. b) a change from FIFO to weighted average cost. c) the initial adoption of a new accounting standard. d) a change in accounting for a defined benefit pension plan from deferral and amortization to immediate recognition. Answer: a Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

6. An example of a correction of an error in previously issued financial statements is a change 21-6 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) from the FIFO method of inventory valuation to the average cost method. b) in the service life of plant assets, based on changes in the economic environment. c) from the cash basis of accounting to the accrual basis of accounting. d) in the tax assessment related to a prior period. Answer: c Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

7. All the following are allowed for accounting changes, except for a) using retrospective application for an accounting policy change without restatement, if restatement is impractical. b) using net accounting errors for disclosure purposes. c) using prospective application for an accounting policy change, if allowed in the transition policy. d) using prospective application for a change in estimate. Answer: b Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

8. The cumulative effect of a change in accounting policy is reported a) as an unusual item. b) between discontinued operations and net income on the income statement. c) as an adjustment to only the current year's beginning retained earnings. d) as an adjustment of beginning retained earnings of the earliest year presented. Answer: d Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors 21-7 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

9. Which of the following alternative accounting methods is(are) allowed by ASPE and IFRS for reporting accounting changes? a) prospective and retrospective b) current and retrospective c) current and prospective d) retrospective only Answer: a Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. For changes in accounting policy that result from applying the transitional provisions of a primary source of GAAP, the following disclosure is required: a) management's opinion on whether the change is in line with company goals. b) the impact on the statement of cash flows. c) how the adjustment will impact the future periods. d) a description of the provisions affecting future periods if the change may have an effect in future periods. Answer: d Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

11. Which of the following statements is CORRECT? a) Changes in accounting policy are always handled in the current or prospective period. b) Prior year statements should always be restated for changes in accounting estimates. c) A change from the deferral and amortization method to the immediate recognition method of 21-8 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

accounting for defined benefit pension plans should be treated as a change in accounting policy. d) Correction of prior period error should be presented as an adjustment on the current income statement. Answer: c Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

12. Retrospective application is required for all a) errors and non-mandated policy changes. b) changes in estimates and non-mandated policy changes. c) errors and changes in estimates. d) changes in estimates. Answer: a Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

13. Which type of accounting change may be accounted for in current and future periods only? a) change in accounting estimate b) change in inventory costing method c) change in accounting policy d) correction of an error Answer: a Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge 21-9 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

14. Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate? a) retrospectively only b) current period and prospectively c) current period and retrospectively d) current period only Answer: b Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

15. Accounting for a retrospective change requires a) reissuing all prior financial statements affected by the change. b) adjusting the ending balance of retained earnings for the current year. c) reporting the “catch-up” adjustment on the current income statement. d) adjusting the opening balance of each affected component of equity for the current year. Answer: d Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

16. The underlying principle of the retrospective application method is to a) apply changes currently and in the future. b) present all comparative periods as if the new accounting policy had always been used. c) make assumptions about what management’s intent was in prior years. d) disclose all mistakes made in the past. Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

17. Stockton Ltd. changed its inventory system from FIFO to average cost. What type of accounting change does this represent? a) A change in accounting estimate for which the financial statements for the prior periods included for comparative purposes do not need to be restated. b) A change in accounting policy for which the financial statements for prior periods included for comparative purposes do not need to be restated. c) A change in accounting policy for which the financial statements for prior periods included for comparative purposes should be restated. d) A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated. Answer: c Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

18. All items below are required disclosures for the correction of an accounting error except a) the nature of the error. b) the amount of the correction to basic and fully diluted EPS and to each line item on the financial statements presented for comparative. c) internal control breakdown that caused the error. d) the amount of the correction made at the beginning of the earliest prior period presented. Answer: c Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Comprehension 21-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

19. When an entity is first transitioning to IFRS, any adjustments required to bring GAAP measures in line with IFRS a) are recognized directly in other comprehensive income. b) are recognized directly in retained earnings. c) must be accounted for by prospective application. d) are ignored. Answer: b Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

20. Which of the following should be given retrospective treatment? Change in Change from Estimated Lives Unacceptable Policy of Depreciable Assets to Acceptable Policy a) yes yes b) no yes c) yes no d) no no Answer: b Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

21. Under IFRS, which of the following disclosures is NOT required for the correction of an accounting error? a) the amount of the correction made to each affected financial statement item for each prior period presented b) the nature of the error 21-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) who was responsible for the error d) the effect of the correction on both basic and diluted earnings per share for each prior period presented Answer: c Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

22. A publicly traded corporation changes from straight-line depreciation to double declining balance. Management believes that this will result in equally reliable and more relevant information; thus, it will be treated as a change in accounting policy. The entry to record this change should include a a) debit to Accumulated Depreciation. b) credit to Other Comprehensive Income. c) credit to Deferred Tax Asset. d) debit to Deferred Tax Liability. Answer: d Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

23. When a company decides to switch from deferring development costs to expensing them immediately, this change should probably be treated as a a) change in accounting policy. b) change in accounting estimate. c) prior period adjustment. d) correction of an error. Answer: b Difficulty: Easy Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. 21-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

24. The service life of a building that has been depreciated for 30 years of an originally estimated 50year life (no residual value) has been revised to an estimated remaining life of 10 years. Based on this information, the accountant should a) continue to depreciate the building over the original 50-year life. b) depreciate the remaining book value over the remaining life of the asset. c) adjust accumulated depreciation to its appropriate balance through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years. d) adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years. Answer: b Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

25. Randall Corp. began operations on January 1, 2022, and uses FIFO to cost its inventory. Management is contemplating a change to the average cost method and is interested in determining what effect such a change will have on pre-tax income. Accordingly, the following information has been developed: Ending Inventory 2022 2023 FIFO $480,000 $540,000 Average cost 400,000 500,000 Pre-tax Income (calculated using FIFO) 750,000 900,000 Based upon the above information, a change to the average cost method in 2023 would result in pretax income for 2023 of a) $790,000. b) $860,000. c) $940,000. d) $980,000. Answer: c

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

26. On January 1, 2023, Bluebird Ltd. changed its inventory valuation method from weighted-average cost to FIFO for financial statement and income tax purposes, to make its reporting as reliable and more relevant. The change resulted in a $900,000 increase in the beginning inventory at January 1, 2023. Assume a 25% income tax rate. The cumulative effect of this accounting change reported for the year ended December 31, 2023 is a) $0. b) $225,000. c) $675,000. d) $900,000. Answer: c Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $900,000 × (1 – .25) = $675,000

27. On January 1, 2023, Miner Corp. changed its inventory costing from FIFO to average cost for financial statement and income tax purposes, to make its reporting as reliable and more relevant. The change resulted in a $600,000 increase in the beginning inventory at January 1, 2023. Assume a 30% income tax rate. The cumulative effect of this accounting change should be reported by Chickadee in its 2023 a) Retained earnings statement as a $420,000 addition to the beginning balance. b) Income statement as $420,000 other comprehensive income. c) Retained earnings statement as a $600,000 addition to the beginning balance. d) Income statement as a $600,000 cumulative effect of accounting change. Answer: a Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how 21-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $600,000 × (1 – .3) = $420,000

28. On January 2, 2021, Moose Corp. purchased machinery for $270,000. The entire cost was incorrectly recorded as an expense. The machinery has a nine-year life and a $18,000 residual value. Moose uses straight-line depreciation for all its plant assets. The error was not discovered until May 1, 2023, and the appropriate corrections were made. Ignore income tax considerations. Before the corrections were made, retained earnings was understated by a) $270,000. b) $242,000. c) $214,000. d) $186,000. Answer: c Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $270,000 – [($270,000 – $18,000) ÷ 9 x 2] = $214,000

29. On January 2, 2021, Beaver Corp. purchased machinery for $270,000. The entire cost was incorrectly recorded as an expense. The machinery has a nine-year life and a $18,000 residual value. Beaver uses straight-line depreciation for all its plant assets. The error was not discovered until May 1, 2023, and the appropriate corrections were made. Ignore income tax considerations. Beaver’s income statement for the year ended December 31, 2023 would show the cumulative effect of this error in the amount of a) $0. b) $186,000. c) $214,000. d) $242,000. Answer: a Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. 21-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Not booked through I/S, booked through R/E

30. On January 1, 2020, Cumberland Ltd. bought machinery for $750,000. The company used straightline depreciation for this machinery, over an estimated useful life of ten years, with no residual value. At the beginning of 2023, Cumberland decided the estimated useful life of this machinery was only eight years (from the date of acquisition), still with no residual value. For calendar 2023, the depreciation expense for this machinery is a) $75,000. b) $65,625. c) $105,000. d) $93,750. Answer: c Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Accumulated depreciation to December 31/22: $750,000 ÷ 10 x 3 = $225,000 new annual expense ($750,000 – $225,000) ÷ (8 – 3) = $525,000 ÷ 5 = $105,000

31. On January 1, 2020, Missoula Corporation bought machinery for $800,000. It used double declining balance depreciation for this asset, with an estimated life of eight years, and an estimated $200,000 residual value. At the beginning of 2023, Missoula decided to change to the straight-line method of depreciation for this equipment and treated the change as a change in estimate. For calendar 2023, the depreciation expense for this machinery is a) $100,000. b) $92,500. c) $75,050. d) $27,500. Answer: d Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors 21-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Accumulated depreciation to December 31/22 (DDB): ($800,000 × .25) + ($600,000 × .25) + ($450,000 × .25) = $462,500 new depreciable amount $800,000 – $200,000 – $462,500 = $137,500 new annual expense $137,500 ÷ 5 = $27,500

32. On January 1, 2020, Casino Inc. purchased a machine for $300,000. The machine has an estimated five-year life, and no residual value. Double declining balance depreciation has been used for financial statement reporting and CCA for income tax reporting. Effective January 1, 2023, Casino decided to change to straight-line depreciation for this machine and treated the change as a change in accounting policy. For calendar 2023, Casino’s pre-tax income before depreciation on this asset is $250,000. Their income tax rate has been 30% for many years. What net income should Casino report for calendar 2023? a) $190,000 b) $171,640 c) $133,000 d) $91,000 Answer: c Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 ÷ 5 = $60,000 (annual depreciation using S/L) ($250,000 – $60,000) × (1 – .3) = $133,000

33. Major Corp. purchased a machine on January 1, 2020, for $900,000. The machine is being depreciated on a straight-line basis, using an estimated useful life of six years and no residual value. On January 1, 2023, Major determined, because of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no residual value. An accounting change was made in 2023 to reflect this additional information. Assuming that the direct effects of this change are limited to the effect on depreciation and the related tax provision, and that the income tax rate for all years since the machine was purchased was 30%, what should be reported in the income statement for calendar 2023 as the cumulative effect on prior years of changing the estimated useful life of the machine? a) $0 b) $60,000 c) $90,000 21-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) $315,000 Answer: a Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $0, use prospective application since this is a change in estimate

34. Minor Corp. purchased a machine on January 1, 2020, for $900,000. The machine is being depreciated on a straight-line basis, using an estimated useful life of six years and no residual value. On January 1, 2023, Minor determined, because of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no residual value. An accounting change was made in 2023 to reflect this additional information. What is the amount of depreciation expense on this machine that should be reported in Major’s income statement for calendar 2023? a) $225,000 b) $180,000 c) $112,500 d) $90,000 Answer: d Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($900,000 ÷ 6) × 3 = $450,000; $900,000 – $450,000 = $450,000 $450,000 ÷ 5 = $90,000

35. On January 1, 2019, Plover Ltd. purchased a machine for $495,000 and depreciated it using the straight-line method with an estimated useful life of eight years with no residual value. On January 1, 2022, Plover determined that the machine had a useful life of only six years from the date of acquisition but will have a residual value of $45,000. An accounting change was made in 2022 to reflect these additional facts. At December 31, 2023, the accumulated depreciation account for this machine should have a balance of a) $273,750. 21-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) $281,250. c) $361,875. d) $375,000. Answer: c Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Accumulated depreciation to December 31/22: $495,000 × 3 ÷ 8 = $185,625 new annual rate ($495,000 – $185,625 – $45,000) ÷ 3 = $88,125 Accumulated depreciation at December 31/23 = $185,625 + ($88,125 x 2) = $361,875

36. On January 1, 2020, Wren Corp. purchased a patent for $238,000. The patent is being amortized straight-line with no residual value over its remaining legal life of 15 years. However, at the beginning of 2023, Wren determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the 2023 of financial position for the patent, net of accumulated amortization, at December 31, 2023? a) $142,800 b) $163,200 c) $168,000 d) $174,550 Answer: b Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Accumulated amortization to December 31/22: $238,000 × 3 ÷ 15 = $47,600 new annual rate [($238,000 – $47,600) ÷ 7] = $27,200 patent at December 31/23 = $238,000 – $47,600 – $27,200 = $163,200

*37. If an error has already counter-balanced itself, and the books have already been closed, which of the following is required? a) No journal entry is required. b) A journal entry into the next period is required. 21-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) An entry is necessary to adjust the present balance of retained earnings and the other affected balance sheet account(s). d) The books must be re-opened and journal entry for the current period should be created. Answer: a Difficulty: Easy Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*38. All of the following involve counterbalancing errors except for the a) failure to record prepaid expenses. b) failure to record an asset impairment. c) understatement of ending inventory. d) overstatement of purchases. Answer: b Difficulty: Easy Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*39. Counterbalancing errors do NOT include a) errors that correct themselves in two years. b) errors that correct themselves in three or more years. c) an understatement of ending inventory. d) an overstatement of unearned revenue. Answer: b Difficulty: Easy Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*40. A company using a perpetual inventory system neglected to record a purchase of merchandise on account at year end. This merchandise was also omitted from the year-end physical count. How will these errors affect assets, liabilities, and shareholders' equity at year end and net income for the year? Assets Liabilities Shareholders' Equity Net Income a) no effect understate overstate overstate b) no effect overstate understate understate c) understate understate no effect no effect d) understate no effect understate understate Answer: c Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*41. MissTake Corp. is a small private corporation that does NOT prepare comparative statements. At the end of its 2023 fiscal year, it was discovered that the 2022 depreciation expense on its computer equipment had been incorrectly debited to maintenance expense. How should MissTake deal with this situation? a) Prepare an adjusting entry to debit depreciation expense and credit maintenance expense. b) Prepare an adjusting entry to debit retained earnings and credit maintenance expense. c) Restate its 2022 financial statements. d) Ignore it, its is likely immaterial. Answer: d Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*42. On December 31, 2023, the bookkeeper at Thrush Corp. did NOT record special insurance costs that had been incurred (but NOT yet paid), related to a building that Thrush Corp. is constructing. What is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2023 statement of financial position? Accrued Liabilities Retained Earnings a) no effect no effect b) no effect overstated c) understated no effect 21-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

understated

overstated

Answer: c Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

*43. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $1,500 understated $2,200 overstated Depreciation expense $400 understated An insurance premium of $3,600 was prepaid in 2022 covering the calendar years 2022, 2023, and 2024. This had been debited to insurance expense. In addition, on December 31, 2023, fully depreciated machinery was sold for $1,900 cash, but the sale was NOT recorded until 2024. There were no other errors during 2023 or 2024 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total net effect of the errors on Cheyenne’s 2023 net income? a) Net income understated by $2,900 b) Net income overstated by $1,500 c) Net income overstated by $2,600 d) Net income overstated by $3,000 Answer: d Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $1,500 (o) + $2,200 (o) + $1,200 (o) – $1,900 (u) = $3,000 (o)

*44. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $1,500 understated $2,200 overstated Depreciation expense $400 understated An insurance premium of $3,600 was prepaid in 2022 covering the calendar years 2022, 2023, and 2024. This had been debited to insurance expense. In addition, on December 31, 2023, fully depreciated machinery was sold for $1,900 cash, but the sale was NOT recorded until 2024. There were no other errors during 2023 or 2024 and no corrections have been made for any of the errors. Ignore income tax 21-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

considerations. What is the total net effect of the errors on the amount of Cheyenne's working capital at December 31, 2023? a) Working capital overstated by $1,000 b) Working capital overstated by $300 c) Working capital understated by $900 d) Working capital understated by $2,400 Answer: c Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $2,200 (o) – $1,200 (u) – $1,900 (u) = $900 (u)

*45. Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $1,500 understated $2,200 overstated Depreciation expense $400 understated An insurance premium of $3,600 was prepaid in 2022 covering the calendar years 2022, 2023, and 2024. This had been debited to insurance expense. In addition, on December 31, 2023, fully depreciated machinery was sold for $1,900 cash, but the sale was NOT recorded until 2024. There were no other errors during 2023 or 2024 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total effect of the errors on the balance of Cheyenne's retained earnings at December 31, 2023? a) Retained earnings understated by $2,000 b) Retained earnings understated by $900 c) Retained earnings understated by $500 d) Retained earnings overstated by $700 Answer: c Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $400 (o) + $2,200 (o) – $1,200 (u) – $1,900 (u) = $500 (u)

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*46. At December 31, 2023, Grant Corp.’s auditor discovered the following errors: 1. Accrued salaries payable of $11,000 were NOT recorded at December 31, 2022. 2. Office supplies on hand of $5,000 at December 31, 2023 had been treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause a) 2023 net income to be understated $16,000 and December 31, 2023 retained earnings to be understated $5,000. b) 2022 net income and December 31, 2022 retained earnings to be understated $11,000 each. c) 2022 net income to be overstated $6,000 and 2023 net income to be understated $5,000. d) 2023 net income and December 31, 2023 retained earnings to be understated $5,000 each. Answer: a Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: 2023 NI = $11,000 (u) + $5,000 (u) = $16,000 (u) 2023 RE = $5,000 (u) The $11,000(o) from 2022 is offset by the $11,000(u) in 2023

*47. Fairfax Inc. began operations on January 1, 2022. Financial statements for 2022 and 2023 contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $33,000 too high $39,000 too low Depreciation expense 21,000 too high — Insurance expense 15,000 too low 15,000 too high Prepaid insurance 15,000 too high — In addition, on December 31, 2023 fully depreciated equipment was sold for $7,200, but the sale was NOT recorded until 2024. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on Fairfax's 2023 net income is a) understated by $94,200. b) understated by $61,200. c) overstated by $28,800. d) overstated by $49,800. Answer: a Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting 21-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Analysis AACSB: Analytic Feedback: $33,000 (u) + $39,000 (u) + $15,000 (u) + $7,200 (u) = $94,200 (u)

*48. Fairfax Inc. began operations on January 1, 2022. Financial statements for 2022 and 2023 contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $33,000 too high $39,000 too low Depreciation expense 21,000 too high — Insurance expense 15,000 too low 15,000 too high Prepaid insurance 15,000 too high — In addition, on December 31, 2023 fully depreciated equipment was sold for $7,200, but the sale was NOT recorded until 2024. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on Fairfax's retained earnings at December 31, 2023 is that the balance is understated by a) $82,200. b) $67,200. c) $46,200. d) $34,200. Answer: b Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $39,000 (u) + $21,000 (u) – $15,000 (o) + $15,000 (u) + $7,200 (u) = $67,200 (u)

*49. Fairfax Inc. began operations on January 1, 2022. Financial statements for 2022 and 2023 contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $33,000 too high $39,000 too low Depreciation expense 21,000 too high — Insurance expense 15,000 too low 15,000 too high Prepaid insurance 15,000 too high — In addition, on December 31, 2023 fully depreciated equipment was sold for $7,200, but the sale was NOT recorded until 2024. No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on Fairfax's working capital at December 31, 2023 is that working capital is understated by a) $100,200. 21-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) $79,200. c) $46,200. d) $31,200. Answer: c Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $39,000 (u) + $7,200 (u) = $46,200 (u)

*50. Eagle Corp. is a calendar-year corporation whose financial statements for 2022 and 2023 included errors as follows: Year Ending Inventory Depreciation Expense 2022 $36,000 overstated $30,000 overstated 2023 12,000 understated 10,000 understated Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2022 or December 31, 2023. Ignoring income taxes, by how much should Eagle's retained earnings be retrospectively adjusted at January 1, 2024? a) $32,000 increase b) $8,000 increase c) $4,000 decrease d) $2,000 increase Answer: a Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $12,000 (u) + $30,000 (u) – $10,000 (o) = $32,000 (u)

*51. On January 1, 2022, Condor Corp. acquired a machine for $200,000. It is to be depreciated straight line over five years, with no residual value. As a result of a bookkeeping error, no depreciation was recognized in Condor's 2022 financial statements. The oversight was discovered during the preparation of Condor's 2023 financial statements. Depreciation expense on this machine for 2023 should be a) $0. b) $40,000. 21-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) $50,000. d) $80,000. Answer: b Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $200,000 ÷ 5 = $40,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 21-52 Conditions and disclosures for a change in accounting policy under IFRS and ASPE Able Enterprises is a large consumable distributor. The company has been using the weighted average method for its inventory valuation but would like to move to using FIFO. The company is publicly traded. Instructions a) Under what conditions would it be acceptable for Able to move from using the weighted average method to FIFO? Under what situations can a company reporting under IFRS make changes to its accounting policy? b) Would your answer in part a change if the company adhered to ASPE rather than IFRS? Explain under what situations a change policy could be made under ASPE. c) Critical Thinking: As the CFO you have informed your accounting team that if management makes the change to FIFO that they will be possible for ensuring that the correct disclosures are made. A new junior accountant is confused by this. Explain the main objectives of accounting and disclosure standards for accounting changes. Solution 21-52 a) Under IFRS, there are only two situations where a change in accounting policy is acceptable: 1. The change is required by a primary source of GAAP. 2. A voluntary change results in the information in the financial statements being as reliable and more relevant. b) Voluntary changes are allowed under ASPE without having to meet the “reliable and more relevant” criterion. These include accounting and reporting 1. for investments in subsidiary companies, and in companies where the investor has significant influence or joint control. 2. for expenditures during the development phase on internally generated intangible assets. 3. for defined benefit plans. 4. for accounting for income taxes. 5. for measuring the equity component of a compound financial instrument. c) CRITICAL THINKING: The three main objectives of accounting and disclosure standards for accounting changes include: 1. Limiting the types of changes permitted. 2. Standardizing the reporting for each type of change. 3. Ensuring that readers of accounting reports have the necessary information to understand the effects of such changes on the financial statements. Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. 21-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 21-53 Matching accounting changes to situations The three types of accounting changes are: Code a) Change in accounting policy b) Change in accounting estimate c) Error correction Instructions Following are a series of situations. You are to enter a code letter to the left to indicate the type of change. ____ 1. Change due to debiting a new asset to an expense account. ____ 2. Change from FIFO to weighted average costing. ____ 3. Change due to failure to recognize unearned portion of revenue. ____ 4. Change in amortization period for an intangible asset. ____ 5 Change in the calculation of warranty liabilities. ____ 6. Change due to failure to recognize and accrue income. ____ 7. Change in residual value of a depreciable plant asset. ____ 8. Change from an unacceptable accounting policy to an acceptable accounting policy. ____ 9. Adoption of a new accounting standard. ____ 10. Change due to expensing prepaid assets. ____ 11. Change from straight-line to double declining-balance method of depreciation. ____ 12. Change in estimated service life of a depreciable plant asset. ____ 13. Change from one acceptable policy to another acceptable policy. ____ 14. Change due to understatement of inventory. ____ 15. Change in estimated net realizable value of accounts receivable. Solution 21-53 1. c 2.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

10. c 11. b 12. b 13. a 14. c 15. b Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 21-54 Matching disclosures to situations In the blank to the left of each statement, fill in the letter from the following list which best describes the treatment of the item on the financial statements of Sora Inc. for the current year ending December 31, 2023: a) Change in accounting policy requiring retrospective application b) Change in estimate c) Correction of error d) None of the above ___

___

In 2023, the company changed its method of recognizing income from the completedcontract method to the percentage-of-completion method. At the end of 2023, an audit revealed that the corporation's allowance for doubtful accounts was too large and should be reduced to 2%. When the audit was performed in 2022, the allowance seemed appropriate. Depreciation on a truck, acquired in 2019, was understated because the service life had been overestimated. The understatement had been made in order to show higher net

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

___

___ ___

8. 9.

___

10.

income in 2020 and 2021. The company switched from average cost to FIFO inventory costing during the current year. In 2023, Sora introduced a new pension plan for its employees, which included past service costs of $50,000. It decided to recognize the $50,000 as part of its 2023 pension expense. During 2023, a long-term bond with a carrying value of $3,600,000 was retired at a cost of $4,100,000. After negotiations with Canada Revenue Agency, income taxes owing for 2022 were established at $42,900. They were originally estimated to be $28,600. In 2023, the company incurred interest expense of $29,000 on a 20-year bond issue. In calculating the depreciation in 2021 for buildings, an error was made which overstated income in that year by $75,000. The error was discovered in 2023. In 2023, the company changed its method of depreciating plant assets from the double declining-balance method to the straight-line method.

Solution 21-54 1. a 2.

10. b Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ex. 21-55 Change in estimate, voluntary change in accounting policy, correction of errors As part of Zip Transports loan covenants, the company must provide its accountant prepared financial statements to its banker on an annual basis. The bank will then conduct a financial analysis of the statements to assess overall company stability and ensure that ZIP is in compliance with the covenants. The bank notices that there appears to significant changes to Zip’s accounting policies and disclosures. The bank contacts Zip’s CFO asking for a detailed explanation of these changes. Instructions a) Provide the bank with a detailed report and examples of each of the following: 1. Change in estimate 2. Voluntary change in accounting policy 3. Correction of an error Make sure to address any differences in reporting under IFRS versus ASPE in your explanation. b) CRITICAL THINKING: Why do you think the banker ask for a detailed explanation of the changes? What challenges is the banker experiencing in conducting the annual review? Solution 21-55 a) 1. Changes in Estimate Accounting estimates will change as new events occur, as more experience is acquired, or new information is obtained. Changes in estimates are handled prospectively; that is in current and future periods. No restatement of previous financial statements is made. Financial statement disclosure includes the nature and amount of the change for the current period under ASPE and future periods under IFRS unless it is impracticable to estimate its affect. Immaterial changes in estimates do not need to be disclosed. Examples include: - collectability of receivables - change in depreciation methods - estimated lives or residual values - warranty costs 2. Voluntary Changes in Accounting Policy The financial statements need to be adjusted to reflect the change in all of the prior years presented, the current year, and the cumulative effect of the change on prior periods, net of tax, should be shown as an adjustment to beginning retained earnings in the current year. Disclosure should include the amount of the adjustment for the current period and each prior period presented, including the effect on each financial statement line item and the per share amounts, the amount of the adjustment related to periods prior to those presented, either that the change has been applied retrospectively, or without restatement and an explanation why this was impractical, and justification of the change. Examples include: - change in the basis of inventory pricing - change in the method of accounting for construction contracts - change in the method of accounting for instalment sales - change in the method of accounting for defined pension plans 3.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Corrections of errors are recorded in the year discovered, are corrected retrospectively with restatement of all prior years presented, and the beginning balance of retained earnings is adjusted. The nature of the error, the amount of the correction for each prior period presented, and the amount related to periods prior to those presented, and that the comparative information has been restated, must all be disclosed. Examples include: - a change from an accounting policy that is not generally accepted to an accounting policy that is accepted - mathematical mistakes - changes in estimates that occur because the estimates are not made in good faith - an oversight - a misuse of facts - misclassification of an asset as an expense or vice versa b) CRITICAL THINKING: Accounting changes often make it difficult to develop meaningful trend data, which would undermine one of the major reasons why the accounting information was useful in the past. Financial statement readers should look closely at all accounting changes and adjust any trend data appropriately. Although most adjustments result in no change in the company’s cash position, some adjustments can end up converting previously reported operating cash flows to investing or financing flows. Most changes tend to shift earnings from one accounting period to another. The disclosures required by the accounting standards are the best source of input for the analysis. Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 21-56 Recognition of accounting changes or corrections Meck Pharmaceuticals new CFO who has been reviewing the company’s past financial statements and its current accounting policies. Based on his analysis, the accounting team has been instructed to make the following changes: 1. Change from straight-line method of depreciation to double declining balance method 2. Change from the cash basis to the accrual basis of accounting 3. Change from FIFO to weighted average cost method for inventory valuation purposes 4. Change due to failure to record depreciation in a previous period 5. Change in the net realizable value of certain receivables Instructions For each of the items above, indicate the type of accounting change the accounting team has been instructed to make and how each is recognized in the accounting records for the current year. Solution 21-56 21-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Change in accounting estimate; prospective application for current and future periods only.

Correction of an error; retrospective treatment; restatement of financial statements of all prior periods presented; adjustment of beginning retained earnings of the current period. If restatement is not practical, restatement may be omitted.

Change in accounting policy; retrospective treatment; adjustment of beginning retained earnings, restatement of financial statements of all prior periods presented. If restatement is not practical, restatement may be omitted.

Correction of an error; restatement of financial statements of the period affected; adjustment of beginning retained earnings of the first period after the error.

Change in accounting estimate; prospective application for current and future periods only.

Ex. 21-57 Effects of errors on financial statements Show how the following independent errors will affect net income on the income statement and the shareholders' equity section of the statement of financial position (SFP) using the symbol + (plus) for overstated, – (minus) for understated, and 0 (zero) for no effect. 2022 2023 Income SFP Income SFP Statement Statement 1. Ending 2022 inventory overstated 2. Failure to accrue 2022 interest revenue 3. A capital expenditure for factory equipment (useful life, 5 years) was charged to expense in error in 2022 4. Failure to accrue 2022 wages 5. Ending inventory in 2022 understated 6. Overstated 2022 depreciation expense; 2023 expense correct Solution 21-57 2022 Income Statement

SFP

2023 Income Statement

SFP

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Ending 2022 inventory overstated.

Failure to accrue 2022 interest revenue.

A capital expenditure for factory equipment (useful life, 5 years) was charged to expense in 2022.

Failure to accrue 2022 wages.

Ending inventory in 2022 understated.

Overstated 2022 depreciation expense; 2023 expense correct.

–

Ex. 21-58 Effects of errors on net income Hummingbird Corp. began operations on January 1, 2022. Financial statements for 2022 and 2023 contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $20,000 too high $35,000 too high Depreciation expense 16,000 too low — Accumulated depreciation 16,000 too low 16,000 too low Insurance expense 14,000 too high 10,000 too low Prepaid insurance 14,000 too low 4,000 too low In addition, on December 26, 2023, fully depreciated equipment was sold for $19,000, but the sale was NOT recorded until 2024. No corrections have been made for any of the errors. Instructions a) Ignoring income tax, show your calculation of the total effect of the errors on 2023 net income. b) CRITICAL THINKING: How do these types of errors get corrected on the financial statements? Within your explanation include a discussion on how a retrospective application for accounting changes is applied. Solution 21-58 2022 ending inventory .........................................................

$(20,000)

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2023 ending inventory ......................................................... Insurance expense ............................................................... Unrecorded gain .................................................................. Overstatement of 2023 income...........................................

35,000 10,000 (19,000) $ 6,000

Note: The error in depreciation expense has no effect on 2023 income. The error in prepaid insurance is related to the error in insurance expense. b) CRITICAL THINKING: The general requirement for changes in accounting policy and the required method for error correction is that the change’s cumulative effect be shown as an adjustment to the beginning retained earnings. Income statements of the affected prior periods presented for comparison purposes are restated to show, on a retrospective basis, the effects of the new accounting policy. When historical summaries are reported, the adjustments are reported in each prior year affected. When the effects on particular prior periods of a change in accounting policy is impractical to determine, the cumulative effect of the change (net of tax) is shown as an adjustment to the beginning retained earnings. Comparative financial statements of prior periods presented for comparison are not restated. Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 21-59 Factors in choosing accounting methods and procedures Max Systems is a new technology start-up. The company is currently in the process of incorporating and choosing appropriate accounting policies for this firm. The management team wants to make sure it understands the economic consequences of the policys the company chooses. Instructions a) Explain what management means when it uses the term “economic consequences”. b) Identify and provide a detailed explanation of the four economic factors as discussed in the textbook that the management team of Max Systems may wish to consider when choosing the company’s accounting policies. Solution 21-59 a) Management pays careful attention to the accounting methods it follows and often changes accounting methods not for conceptual reasons but rather for economic reasons. As indicated throughout this textbook, such arguments have come to be known as economic consequences arguments, since they focus on the supposed impact of accounting on the behaviour of investors, creditors, competitors, governments, and the managers of the reporting companies themselves, rather than addressing the conceptual justification for accounting standards. b) Research has shown that choices of accounting policies often have economic consequences for 21-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

business organizations. As a result, management may choose accounting policies based on the expected economic impact of the policy. Some of these reasons are political costs, capital structure, bonus payments, and smoothing of earnings. Each of these is explained in more detail below: 1. Political costs: The larger the firm, the more likely it is to become subject to legislation such as anti-competition regulations and the more likely it is to be required to pay higher taxes. Therefore, companies that are politically visible may try to report income numbers that are low in order to avoid the scrutiny of regulators. 2. Capital structure: Several studies have found that a company’s capital structure can affect the selection of accounting methods. For example, a company with a high debt-to-equity ratio is more likely to be constrained by debt covenants. A company may be considered in default on its bonds if the debt-to-equity ratio is too high. As a result, this type of company is more likely to select accounting methods that will increase net income—such as capitalizing interest instead of expensing it, or using the full cost method instead of the successful efforts approach for exploration and development costs in the oil and gas industry. 3. Bonus payments: Studies have found that if compensation plans tie managers’ bonus payments to income, management may select accounting methods that maximize bonus payments. 4. Smooth earnings: Substantial increases in earnings attract the attention of politicians, regulators, and competitors. In addition, large increases in income create problems for management because the same results are difficult to achieve in subsequent years. Compensation plans may adjust to these higher numbers as a baseline and make it difficult for management to achieve its profit goals and receive bonuses in the following years. On the other hand, decreases in earnings might signal that the company is in financial trouble. Furthermore, significant changes in income raise concerns on the part of shareholders, lenders, and other interested parties about the riskiness of the company. For all these reasons, companies have an incentive to “manage” or “smooth” their earnings. Difficulty: Easy Learning Objective: Identify economic motives for changing accounting methods and interpret financial statements where there have been retrospective changes to previously reported results. Section Reference: Analysis CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Ex. 21-60 IASB and accounting policies and estimates As part of its disclosure initiative, why is the IASB looking at the definitions of accounting policies and accounting estimates? Solution 21-60 The IASB is looking at the definitions of accounting policies and accounting estimates as some preparers and users feel that the definitions currently provided in IFRS are not sufficiently detailed or informative. What is the issue? As noted in the chapter, accountants are increasingly called to deal with measurement uncertainty and must continually estimate and re-estimate many financial statement elements. If we look at recently issued IFRS, we can see that, as new standards are issued 21-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

or old standards revised, the IASB is including additional guidance regarding tools and techniques to measure and deal with estimation uncertainty. Therefore, as the amount of guidance increases (including specific methods to estimate amounts), the act of estimating becomes in many ways more complex and companies must carefully consider which methodologies should be used to measure things and how they should be applied. Thus the line between changes in accounting policies and changes in estimates is becoming more blurred. Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and APSE. Section Reference: IFRS/ASPE Comparison CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Communication

*Ex.21–61 Error corrections TokTik Inc.'s December 31 year-end financial statements contained the following errors: Dec. 31, 2022 Dec. 31, 2023 Ending inventory $1,800 overstated $2,100 understated Depreciation expense $200 understated An insurance policy of $4,500 was prepaid in 2022 covering the calendar years 2022, 2023, and 2024 but had been debited to insurance expense. On December 31, 2023, fully depreciated equipment was sold for $2,500 cash, but the sale was NOT recorded until 2024. There were no other errors during this period and no corrections have been made. Instructions a) Calculate the net effect of the errors on TokTik’s 2023 net income. b) Calculate the total effect of the errors on the balance of TokTik’s retained earnings at December 31, 2023. c) Calculate the net effect of the errors on TokTik’s working capital at December 31, 2023. *Solution 21-61 a) $1,800 understated + $2,100 understated – $1,500* overstated + $2,500 understated = $4,900 understated b) $2,100 understated + $1,500* understated + $2,500 understated – $200 overstated = $5,900 understated c) $2,100 understated + $1,500* understated + $2,500 Understated = $6,100 understated *$4,500 ÷ 3 = $1,500 Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. 21-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Ex. 21-62 Non-counterbalancing error correction Turkey Corp. bought a machine on January 3, 2021 for $275,000. It had a $15,000 estimated residual value and a ten-year life. The corporation uses straight-line depreciation. An expense account was debited in error on the purchase date, but this was NOT discovered until late 2023. Instructions Prepare the correcting entry or entries related to the machine for 2023. Ignore income tax effects. *Solution 21-62 Annual depreciation is ($275,000 – $15,000) ÷ 10 = $26,000 Machinery ................................................................................................. Retained Earnings ............................................................................... Accumulated Depreciation—Machinery (2 × $26,000) .......................

275,000

Depreciation Expense............................................................................... Accumulated Depreciation—Machinery.............................................

26,000

223,000 52,000

26,000

Difficulty: Medium Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 21-63 Correction of errors in prior years Goldfinch Inc. reported net incomes for the last three years as follows: 2021, $62,000;

2022, $63,000;

2023, $60,000

In reviewing the accounts in 2024 (after the books for the prior year had been closed), you find that the following errors have been made: 2021 2022 2023 Overstatement of ending inventory ........................................ $7,000 $8,500 $4,000 Understatement of accrued advertising expense ................... 1,100 2,000 1,200 Instructions a) Calculate corrected net incomes for 2021, 2022, and 2023. b) Prepare the entry required in 2024 to correct the books. Ignore income taxes. Show any calculations. Solution 21-63 a) Net income (unadjusted) Overstatement of ending inventory—2021 Overstatement of ending inventory—2022 Overstatement of ending inventory—2023 Understatement of accrued advertising expense—2021 Understatement of accrued advertising expense—2022 Understatement of accrued advertising expense—2023 Net income (corrected) b)

2021 $62,000 (7,000)

2022 $63,000 7,000 (8,500)

1,100 (2,000) _________ _________ $53,900 $60,600

2023 $60,000 8,500 (4,000)

(1,100)

Retained Earnings .................................................................................... Advertising Expense.......................................................................... Inventory ...........................................................................................

2,000 (1,200) $65,300

5,200 1,200 4,000

Pr. 21-64 Accounting for accounting changes and error corrections Parrot Corp. reported net incomes for the last three years as follows: 21-41 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2023 2022 2021 $240,000 $225,000 $180,000 During the 2023 year-end audit, the following items come to your attention: 1. Parrot bought a truck on January 1, 2020 for $98,000 cash, with an $8,000 estimated residual value and a six-year life. The company debited an expense account for the entire cost of the asset. Parrot uses straight-line depreciation for all trucks. 2. During 2023, Parrot changed from straight-line depreciation for its cement plant to double declining balance. The following calculations present depreciation on both bases: 2023 2022 2021 Straight-line $18,000 $18,000 $18,000 Double declining balance 23,100 30,000 36,000 The net income for 2023 was calculated using the double declining balance method. 3. In reviewing its provision for uncollectible accounts during 2023, the corporation has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2022 and 2021 when the expense had been $9,000 and $6,000, respectively. Parrot recorded bad debt expense using the new rate for 2023. If they had used the old rate, they would have recorded $3,000 less bad debt expense on December 31, 2023. Instructions (Ignore all income tax effects) a) Prepare the general journal entry required to correct the books for the item 1 situation (only) of this problem, assuming that the books have not been closed for 2023. b) Present comparative income statement data for the years 2021 to 2023, starting with income before the cumulative effect of any accounting changes. c) Assume that the beginning retained earnings balance (unadjusted) for 2021 was $630,000. At what adjusted amount should the beginning retained earnings balance for 2021 be shown, assuming that comparative financial statements were prepared? d) Assume that the beginning retained earnings balance (unadjusted) for 2023 is $900,000 and that comparative financial statements are not prepared. At what adjusted amount should this beginning retained earnings balance be shown? Solution 21-64 Annual depreciation would be ($98,000 – $8,000) ÷ 6 = $15,000 a)

Vehicles ..................................................................................................... Depreciation Expense (2023 only) ........................................................... Accumulated Depreciation—Vehicles (4 years, 2020–2023) ........... Retained Earnings .............................................................................

b) Income before cumulative effect of of error correction Depreciation of truck

98,000 15,000 60,000 53,000

2023

2022

2021

$240,000 (15,000) $225,000

$225,000 (15,000) $210,000

$180,000 (15,000) $165,000

Note items 2 and 3 are considered changes in estimates, and are accounted for prospectively. 21-42 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Retained earnings (unadjusted) ......................................................... Correction of 2020 error ($98,000 – $15,000)...................................... Retained earnings (adjusted) ..............................................................

$630,000 83,000 $713,000

Retained earnings (unadjusted) ......................................................... Correction of error ($98,000 – $45,000) .............................................. Retained earnings (adjusted) ..............................................................

$900,000 53,000 $953,000

Pr.21-65 Changes in estimates Green Home Automation (GHA) Inc. is a publicly traded company that designs and manufactures environmentally-friendly windows. The high-tech windows have the ability to both cool homes in the summer and warm them in the winter. The company owns the following assets: 1. Manufacturing equipment that was purchased for $495,000 on August 1, 2019. The equipment was estimated to have a useful life of 10 years with no residual value. 2. A patent for the heating / cooling technology that was purchased for $315,000 on August 1, 2019. The patent is estimated to have a remaining legal life of 12 years with no residual value. GHA has a fiscal year end of July 31 and uses straight-line depreciation. On August 1, 2022, GHA determines that the equipment actually only has a 7-year useful life from the acquisition date, but with a residual value of $25,000. In addition, the economic benefits of the patent were determined to only last 6 years from the acquisition date. Instructions a) Calculate the depreciation expense for each asset for 2023. b) Calculate the balance in the accumulated depreciation account for each asset on July 31, 2023. c) Calculate the net amount to be reported in the 2023 of financial position for each of these assets at July 31, 2023. Solution 21-65 Manufacturing Equipment: Accumulated depreciation to July 31/22: $495,000 ÷ 10 × 3 = $148,500 a) 2022 depreciation expense: ($495,000 – $148,500 – $25,000) ÷ 4 = $80,375 b) Accumulated depreciation at July 31/23: $148,500 + $80,375 = $228,875 c) Equipment net value at July 31/23: $495,000 – $228,875 = $266,125 Patent: 21-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Accumulated amortization to July 31/22: $315,000 ÷ 12 × 3 = $78,750 a) 2022 amortization expense: [($315,000 – $78,750) ÷ 3] = $78,750 b) Accumulated amortization – patents: $78,750 + $78,750 = $157,500 c) Patent net book value at July 31/23: $315,000 – $157,500 = $157,500 Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 21-66 Accounting policies under IFRS and ASPE Explain how management should apply accounting policies under IFRS and ASPE when there is no specific IFRS or primary source of GAAP to refer. Solution 21-66 Under IFRS, accounting policies applied are determined by applying the IFRS. If there is no specific IFRS that applies, management applies judgement in determining a policy that is relevant to the needs of users and is reliable. Judgement considers first the requirements of IFRS in similar situations, and then the definitions, recognition criteria, and elements in the Framework for the Preparation and Presentation of Financial Statements. Under ASPE, if not dealt with in a primary source or if additional guidance is needed, management uses policies consistent with the primary sources, and that are developed using professional judgement and the concepts in Section 1000. Difficulty: Easy Learning Objective: Identify differences in accounting between IFRS and APSE. Section Reference: IFRS/ASPE Comparison CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

*Pr. 21-67 Error corrections and adjustments The controller for Stork Corp. is concerned about certain business transactions that the company experienced during 2023. The controller, after discussing these matters with various individuals, has come to you as the CFO for advice. Stork follows ASPE. The transactions at issue are presented below: 1. The company has decided to switch from the direct write-off method for accounting for bad debts to the percentage-of-sales approach. Assume that Stork has recognized bad debt expense as the receivables have actually become uncollectible in the following way: 2022 2023 21-44 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

From 2022 sales 10,600 4,000 From 2023 sales 15,000 The controller estimates that an additional $21,800 in bad debts will be written off in 2024: $3,800 applicable to 2022 sales and $18,000 to 2023 sales. Inventory has been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such (on account). At December 31, 2023, inventory billed and in the hands of consignees amounted to $160,000. The percentage markup on selling price is 20%. Assume that the consigned inventory is sold the following year. The company uses the perpetual inventory system. During 2023, Stork sold $300,000 worth of goods on the instalment basis. The cost of sales associated with these instalment sales is $225,000. The company inadvertently handled these sales and related costs as part of their regular sales transactions. Cash of $86,000, including a down payment of $30,000, was collected on these instalment sales during 2023. Due to questionable collectability, the instalment method was considered appropriate.

Instructions a) Assume that Stork Corp. reported pre-tax income of $500,000 for 2023. Present a schedule showing the corrected pre-tax income after the above transactions are taken into account. Ignore income tax effects. b) Prepare the correcting journal entries required at December 31, 2023, assuming that the books have been closed. c) CRITICAL THINKING: The CEO of Stork Corp. is reviewing the controller’s work. She is unclear why the reported pre-tax income is now lower than it was prior to these adjustments. She asks you why this occurred and for of a comprehensive explanation regard how and when accounting changes are made. Provide her with this information. *Solution 21-67 a) Reported net income ................................................................................ 1. Additional charge for bad debts 2022 debts written off in 2023 (add back)........................................ 2023 debts to be written off in 2024 (deduct) .................................. 2.

$ 4,000 (18,000)

Consignment (20% × $160,000) ........................................................

$500,000

(32,000)

Gross profit—Recognized ................................................................. Should be 25% × $86,000 .......................................................... Corrected income .....................................................................................

75,000 (21,500)

Retained Earnings ............................................................................. Allowance for Doubtful Accounts .............................................

21,800

Consignment Inventory .................................................................... Retained Earnings ............................................................................. Accounts Receivable .................................................................

128,000 32,000

Retained Earnings .............................................................................

53,500

(14,000)

(53,500) $400,500

21,800

160,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Deferred Gross Profit.................................................................

53,500

c) CRITICAL THINKING: In this case Stork made an adjustment to its accounting policies and there was a change in estimates. Accounting changes may result for any of the following reasons: 1. A change in accounting policy. Changes in the choice of “specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements” are all changes in accounting policies. The initial adoption of a new accounting standard and a change from a weighted average cost flow formula to one based on FIFO (as long as this results in reliable and more relevant information) are both examples of a change in policy. 2. A change in accounting estimate. A change in an accounting estimate is an adjustment to the carrying amount of an asset or a liability or the amount of an asset’s periodic consumption, and results from an assessment of the present status of or the expected future benefits and obligations associated with an asset or liability. Examples include a change in the estimate of the service life of an asset that is subject to depreciation, and a change in the estimate of the net realizable value of accounts receivable. 3. Correction of a prior period error. Prior period errors are omissions from or mistakes in the financial statements of one or more prior periods that are caused by the misuse of, or failure to use, reliable information that existed when those financial statements were completed and could reasonably have been found and used in their preparation and presentation. An example is the failure to recognize depreciation on a group of capital assets that were used in operations for a specific prior period. Difficulty: Medium Learning Objective: Identify and differentiate among the types of accounting changes and explain how to account for them. Section Reference: Changes in Accounting Policies and Estimates, and Errors Learning Objective: Correct the effects of errors and prepare restated financial statements. Section Reference: Appendix 21A: Error Analysis CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 22 STATEMENT OF CASH FLOWS CHAPTER STUDY OBJECTIVES 1. Understand cash and cash equivalents as well as the business importance of cash flows, and describe the purpose and uses of the statement of cash flows. One sign of a healthy company is positive cash flow from operations. Companies can use these funds to finance expansion, to issue dividends, or to ensure that they remain solvent during economic downturns. Many consider the statement of cash flows to be less susceptible to earnings management than the statement of comprehensive income. The primary purpose of this statement is to provide information about an entity’s cash receipts and cash payments during a period. A secondary objective is to report the entity’s operating, investing, and financing activities during the period. Cash and cash equivalents include cash on hand, demand deposits, and short-term, highly liquid nonequity investments that are convertible to known amounts of cash with insignificant risk of changes in value. These amounts are reduced by bank overdrafts that fluctuate from positive to negative balances and that are repayable on demand. IFRS allows preferred shares acquired within a short period of their maturity to be included as a cash equivalent.

2. Identify the major classifications of cash flows and explain the significance of each classification. Cash flows are classified into those resulting from operating, investing, and financing activities. A company’s ability to generate operating cash flows affects its capacity to pay dividends to shareholders, to take advantage of investment opportunities, to provide internal financing for growth, and to meet obligations when they fall due. The amount of cash spent on investing activities affects an organization’s potential for future cash flows. Cash invested in increased levels of productive assets forms the basis for increased future operating cash inflows. Financing cash activities affect the firm’s capital structure and, therefore, the requirements for future cash outflows.

3. Prepare the operating activities section of a statement of cash flows using the direct versus the indirect method. The direct method presents operating cash flows in a manner similar to a condensed cash basis income statement. The accrual amounts are listed and adjusted whenever the cash received or paid out differs from the revenues, gains, expenses, and losses reported in net income, and for non-operating gains and losses.

4. Understand the basic steps in the manual preparation of a statement of cash flows. The statement of cash flows (SCF) is usually based on an analysis of the changes in the accounts on the statement of financial position over the accounting period. The basic steps in preparing the SCF are to 1) determine the change in cash; 2) record information from the income statement onto the 22-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

work sheet for the SCF; 3) analyze the change in each SFP account, identify all cash flows associated with changes in the SFP account balance, and record the effect on the SCF; and 4) complete the SCF.

5. Prepare a statement of cash flows using the direct method. The direct method involves determining the change in cash and cash equivalents during the period, inserting line items from the income statement as the starting point within the statement’s operating activities section, and analyzing the changes in all accounts on the statement of financial position to identify all transactions that have an impact on cash. Those with a cash impact are recorded on the statement of cash flows. To ensure that all cash flows have been identified, the results recorded on the statement are compared with the change in cash during the period. The statement is then prepared with required disclosures.

6. Prepare a statement of cash flows using the indirect method. The steps using the indirect method are the same as in Objective 5 above, with one exception. Rather than starting with line items from the income statement in the operating activities section, the net income amount is the beginning point. All the same adjustments are then made to adjust net income to a cash basis, but the style and format of the operating activities sections differ.

7. Prepare a complex statement of cash flows using both methods. When preparing a more complex statement of cash flows under either the direct or indirect method, the same four step process can be followed: (1) Determine the change in cash; (2) Record information from the income statement to the statement of cash flows; (3) Analyze the change in each SFP account and identify/record the effect on the statement of cash flows; and (4) Complete the statement of cash flows.

8. Identify the financial presentation and disclosure requirements for the statement of cash flows. Under IFRS, disclosure is required of cash flows associated with interest and dividends received and paid, the definition and components of cash and cash equivalents reconciled to the amounts reported on the statement of financial position, and the amount of and explanation for cash and cash equivalents not available for use. All income tax cash flows are reported as operating flows unless they can be linked directly to investing or financing flows. Choices are available under IFRS for the reporting of interest and dividends received (operating or investing) and interest and dividends paid (operating or financing). Gross amounts should be reported except in specifically permitted circumstances, and non-cash investing and financing transactions are excluded from the statement of cash flows, but details about these are reported elsewhere on the financial statements. Disclosures regarding changes in liabilities arising from financing activities are now also required. ASPE presentation requirements are very similar, but required disclosures are limited to interest and dividends paid and charged to retained earnings and the amount of any restricted cash. In addition, interest and dividends received are both operating flows, and interest and dividends paid are operating flows unless they were charged directly to retained earnings.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

9. Read and interpret a statement of cash flows. The first step in reading and interpreting a statement of cash flows is to look at the subtotals for the three classifications of activities and the overall change in cash. This provides a high-level summary of the period’s cash flows. Next, analyze the items within each section for additional insights, keeping alert for accounting policies that affect the type of cash flow reported. Familiarity with the company’s business and strategic direction is very useful in interpreting the statement.

10. Identify differences in IFRS and ASPE, and explain what changes are expected to standards for the statement of cash flows. There are no significant differences between IFRS and ASPE related to the statement of cash flows except for the definition of cash equivalents and the presentation and disclosure requirements identified in Learning Objective 8. Proposed updates to IAS 7 are discussed in the Looking Ahead section.

11. Use a work sheet to prepare a statement of cash flows. A work sheet can be used to organize the analysis and cash flow information needed to prepare a statement of cash flows. This method accounts for all changes in the balances of non-cash statement of financial position accounts from the period’s beginning to the end, identifying all operating, investing, and financing cash flows in the process. The statement of cash flows is prepared from the cash flow information accumulated at the bottom of the work sheet.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE Answer c b c d d a d c d c c a c b c a d b c b c c b b b a d c c c c c a c d a d a b d b b d

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Primary purpose of the statement of cash flows Assessment of information in the statement of cash flows IFRS and ASPE requirements Cash equivalent elements Significant non-cash transactions Major source of cash for a successful company Cash flow effects of a stock dividend Cash flow effects of operating activities Cash flow effects of operating activities Item(s) to include in investing activities Additional cash invested by a sole proprietor Calculate cash provided by investing activities Calculate cash provided by financing activities Calculate cash provided by (used in) investing activities Calculate cash provided by financing activities Calculate cash provided by investing activities Calculate cash provided by (used in) financing activities Calculate cash provided by (used in) investing activities Calculate cash provided by (used in) financing activities Calculate cash provided by (used in) investing activities Calculate cash provided by (used in) financing activities Calculate cash used in investing activities Calculate cash provided by (used in) financing activities Calculate cash provided by investing activities Calculate cash provided by financing activities Calculate cash used in investing activities Calculate cash provided by financing activities Classification on the statement of cash flows Adjustments under the direct method and indirect method Effect of decrease in accounts payable Adjustment for an increase in accounts payable Adjustment for a decrease in prepaid insurance Adjustment to wages expense under direct method Adjustment to revenues under direct method Net loss under direct method Calculate cash provided by operating activities using direct method Calculate cash received from customers. Calculate cash paid for income taxes Calculate cash paid for insurance (direct method) Adjustments to net income (indirect method) Reporting of inventory increase on the statement of cash flows Adjustments to reconcile net income to cash from operating activities Adjustment to net income for inventory increase 22-4

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d b c Answer a c a b c d a c c d d b c c a d b b a c a b c d b

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. *62. *63. *64. *65. *66. *67. *68. *69. *70. *71.

Adjustment for equity method investment income Cash flow effects of depreciation expense and purchase of assets Reporting insurance proceeds Description Adjust net income for loss on impairment of accounts receivable Cash flow effects of selling plant assets at a gain Cash flow effects of selling equipment at a loss Calculate cash provided by operating activities Calculate cash provided by operating activities Calculate cash provided by operating activities Calculate cash provided by operating activities Calculate depreciation expense for year Calculate depreciation expense for year Noncash investing and financing activities Disclosures under IFRS and ASPE Free cash flow Benefit of cash expenditures Gain from asset sale Management borrowing policies Reporting a stock dividend Calculate net income for year Calculate depreciation expense for year Calculate equipment purchased during year Calculate cost of equipment sold Calculate book value of assets at end of year Calculate ending balance of accounts payable Calculate ending balance of retained earnings Calculate ending balance of common shares account Calculate amount of a cash dividend

*This topic is dealt with in an Appendix to the chapter.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Item E22-72 E22-73 E22-74 E22-75 E22-76 E22-77 E22-78 E22-79 E22-80 E22-81 E22-82 E22-83 E22-84 E22-85 E22-86 E22-87

Description Classification of cash flows and transactions Effects of transactions on the statement of cash flows (indirect method) Effects of transactions on the statement of cash flows (indirect method) Effects of transactions on the statement of cash flows (indirect method) Preparation of statement of cash flows (indirect method) Preparation of statement of cash flows Classification of cash flows (indirect method) Calculations for statement of cash flows (direct method) Calculation of operating activities (direct method) Use of the statement of cash flows use and the impact of using the direct versus the indirect method Calculations for statement of cash flows (indirect method) Calculations for statement of cash flows (indirect method) Cash flows from operating activities (indirect and direct methods) Cash flows from operating activities (indirect and direct methods) Calculating and using free cash flow Choices of statement of cash flow categories under IFRS

PROBLEMS Item P22-88 P22-89 P22-90 P22-91 P22-92 P22-93 P22-94 P22-95

Description Preparation of statement of cash flows (direct method) Preparation of statement of cash flows (direct method) Preparation of statement of cash flows (direct method) Preparation of statement of cash flows (indirect method) Preparation of statement of cash flows (indirect method) Preparation of statement of cash flows (indirect method) Complex statement of cash flows (indirect method) Statement of cash flows (indirect method) and statement analysis

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE 1. The primary purpose of the statement of cash flows is to provide information a) about an entity’s operating, investing, and financing activities during a period. b) that is useful in assessing cash flow prospects. c) about an entity’s cash receipts and cash payments during a period. d) about an entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing. Answer: c Difficulty: Easy Learning Objective: Understand cash and cash equivalents as well as the business importance of cash flows, and describe the purpose and uses of the statement of cash flows. Section Reference: Purpose, Uses, and Importance of Cash, Cash Equivalents and Cash Flows from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. The information in a statement of cash flows enables stakeholders to assess the a) amounts, timing and certainty of future cash flows. b) liquidity and solvency of an entity. c) change in working capital during the period. d) reason(s) for the difference between net income and cash flows from financing activities. Answer: b Difficulty: Medium Learning Objective: Understand cash and cash equivalents as well as the business importance of cash flows, and describe the purpose and uses of the statement of cash flows. Section Reference: Purpose, Uses, and Importance of Cash, Cash Equivalents and Cash Flows from a Business Perspective CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

3. The statement of cash flows is required to be included a) only for financial statements prepared under IFRS. b) only for financial statements prepared under ASPE. c) for both financial statements prepared under IFRS and under ASPE. d) for financial statements prepared under IFRS, but is optional under ASPE.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Easy Learning Objective: Understand cash and cash equivalents as well as the business importance of cash flows, and describe the purpose and uses of the statement of cash flows. . Section Reference: Purpose, Uses, and Importance of Cash, Cash Equivalents and Cash Flows from a Business Perspective CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. Cash equivalents include a) treasury bills, equity investments and long-term bonds. b) non-equity investments with short maturities and bank overdrafts repayable on demand. c) treasury bills, commercial paper and all equity investments. d) treasury bills, commercial paper, and money market funds purchased with excess cash. Answer: d Difficulty: Easy Learning Objective: Understand cash and cash equivalents as well as the business importance of cash flows, and describe the purpose and uses of the statement of cash flows. Section Reference: Purpose, Uses, and Importance of Cash, Cash Equivalents and Cash Flows from a Business Perspective CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

5. Which of the following is NOT a significant non-cash transaction? a) capital (finance) lease obligations b) conversion of preferred shares to common shares c) exchange of non-monetary assets d) purchasing a building with a 10% cash down payment and mortgaging the balance Answer: d Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

6. A successful company’s major source of cash should be a) operating activities. b) investing activities. c) financing activities. d) both operating activities and investing activities. Answer: a Difficulty: Easy Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

7. A statement of cash flows generally would NOT include the effects of a) common shares issued at an amount greater than par value. b) the purchase of treasury shares. c) cash dividends paid. d) stock dividends declared and issued. Answer: d Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

8. All of the following adjustments are added to net income under the indirect method in calculating net cash flow from operating activities except for a) the loss on a sale of equipment. b) a decrease in accounts receivable. c) a decrease in accounts payable. d) a decrease in inventory. Answer: c Difficulty: Easy Learning Objective: Identify the major classifications of cash flows and explain the significance of each 22-9 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

9. All of the following adjustments would be added back under the indirect method in determining net cash flow from operating activities except for a) amortization of bond discount. b) an increase in future income tax liability. c) a loss on sale of plant assets. d) a decrease in income taxes payable. Answer: d Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

10. In a statement of cash flows, which of the following would be reported in the cash flows from investing activities section? a) issuance of common shares in exchange for a factory building b) stock dividends received c) development costs incurred (intangible asset) d) declaration of cash dividends Answer: c Difficulty: Easy Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

11. On a statement of cash flows, additional cash invested by a sole proprietor would be disclosed in a) operating activities. b) investing activities. 22-10 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) financing activities. d) both operating and financing activities. Answer: c Difficulty: Easy Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

12. Duncan Corp. purchased a building, paying part of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in investing activities for the above transaction? a) the cash payment b) the full purchase price c) zero (but disclosed in the notes) d) the amount mortgaged Answer: a Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

13. Duncan Corp. purchased a building, paying part of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in financing activities for the above transaction? a) the cash payment b) the full purchase price c) zero (but disclosed in the notes) d) the amount mortgaged Answer: c Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. 22-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

14. Fables Corp. provided the following information for calendar 2023: Fables adheres to ASPE. Proceeds from issuing bonds .............................................. $300,000 Purchase of inventories ....................................................... 570,000 Purchase of treasury shares ................................................ 90,000 Purchase of long-term investment ..................................... 420,000 Dividends paid to preferred shareholders.......................... 60,000 Proceeds from issuing preferred shares ............................. 240,000 Proceeds from sale of equipment ....................................... 60,000 The cash provided by (used in) investing activities during 2023 is a) $60,000. b) $(360,000). c) $(600,000). d) $(660,000). Answer: b Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $60,000 – $420,000 = $(360,000)

15. Fables Corp. provided the following information for calendar 2023: Fables adheres to ASPE. Proceeds from issuing bonds .............................................. $300,000 Purchase of inventories ....................................................... 570,000 Purchase of treasury shares ................................................ 90,000 Purchase of long-term investment ..................................... 420,000 Dividends paid to preferred shareholders.......................... 60,000 Proceeds from issuing preferred shares ............................. 240,000 Proceeds from sale of equipment ....................................... 60,000 The cash provided by financing activities during 2023 is a) $540,000. b) $480,000. 22-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) $390,000. d) $330,000. Answer: c Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 – $90,000 – $60,000 + $240,000 = $390,000

16. Selected information from Regan Ltd.'s 2023 accounting records is as follows: Proceeds from sale of land.................................................. $300,000 Proceeds from long-term borrowings ................................ 400,000 Purchase of plant assets ..................................................... 280,000 Purchase of inventories ....................................................... 850,000 Proceeds from issuance of common shares ....................... 300,000 Based on the above information, the cash provided by investing activities for calendar 2023 is a) $20,000. b) $200,000. c) $320,000. d) $400,000. Answer: a Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 – $280,000 = $20,000

17. Hatian adheres to ASPE. Selected information from Hatian Corp.'s 2023 accounting records is as follows: Proceeds from issuance of common shares ....................... $200,000 Proceeds from issuance of bonds ....................................... 600,000 Cash dividends paid on common shares ............................ 80,000 Cash dividends paid on preferred shares ........................... 30,000 22-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Purchase of a FV-NI investment .......................................... Sale of shares to officers and employees NOT included above ....................................................

60,000 50,000

Based on the above information, the cash provided by (used in) financing activities for calendar 2023 is a) $80,000. b) $90,000. c) $(110,000). d) $740,000. Answer: d Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $200,000 + $600,000 – $80,000 – $30,000 + $50,000 = $740,000

18. Oswald Ltd. has recently decided to go public and has hired you as their independent accountant. The company wishes to adhere to IFRS and know that they must prepare a statement of cash flows. Its financial statements for 2023 and 2022 are provided below: Statements of Financial Position Dec 31/23 Cash .................................................................... $51,000 Accounts receivable ........................................... 45,000 Merchandise inventory ...................................... 48,000 Property, plant and equipment ......................... $76,000 Less accumulated depreciation ................. (40,000) 36,000 Total Assets $180,000 Accounts payable ............................................... Income taxes payable ........................................ Bonds payable .................................................... Common shares ................................................. Retained earnings .............................................. Total Liabilities & Shareholders’ Equity ............

$22,000 44,000 45,000 27,000 42,000 $180,000

Dec 31/22 $ 24,000 27,000 60,000 $120,000 (38,000)

82,000 $193,000 $12,000 49,000 75,000 27,000 30,000 $193,000

Income Statement Year ended December 31, 2023 Sales...................................................................................................................................... $1,050,000 22-14 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cost of sales .......................................................................................................................... 894,000 Gross profit ........................................................................................................................... 156,000 Selling and administrative expenses ................................................................................... 99,000 Income from operations ...................................................................................................... 57,000 Interest expense ................................................................................................................... 9,000 Income before taxes ............................................................................................................. 48,000 Income taxes ........................................................................................................................ 12,000 Net income ........................................................................................................................... $ 36,000 The following additional data were provided for calendar 2023: 1. Dividends declared and paid were $24,000. 2. Equipment was sold for $30,000. This equipment originally cost $44,000, and had a book value of $36,000 at the time of sale. The loss on sale was included in “selling and administrative expenses,” as was the depreciation expense for the year. 3. Bonds were retired during the year at par. On a statement of cash flows for calendar 2023, the cash provided by (used in) investing activities is a) $6,000. b) $30,000. c) $(36,000). d) $(44,000). Answer: b Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $30,000 (sale of equipment; no purchases)

19. Oswald Ltd. has recently decided to go public and has hired you as their independent accountant. The company wishes to adhere to IFRS and know that they must prepare a statement of cash flows. Its financial statements for 2023 and 2022 are provided below: Statements of Financial Position Dec 31/23 Cash .................................................................... $ 51,000 Accounts receivable ........................................... 45,000 Merchandise inventory ...................................... 48,000 Property, plant and equipment ......................... $76,000 Less accumulated depreciation ................. (40,000) 36,000 Total Assets $180,000

Dec 31/22 $ 24,000 27,000 60,000 $120,000 (38,000)

82,000 $193,000 22-15

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Accounts payable ............................................... Income taxes payable ........................................ Bonds payable .................................................... Common shares ................................................. Retained earnings .............................................. Total Liabilities & Shareholders’ Equity ............

$22,000 44,000 45,000 27,000 42,000 $180,000

$ 12,000 49,000 75,000 27,000 30,000 $193,000

Income Statement Year ended December 31, 2023 Sales...................................................................................................................................... $1,050,000 Cost of sales .......................................................................................................................... 894,000 Gross profit ........................................................................................................................... 156,000 Selling and administrative expenses ................................................................................... 99,000 Income from operations ...................................................................................................... 57,000 Interest expense ................................................................................................................... 9,000 Income before taxes ............................................................................................................. 48,000 Income taxes ........................................................................................................................ 12,000 Net income ........................................................................................................................... $ 36,000 The following additional data were provided for calendar 2023: 1. Dividends declared and paid were $24,000. 2. Equipment was sold for $30,000. This equipment originally cost $44,000 and had a book value of $36,000 at the time of sale. The loss on sale was included in “selling and administrative expenses,” as was the depreciation expense for the year. 3. Bonds were retired during the year at par. On a statement of cash flows for calendar 2023, the cash provided by (used in) by financing activities is a) $6,000. b) $24,000. c) $(54,000). d) $(30,000). Answer: c Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($24,000) – ($30,000) = ($54,000)

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

20. The statements of financial position for King Lear Corp. at the end of 2023 and 2022 are as follows: 2023 2022 Cash ............................................................................................................. $75,000 $105,000 Accounts receivable (net) ........................................................................... 180,000 135,000 Merchandise inventory ............................................................................... 210,000 135,000 Prepaid expenses ........................................................................................ 30,000 75,000 Land ............................................................................................................. 270,000 120,000 Buildings and equipment............................................................................ 270,000 225,000 Accumulated depreciation—buildings and equipment ............................ (54,000) (24,000) Total Assets ................................................................................................. $981,000 $771,000 Accounts payable ........................................................................................ $204,000 $165,000 Salaries payable .......................................................................................... 36,000 54,000 Notes payable—long-term .......................................................................... — 120,000 Mortgage payable........................................................................................ 90,000 — Common shares .......................................................................................... 627,000 477,000 Retained earnings (deficit).......................................................................... 24,000 (45,000) Total Liabilities & Shareholders’ Equity ..................................................... $981,000 $771,000 During 2023, land was acquired in exchange for common shares (which had a market value of $150,000 at the time). All equipment purchased was for cash. Equipment costing $15,000 was sold for $6,000 cash; book value of the equipment at the time of sale was $12,000, and the loss was included in net income. Cash dividends of $30,000 were declared and paid during the year. King adheres to ASPE and uses the indirect method when preparing the statement of cash flows. The cash provided by (used in) investing activities was a) $39,000. b) $(54,000). c) $(60,000). d) $(204,000). Answer: b Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $6,000 – ($270,000 + $15,000 – $225,000) = ($54,000)

21. The statements of financial position for King Lear Corp. at the end of 2023 and 2022 are as follows: 2023 2022 Cash ............................................................................................................. $ 75,000 $105,000 Accounts receivable (net) ........................................................................... 180,000 135,000 22-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Merchandise inventory ............................................................................... Prepaid expenses ........................................................................................ Land ............................................................................................................. Buildings and equipment............................................................................ Accumulated depreciation—buildings and equipment ............................ Total Assets ................................................................................................. Accounts payable ........................................................................................ Salaries payable .......................................................................................... Notes payable—long-term .......................................................................... Mortgage payable........................................................................................ Common shares .......................................................................................... Retained earnings (deficit).......................................................................... Total Liabilities & Shareholders’ Equity .....................................................

210,000 30,000 270,000 270,000 (54,000) $981,000 $204,000 36,000 — 90,000 627,000 24,000 $981,000

135,000 75,000 120,000 225,000 (24,000) $771,000 $165,000 54,000 120,000 — 477,000 (45,000) $771,000

During 2023, land was acquired in exchange for common shares (which had a market value of $150,000 at the time). All equipment purchased was for cash. Equipment costing $15,000 was sold for $6,000 cash; book value of the equipment at the time of sale was $12,000, and the loss was included in net income. Cash dividends of $30,000 were declared and paid during the year. King adheres to ASPE and uses the indirect method when preparing the statement of cash flows. The cash provided by (used in) financing activities was a) $90,000. b) $(30,000). c) $(60,000). d) $0. Answer: c Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($120,000) + $90,000 – $30,000 = ($60,000)

22. Casio adheres to ASPE. Casio Corp.'s transactions for the year ended December 31, 2023 included the following: 1. Purchased land for $275,000 cash. 2. Borrowed $275,000 from the bank on a long-term note. 3. Sold long-term investments for $250,000. 4. Accounts receivable decreased by $50,000. 5. Paid cash dividends of $300,000. 6. Issued 1,000 common shares for $125,000. 22-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

7. 8.

Purchased machinery and equipment for $62,500 cash. Accounts payable increased by $100,000.

The cash used in investing activities for 2023 was a) $(337,500). b) $(187,500). c) $(87,500). d) $(25,000). Answer: c Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $250,000 – $275,000 – $62,500 = $(87,500)

23. Casio adheres to ASPE. Casio Corp.'s transactions for the year ended December 31, 2023 included the following: 1. Purchased land for $275,000 cash. 2. Borrowed $275,000 from the bank on a long-term note. 3. Sold long-term investments for $250,000. 4. Accounts receivable decreased by $50,000. 5. Paid cash dividends of $300,000. 6. Issued 1,000 common shares for $125,000. 7. Purchased machinery and equipment for $62,500 cash. 8. Accounts payable increased by $100,000. The cash provided by (used in) financing activities for 2023 was a) $12,500. b) $100,000. c) $(225,000). d) $(250,000). Answer: b Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application 22-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: $275,000 – $300,000 + $125,000 = $100,000

24. SenRoss Corp.'s transactions for calendar 2023 included the following: 1. Acquired 50% of Lennox Ltd.'s common shares for $90,000 cash. 2. Issued 5,000 preferred shares in exchange for land with a fair value of $160,000. 3. Issued 11% bonds, par value $200,000, due 2023, for $196,000 cash. 4. Purchased a patent for $110,000 cash. 5. Borrowed $90,000 from Bank A. 6. Paid $60,000 toward a bank loan with Bank B. 7. Sold long-term investments for $398,000. The cash provided by investing activities in 2023 was a) $148,000. b) $198,000. c) $238,000. d) $308,000. Answer: b Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $398,000 – $90,000 – $110,000 = $198,000

25. SenRoss Corp.'s transactions for calendar 2023 included the following: 1. Acquired 50% of Lennox Ltd.'s common shares for $90,000 cash. 2. Issued 5,000 preferred shares in exchange for land with a fair value of $160,000. 3. Issued 11% bonds, par value $200,000, due 2023, for $196,000 cash. 4. Purchased a patent for $110,000 cash. 5. Borrowed $90,000 from Bank A. 6. Paid $60,000 toward a bank loan with Bank B. 7. Sold long-term investments for $398,000. The cash provided by financing activities in 2023 was a) $136,000. b) $226,000. c) $286,000. d) $296,000. 22-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $196,000 + $90,000 – $60,000 = $226,000

26. Malcolm Corp.'s statements of financial position at December 31, 2023 and 2022 and information relating to 2023 activities are presented below: December 31, 2023 2022 Assets Cash...................................................................................................... $ 110,000 $ 50,000 Temporary investments ...................................................................... 150,000 — Accounts receivable (net).................................................................... 255,000 255,000 Inventory .............................................................................................. 345,000 300,000 Long-term investments ....................................................................... 100,000 150,000 Property, plant and equipment .......................................................... 850,000 500,000 Accumulated depreciation.................................................................. (225,000) (225,000) Goodwill ............................................................................................... 45,000 50,000 Total assets .................................................................................. $1,630,000 $1,080,000 Liabilities and Shareholders' Equity Accounts payable ................................................................................ $ 415,000 $ 360,000 Long-term note payable...................................................................... 145,000 — Common shares................................................................................... 600,000 475,000 Retained earnings................................................................................ 470,000 245,000 Total liabilities and shareholders' equity ................................... $1,630,000 $1,080,000 Other information relating to 2023 activities: 1. Net income was $375,000. 2. Cash dividends of $150,000 were declared and paid. 3. Equipment costing $250,000, with a book value of $80,000, was sold for $90,000. 4. A long-term investment was sold for $80,000. There were no other transactions affecting longterm investments. 5. 5,000 common shares were issued for $25 a share. 6. Temporary investments consist of treasury bills maturing on June 30, 2024. The cash used in investing activities in 2023 was a) $580,000. b) $455,000. 22-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) $430,000. d) $420,000. Answer: a Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $80,000 + $90,000 – ($850,000 + $250,000 – $500,000) – $150,000 = $580,000

27. Malcolm Corp.'s statements of financial position at December 31, 2023 and 2022 and information relating to 2023 activities are presented below: December 31, 2023 2022 Assets Cash...................................................................................................... $ 110,000 $ 50,000 Temporary investments ...................................................................... 150,000 — Accounts receivable (net).................................................................... 255,000 255,000 Inventory .............................................................................................. 345,000 300,000 Long-term investments ....................................................................... 100,000 150,000 Property, plant and equipment .......................................................... 850,000 500,000 Accumulated depreciation.................................................................. (225,000) (225,000) Goodwill ............................................................................................... 45,000 50,000 Total assets .................................................................................. $1,630,000 $1,080,000 Liabilities and Shareholders' Equity Accounts payable ................................................................................ $ 415,000 $ 360,000 Long-term note payable...................................................................... 145,000 — Common shares................................................................................... 600,000 475,000 Retained earnings................................................................................ 470,000 245,000 Total liabilities and shareholders' equity ................................... $1,630,000 $1,080,000 Other information relating to 2023 activities: 1. Net income was $375,000. 2. Cash dividends of $150,000 were declared and paid. 3. Equipment costing $250,000, with a book value of $80,000, was sold for $90,000. 4. A long-term investment was sold for $80,000. There were no other transactions affecting longterm investments. 5. 5,000 common shares were issued for $25 a share. 6. Temporary investments consist of treasury bills maturing on June 30, 2024. The cash provided by financing activities in 2023 was 22-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) $420,000. b) $270,000. c) $130,000. d) $120,000. Answer: d Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: (5,000 × $25 = $125,000) + $145,000 – $150,000 = $120,000

28. Which of the following statements about cash flows is correct? a) Cash flows are defined as inflows and outflows of cash. b) Cash is defined as cash on hand less accounts payable. c) Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value. d) All of the choices are correct. Answer: c Difficulty: Easy Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

29. When preparing a statement of cash flows, a decrease in accounts receivable during a period would cause which one of the following adjustments in calculating cash flows from operating activities? Direct Method Indirect Method a) increase decrease b) decrease increase c) increase increase d) decrease decrease Answer: c

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Understand the basic steps in the manual preparation of a statement of cash flows. Section Reference: Basic Steps in the Preparation of the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

30. In calculating cash flows from operating activities, a decrease in accounts payable during a period a) means that accrual basis income is less than cash basis income. b) requires an addition to net income under the indirect method. c) requires an increase to cost of goods sold under the direct method. d) requires a decrease to cost of goods sold under the direct method. Answer: c Difficulty: Medium Learning Objective: Understand the basic steps in the manual preparation of a statement of cash flows. Section Reference: Basic Steps in the Preparation of the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

31. When preparing a statement of cash flows, an increase in accounts payable during a period would require which of the following adjustments in determining cash flows from operating activities? Indirect Method Direct Method a) increase decrease b) decrease increase c) increase increase d) decrease decrease Answer: c Difficulty: Medium Learning Objective: Understand the basic steps in the manual preparation of a statement of cash flows. Section Reference: Basic Steps in the Preparation of the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

32. When preparing a statement of cash flows, a decrease in prepaid insurance during a period would 22-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

require which of the following adjustments in determining cash flows from operating activities? Indirect Method Direct Method a) increase decrease b) decrease increase c) increase increase d) decrease decrease Answer: c Difficulty: Medium Learning Objective: Understand the basic steps in the manual preparation of a statement of cash flows. Section Reference: Basic Steps in the Preparation of the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

33. Under the direct method, cash payments to employees equals wage expense a) plus decreases wages payable. b) minus decreases in wages payable. c) plus increases in wages payable. d) plus increases in accounts payable. Answer: a Difficulty: Easy Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

34. Under the direct method, cash received from customers equals revenue a) plus increases in accounts receivable. b) minus decreases in accounts receivable. c) plus decreases in accounts receivable. d) None of the choices are correct. Answer: c Difficulty: Easy Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting 22-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

35. When preparing a statement of cash flows using the direct method, a net loss reported on the income statement will a) automatically result in a cash outflow from operating activities. b) be included in financing activities. c) be disclosed as a note to the statement of cash flows. d) not be included on the statement at all. Answer: d Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

36. Noah Inc., a service organization, reports the following for calendar 2023: Service revenue ................................................................... $525,000 Cash received from customers ........................................... 450,000 Interest payments (on long-term debt) .............................. 12,000 Salaries and wages paid to employees............................... 157,500 Purchase of new equipment for cash ................................. 240,000 Cash dividends paid ............................................................ 30,000 Payments for office rental & general expenses .................. 210,000 Income taxes paid ............................................................... 22,500 Net income........................................................................... 67,500 Noah adheres to ASPE. Based on the above information, and using the direct method, the cash provided by (used in) operating activities to be reported on Noah’s 2023 statement of cash flows is a) $48,000. b) $60,000. c) $105,000. d) $(135,000). Answer: a Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Application 22-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic Feedback: $450,000 – $12,000 – $157,500 – $210,000 – $22,500 = $48,000

37. Oswald Ltd. has recently decided to go public and has hired you as its independent accountant. The company wishes to adhere to IFRS and knows that it must prepare a statement of cash flows. The financial statements for 2023 and 2022 are provided below: Statements of Financial Position Dec 31/23 Cash .................................................................... $ 51,000 Accounts receivable ........................................... 45,000 Merchandise inventory ...................................... 48,000 Property, plant and equipment ......................... $76,000 Less accumulated depreciation ................. (40,000) 36,000 Total Assets $180,000 Accounts payable ............................................... $ 22,000 Income taxes payable ........................................ 44,000 Bonds payable .................................................... 45,000 Common shares ................................................. 27,000 Retained earnings .............................................. 42,000 Total Liabilities & Shareholders’ Equity ............ $180,000

Dec 31/22 $ 24,000 27,000 60,000 $120,000 (38,000)

82,000 $193,000 $ 12,000 49,000 75,000 27,000 30,000 $193,000

Income Statement Year ended December 31, 2023 Sales...................................................................................................................................... $1,050,000 Cost of sales .......................................................................................................................... 894,000 Gross profit ........................................................................................................................... 156,000 Selling and administrative expenses ................................................................................... 99,000 Income from operations ...................................................................................................... 57,000 Interest expense ................................................................................................................... 9,000 Income before taxes ............................................................................................................. 48,000 Income taxes ........................................................................................................................ 12,000 Net income ........................................................................................................................... $ 36,000 The following additional data were provided for calendar 2023: 1. Dividends declared and paid were $24,000. 2. Equipment was sold for $30,000. This equipment originally cost $44,000 and had a book value of $36,000 at the time of sale. The loss on sale was included in “selling and administrative expenses,” as was the depreciation expense for the year. 3. Bonds were retired during the year at par. On a statement of cash flows for calendar 2023, the cash received from customers is a) $1,068,000. b) $1,055,000. c) $1,050,000. 22-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) $1,032,000. Answer: d Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $27,000 + $1,050,000 – $45,000 = $1,032,000

38. Oswald Ltd. has recently decided to go public and has hired you as its independent accountant. The company wishes to adhere to IFRS and knows that it must prepare a statement of cash flows. The financial statements for 2023 and 2022 are provided below: Statements of Financial Position Dec 31/23 Cash .................................................................... $ 51,000 Accounts receivable ........................................... 45,000 Merchandise inventory ...................................... 48,000 Property, plant and equipment ......................... $76,000 Less accumulated depreciation ................. (40,000) 36,000 Total Assets $180,000 Accounts payable ............................................... Income taxes payable ........................................ Bonds payable .................................................... Common shares ................................................. Retained earnings .............................................. Total Liabilities & Shareholders’ Equity

$ 22,000 44,000 45,000 27,000 42,000 $180,000

Dec 31/22 $ 24,000 27,000 60,000 $120,000 (38,000)

82,000 $193,000 $ 12,000 49,000 75,000 27,000 30,000 $193,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

1. 2.

Dividends declared and paid were $24,000. Equipment was sold for $30,000. This equipment originally cost $44,000 and had a book value of $36,000 at the time of sale. The loss on sale was included in “selling and administrative expenses,” as was the depreciation expense for the year. Bonds were retired during the year at par.

On a statement of cash flows for calendar 2023, the cash paid for income taxes is a) $17,000. b) $12,000. c) $7,000. d) $5,000. Answer: a Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $49,000 + $12,000 – $44,000 = $17,000

39. Tampa Ltd.'s prepaid insurance balance was $20,000 at December 31, 2023 and $10,000 at December 31, 2022. Insurance expense was $8,000 for 2023 and $6,000 for 2022. How much cash paid for insurance would be reported in Tampa 2023 statement of cash flows prepared using the direct method? a) $22,000 b) $18,000 c) $12,000 d) $8,000 Answer: b Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $20,000 + $8,000 – $10,000 = $18,000

40. Which method adjusts net income for items that affect reported net income but do NOT affect cash? a) direct 22-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) adjustment c) accrual d) indirect Answer: d Difficulty: Easy Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

41. Using the indirect method, an increase in inventory would be reported in a statement of cash flows as a(n) a) addition to net income in calculating cash flows from operating activities. b) deduction from net income in calculating cash flows from operating activities. c) cash flow from investing activities. d) cash flow from financing activities. Answer: b Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

42. When preparing a statement of cash flows (indirect method), which of the following is NOT an adjustment to reconcile net income to cash flows from operating activities? a) an increase in prepaid expenses b) an increase in bonds payable c) a decrease in income taxes payable d) depreciation expense Answer: b Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 22-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

43. When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning inventory will result in an adjustment to net income because a) cash was increased while cost of goods sold was decreased. b) acquisition of inventory is an investment activity. c) inventory purchased during the period was less than inventory sold, resulting in a net cash increase. d) cost of goods sold on an accrual basis is lower than on a cash basis. Answer: d Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

44. Oyster Corp. reports its income from investments by the equity method and recognized income of $25,000 from its investment in Pearl Ltd. during the current year, even though no dividends were declared or paid by Pearl during the year. On Oyster's statement of cash flows (indirect method), the $25,000 should a) not be shown. b) be shown as cash inflow from investing activities. c) be shown as cash outflow from financing activities. d) be shown as a deduction from net income in the cash flows from operating activities section. Answer: d Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

45. An analysis of the machinery accounts of Polonius Ltd. during 2023 follows: Accumulated Machinery Depreciation Balance, Jan 1, 2023 $500,000 $125,000 Purchases of new machinery in 2023 for cash 200,000 — 2023 depreciation — 100,000 Balance, Dec 31, 2023 $700,000 $225,000

Book Value $375,000 200,000 (100,000) $475,000 22-31

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

The information concerning Polonius's machinery accounts should be shown in their statement of cash flows (indirect method) for the year ended December 31, 2023, as a(n) a) subtraction from net income of $100,000 and a $200,000 decrease in cash flows from financing activities. b) addition to net income of $100,000 and a $200,000 decrease in cash flows from investing activities. c) $100,000 increase in cash flows from financing activities. d) $200,000 decrease in cash flows from investing activities. Answer: b Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

46. A fire damaged Francisco Corp.’s office building. The company received $600,000 as a settlement from its insurance company, which was $180,000 less than the book value of the building. its income tax rate is 25%. On the statement of cash flows (indirect method), the receipt from the insurance company should a) be shown as an addition to net income of $420,000. b) be shown as an inflow from investing activities of $420,000. c) be shown as an inflow from investing activities of $600,000. d) be shown as an inflow from investing activities of $450,000. Answer: c Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $600,000 (actual proceeds)

47. During 2023, Olivier Corp., which uses the allowance method of accounting for expected credit losses, recorded loss on impairment of accounts receivable of $25,000. As well, the corporation wrote off uncollectible accounts receivable of $9,000. As a result of these transactions, its cash flows from operating activities would be calculated (indirect method) by adjusting net income with a a) $25,000 increase. b) $9,000 increase. c) $16,000 increase. d) $34,000 decrease. 22-32 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $25,000 (Loss on impairment of accounts receivable added back). The change in accounts receivable is adjusted for the A/R write-offs using indirect method. Alternately, use just the change in net receivables and ignore the loss on impairment for accounts receivable.

48. Horatio Corp. sold some of its plant assets during calendar 2023 for $21,000 cash. The original cost of the assets was $150,000, and the accumulated depreciation to the date of sale was $140,000. This transaction should be shown on Horatio's 2023 statement of cash flows (indirect method) as a(n) a) deduction from net income of $11,000 and a $10,000 cash inflow from financing activities. b) addition to net income of $11,000 and a $21,000 cash inflow from investing activities. c) deduction from net income of $11,000 and a $21,000 cash inflow from investing activities. d) addition to net income of $21,000. Answer: c Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $21,000 – ($150,000 – $140,000) = $11,000 (gain); $21,000 (proceeds)

49. Marcus Ltd. sold equipment during calendar 2023 for $28,500 cash. The original cost of the equipment was $69,000, and the accumulated depreciation to the date of sale was $36,750. This transaction should be shown on Marcus’ 2023 statement of cash flows (indirect method) as a(n) a) addition to net income of $3,750 and a $28,500 cash inflow from investing activities. b) deduction from net income of $3,750 and a $32,250 cash inflow from investing activities. c) deduction from net income of $3,750 and a $28,500 cash inflow from investing activities. d) addition to net income of $3,750 and a $28,500 cash inflow from financing activities. Answer: a Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method 22-33 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $28,500 – ($69,000 – $36,750) = $3,750 (loss); $28,500 (proceeds)

50. Downsview Corp. reported net income for calendar 2023 of $375,000. Additional information follows: Depreciation on property, plant and equipment ............... $187,500 Loss on impairment of accounts receivable....................... 68,750 Purchase of equipment ....................................................... 31,250 Interest paid on long-term bonds ....................................... 18,750 Loss on sale of equipment .................................................. 106,250 Based on the above information, the cash provided by operating activities (indirect method) for calendar 2023 is a) $706,250. b) $737,500. c) $756,250. d) $787,500. Answer: b Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $375,000 + $187,500 + $68,750 + $106,250 = $737,500

51. The statements of financial position for King Lear Corp. at the end of 2023 and 2022 are as follows: 2023 2022 Cash ............................................................................................................. $ 75,000 $105,000 Accounts receivable (net) ........................................................................... 180,000 135,000 Merchandise inventory ............................................................................... 210,000 135,000 Prepaid expenses ........................................................................................ 30,000 75,000 Land ............................................................................................................. 270,000 120,000 Buildings and equipment............................................................................ 270,000 225,000 Accumulated depreciation—buildings and equipment ............................ (54,000) (24,000) Total Assets ................................................................................................. $981,000 $771,000 Accounts payable ........................................................................................ $204,000 $165,000 Salaries payable .......................................................................................... 36,000 54,000 Notes payable—long-term .......................................................................... 120,000 22-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Mortgage payable........................................................................................ Common shares .......................................................................................... Retained earnings (deficit).......................................................................... Total Liabilities & Shareholders’ Equity .....................................................

90,000 627,000 24,000 $981,000

477,000 (45,000) $771,000

During 2023, land was acquired in exchange for common shares (which had a market value of $150,000 at the time). All equipment purchased was for cash. Equipment costing $15,000 was sold for $6,000 cash; book value of the equipment at the time of sale was $12,000, and the loss was included in net income. Cash dividends of $30,000 were declared and paid during the year. King adheres to ASPE and uses the indirect method when preparing the statement of cash flows. The cash provided by operating activities for calendar 2023 was a) $72,000. b) $78,000. c) $84,000. d) $99,000. Answer: c Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $24,000 + $30,000 + $45,000 = $99,000 (NI) ($15,000 – $3,000) – $6,000 = $6,000 (Loss) $54,000 + $3,000 – $24,000 = $33,000 (Depreciation expense) $99,000 – $45,000 – $75,000 + $45,000 + $6,000 + $33,000 + $39,000 – $18,000 = $84,000

52. Edgar Inc. reported net income for calendar 2023 of $3,500,000. Additional information follows: Impairment of goodwill....................................................... $30,000 Depreciation on plant assets .............................................. 1,100,000 Long-term debt: Bond premium amortized ................................................... 45,000 Interest expense .................................................................. 600,000 Loss on impairment of accounts receivable....................... 75,000 Based on the above information, the cash provided by operating activities (indirect method) for calendar 2023 is a) $4,750,000. b) $4,730,000. c) $4,715,000. d) $4,660,000. Answer: d 22-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $3,500,000 + $30,000 + $1,100,000 – $45,000 + $75,000 = $4,660,000

53. Oswald Ltd. has recently decided to go public and has hired you as its independent accountant. The company wishes to adhere to IFRS and knows that it must prepare a statement of cash flows. The financial statements for 2023 and 2022 are provided below: Statements of Financial Position Dec 31/23 Cash .................................................................... $ 51,000 Accounts receivable ........................................... 45,000 Merchandise inventory ...................................... 48,000 Property, plant and equipment ......................... $76,000 Less accumulated depreciation ................. (40,000) 36,000 Total Assets $180,000 Accounts payable ............................................... $ 22,000 Income taxes payable ........................................ 44,000 Bonds payable .................................................... 45,000 Common shares ................................................. 27,000 Retained earnings .............................................. 42,000 Total Liabilities & Shareholders’ Equity ............ $180,000

Dec 31/22 $ 24,000 27,000 60,000 $120,000 (38,000)

82,000 $193,000 $ 12,000 49,000 75,000 27,000 30,000 $193,000

Income Statement Year ended December 31, 2023 Sales...................................................................................................................................... $1,050,000 Cost of sales .......................................................................................................................... 894,000 Gross profit ........................................................................................................................... 156,000 Selling and administrative expenses ................................................................................... 99,000 Income from operations ...................................................................................................... 57,000 Interest expense ................................................................................................................... 9,000 Income before taxes ............................................................................................................. 48,000 Income taxes ........................................................................................................................ 12,000 Net income ........................................................................................................................... $ 36,000 The following additional data were provided for calendar 2023: 1. Dividends declared and paid were $24,000. 2. Equipment was sold for $30,000. This equipment originally cost $44,000 and had a book value of $36,000 at the time of sale. The loss on sale was included in “selling and administrative 22-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

expenses,” as was the depreciation expense for the year. Bonds were retired during the year at par.

For a statement of cash flows for calendar 2023, using the indirect method, the cash provided by operating activities is a) $51,000. b) $36,000. c) $30,000. d) $25,000. Answer: a Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $36,000 + $6,000 + ($40,000 + $8,000 – $38,000) – $18,000 + $12,000 + $10,000 – $5,000 = $51,000

54. During calendar 2023, Marcellus Inc. sold equipment for $168,000. The equipment had cost $252,000 and had a book value of $144,000 at the time of sale. Accumulated Depreciation—Equipment was $688,000 at Dec 31, 2022 and $736,000 at Dec 31, 2023. Therefore, Depreciation Expense (Equipment) for 2023 was a) $60,000. b) $96,000. c) $156,000. d) $192,000. Answer: c Difficulty: Medium Learning Objective: Prepare a complex statement of cash flows using both methods. Section Reference: Preparing Statement of Cash Flows Using Both Methods CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $736,000 – $688,000 + ($252,000 – $144,000) = $156,000

55. Macbeth Corp.'s comparative statements of financial position at December 31, 2023 and 2022 reported accumulated depreciation balances of $960,000 and $720,000, respectively. Equipment with a cost of $60,000 and a book value of $48,000 was the only equipment sold in 2023. Therefore, the depreciation expense for 2023 was 22-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) $228,000. b) $240,000. c) $252,000. d) $264,000. Answer: c Difficulty: Medium Learning Objective: Prepare a complex statement of cash flows using both methods. Section Reference: Preparing Statement of Cash Flows Using Both Methods CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $960,000 – $720,000 + ($60,000 – $48,000) = $252,000

56. Acquiring assets by issuing equity securities would be reported as a) an investing activity. b) a financing activity. c) both an investing activity and a financing activity. d) a noncash investing and financing activity. Answer: d Difficulty: Easy Learning Objective: Prepare a complex statement of cash flows using both methods. Section Reference: Preparing Statement of Cash Flows Using Both Methods CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

57. With regard to disclosures required under IFRS and ASPE, which of the following statements is INCORRECT? a) IFRS requires separate disclosure of taxes on income. b) IFRS requires separate disclosure of interest received and paid and dividends received and paid. c) ASPE does not require reporting and explanation of the amount of cash and cash equivalents that have restrictions on their use. d) ASPE does not require separate disclosure of taxes on income. Answer: d Difficulty: Easy Learning Objective: Identify the financial presentation and disclosure requirements for the statement of cash flows. Section Reference: Presentation 22-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

58. Free cash flow is a) the cash flows from operating activities reported on the statement of cash flows. b) the discretionary cash that an entity has available for increasing capacity, acquiring new investments, paying dividends, and retiring debt. c) the discretionary cash that an entity has available for increasing capacity, selling off investments, paying dividends, and incurring new debt. d) the cash flows from operating activities reported on the statement of cash flows increased by the capital expenditures that are needed to sustain the current level of operations. Answer: b Difficulty: Medium Learning Objective: Read and interpret a statement of cash flows. Section Reference: Analyzing the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

59. Of the following questions, which one would NOT be answered by the statement of cash flows? a) Where did the cash come from during the period? b) What was the cash used for during the period? c) Were all the cash expenditures of benefit to the company during the period? d) What was the change in the cash balance during the period? Answer: c Difficulty: Easy Learning Objective: Read and interpret a statement of cash flows. Section Reference: Analyzing the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

60. If a plant asset is sold for cash and there is a gain, which activities are affected in the statement of cash flows under the indirect method? a) investing only b) financing only c) operating and investing d) operating and financing 22-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Easy Learning Objective: Read and interpret a statement of cash flows. Section Reference: Analyzing the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

61. Which of the following is NOT one of the benefits that creditors and investors can derive from the statement of cash flows? a) Assess the effectiveness of management's borrowing policy. b) Assess the company's ability to generate future cash flows. c) Assess the company's ability to pay future cash dividends. d) Explain the difference between net income and net cash flow from operating activities. Answer: a Difficulty: Easy Learning Objective: Read and interpret a statement of cash flows. Section Reference: Analyzing the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

*62. Ophelia Ltd. reported retained earnings at December 31, 2022 of $270,000, and at December 31, 2023, $218,000. Net income for calendar 2023 was $187,500. During 2023, a stock dividend was declared and distributed, which increased the common shares account by $116,500. As well, a cash dividend was declared and paid during the year. The stock dividend should be reported on the statement of cash flows as a) an outflow from operating activities of $116,500. b) an outflow from financing activities of $116,500. c) an outflow from investing activities of $116,500. d) Stock dividends are not shown on a statement of cash flows. Answer: d Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Application AACSB: Analytic 22-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*63. Hamlet Ltd. adheres to ASPE. On Hamlet Ltd.'s statement of cash flows (indirect method) for calendar 2023, cash flows from operating activities were reported at $154,000. The statement included the following items: depreciation on plant assets of $60,000; impairment of goodwill of $10,000; and cash dividends paid of $72,000. Based only on the information given above, Hamlet’s net income for 2023 was a) $12,000. b) $84,000. c) $154,000. d) $214,000. Answer: b Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $154,000 – $60,000 – $10,000 = $84,000

*64. During calendar 2023, Laertes Corp. sold equipment for $70,000. The equipment had cost $100,000 and had a book value of $52,000 at the time of sale. Data from their comparative statements of financial position are: Dec 31/23 Dec 31/22 Equipment $720,000 $650,000 Accumulated Depreciation 210,000 190,000 Depreciation expense for 2023 was a) $86,000. b) $68,000. c) $18,000. d) $12,000. Answer: b Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $210,000 – $190,000 + ($100,000 – $52,000) = $68,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*65. During calendar 2023, Laertes Corp. sold equipment for $70,000. The equipment had cost $100,000 and had a book value of $52,000 at the time of sale. Data from their comparative statements of financial position are: Dec 31/23 Dec 31/22 Equipment $720,000 $650,000 Accumulated Depreciation 210,000 190,000 Equipment purchased during 2023 was a) $170,000. b) $100,000. c) $70,000. d) $30,000. Answer: a Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $720,000 – $650,000 + $100,000 = $170,000

*66. Financial statements for Bernard Corp. are presented below: BERNARD CORP. Statement of Financial Position January 1, 2023 Assets Liabilities and Equity Cash ....................................................... $160,000 Accounts payable .......... Accounts receivable .............................. 144,000 Buildings and equipment...................... 600,000 Accumulated depreciation— buildings and equipment ................. (200,000) Common shares............. Patents................................................... 72,000 Retained earnings ......... Total Assets ........................................... $776,000 Total Liabilities & Shareholders’ Equity ..... BERNARD CORP. Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash provided by operating activities Net income................................................................................................

$ 76,000

460,000 240,000 $776,000

$200,000 22-42

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Add back non-cash expenses: Increase in accounts receivable ....................................................... Increase in accounts payable ........................................................... Depreciation expense ....................................................................... Gain on disposal of equipment ........................................................ Amortization of patents.................................................................... Cash provided by operating activities ............................................................. Cash provided by (used in) investing activities Sale of equipment .................................................................................... Purchase of land ....................................................................................... Purchase of buildings and equipment..................................................... Cash used by investing activities ..................................................................... Cash provided by financing activities Payment of cash dividends ...................................................................... Issuance of common shares ..................................................................... Cash provided by financing activities.............................................................. Net increase in cash ......................................................................................... Cash, January 1, 2023....................................................................................... Cash, December 31, 2023 .................................................................................

$(64,000) 32,000 60,000 (24,000) 8,000

12,000 $212,000

48,000 (100,000) (192,000) (244,000) (60,000) 160,000 100,000 68,000 160,000 $228,000

Total assets on the December 31, 2023 statement of financial position were $1,108,000. Accumulated depreciation on the equipment sold was $56,000. When the equipment was sold, the Buildings and Equipment account was credited with a) $48,000. b) $56,000. c) $80,000. d) $104,000. Answer: c Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $48,000 – $24,000 = $24,000 (BV); $24,000 + $56,000 = $80,000

*67. Financial statements for Bernard Corp. are presented below:

Assets

BERNARD CORP. Statement of Financial Position January 1, 2023 Liabilities and Equity 22-43

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash ....................................................... Accounts receivable .............................. Buildings and equipment...................... Accumulated depreciation— buildings and equipment ................. Patents................................................... Total Assets ...........................................

$160,000 144,000 600,000

Accounts payable ..........

$76,000

(200,000) 72,000 $776,000

Common shares............. Retained earnings ......... Total Liabilities & Shareholders’ Equity .....

460,000 240,000

BERNARD CORP. Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash provided by operating activities Net income................................................................................................ Add back non-cash expenses: Increase in accounts receivable ....................................................... Increase in accounts payable ........................................................... Depreciation expense ....................................................................... Gain on disposal of equipment ........................................................ Amortization of patents.................................................................... Cash provided by operating activities ............................................................. Cash provided by (used in) investing activities Sale of equipment .................................................................................... Purchase of land ....................................................................................... Purchase of buildings and equipment..................................................... Cash used by investing activities ..................................................................... Cash provided by financing activities Payment of cash dividends ...................................................................... Issuance of common shares ..................................................................... Cash provided by financing activities.............................................................. Net increase in cash ......................................................................................... Cash, January 1, 2023....................................................................................... Cash, December 31, 2023 .................................................................................

$776,000

$200,000 $(64,000) 32,000 60,000 (24,000) 8,000

12,000 $212,000

48,000 (100,000) (192,000) (244,000) (60,000) 160,000 100,000 68,000 160,000 $228,000

Total assets on the December 31, 2023 statement of financial position were $1,108,000. Accumulated depreciation on the equipment sold was $56,000. The book value of the buildings and equipment at December 31, 2023 was a) $508,000. b) $520,000. c) $588,000. d) $712,000. Answer: a Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. 22-44 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: ($600,000 – $200,000) – $24,000 + $192,000 – $60,000 = $508,000

*68. Financial statements for Bernard Corp. are presented below: BERNARD CORP. Statement of Financial Position January 1, 2023 Assets Liabilities and Equity Cash ....................................................... $160,000 Accounts payable .......... Accounts receivable .............................. 144,000 Buildings and equipment...................... 600,000 Accumulated depreciation— buildings and equipment ................. (200,000) Common shares............. Patents................................................... 72,000 Retained earnings ......... Total Assets ........................................... $776,000 Total Liabilities & Shareholders’ Equity ..... BERNARD CORP. Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash provided by operating activities Net income................................................................................................ Add back non-cash expenses: Increase in accounts receivable ....................................................... Increase in accounts payable ........................................................... Depreciation expense ....................................................................... Gain on disposal of equipment ........................................................ Amortization of patents.................................................................... Cash provided by operating activities ............................................................. Cash provided by (used in) investing activities Sale of equipment .................................................................................... Purchase of land ....................................................................................... Purchase of buildings and equipment..................................................... Cash used by investing activities ..................................................................... Cash provided by financing activities Payment of cash dividends ...................................................................... Issuance of common shares..................................................................... Cash provided by financing activities.............................................................. Net increase in cash .........................................................................................

$ 76,000

460,000 240,000 $776,000

$200,000 $(64,000) 32,000 60,000 (24,000) 8,000

12,000 $212,000

48,000 (100,000) (192,000) (244,000) (60,000) 160,000 100,000 68,000 22-45

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash, January 1, 2023....................................................................................... Cash, December 31, 2023 .................................................................................

160,000 $228,000

Total assets on the December 31, 2023 statement of financial position were $1,108,000. Accumulated depreciation on the equipment sold was $56,000. The balance in the Accounts Payable account at December 31, 2023 was a) $148,000. b) $108,000. c) $44,000. d) $32,000. Answer: b Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $76,000 + $32,000 = $108,000

*69. Financial statements for Bernard Corp. are presented below: BERNARD CORP. Statement of Financial Position January 1, 2023 Assets Liabilities and Equity Cash ....................................................... $160,000 Accounts payable .......... Accounts receivable .............................. 144,000 Buildings and equipment...................... 600,000 Accumulated depreciation— buildings and equipment ................. (200,000) Common shares............. Patents................................................... 72,000 Retained earnings ......... Total Assets ........................................... $776,000 Total Liabilities & Shareholders’ Equity ..... BERNARD CORP. Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash provided by operating activities Net income................................................................................................ Add back non-cash expenses: Increase in accounts receivable ....................................................... Increase in accounts payable ...........................................................

$ 76,000

460,000 240,000 $776,000

$200,000 $(64,000) 32,000 22-46

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Depreciation expense ....................................................................... Gain on disposal of equipment ........................................................ Amortization of patents.................................................................... Cash provided by operating activities ............................................................. Cash provided by (used in) investing activities Sale of equipment .................................................................................... Purchase of land ....................................................................................... Purchase of buildings and equipment..................................................... Cash used by investing activities ..................................................................... Cash provided by financing activities Payment of cash dividends ...................................................................... Issuance of common shares ..................................................................... Cash provided by financing activities.............................................................. Net increase in cash ......................................................................................... Cash, January 1, 2023....................................................................................... Cash, December 31, 2023 .................................................................................

60,000 (24,000) 8,000

12,000 $212,000

48,000 (100,000) (192,000) (244,000) (60,000) 160,000 100,000 68,000 160,000 $228,000

Total assets on the December 31, 2023 statement of financial position were $1,108,000. Accumulated depreciation on the equipment sold was $56,000. The balance in the Retained Earnings account at December 31, 2023 was a) $500,000. b) $440,000. c) $380,000. d) $180,000. Answer: c Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $240,000 + $200,000 – $60,000 = $380,000

*70. Financial statements for Bernard Corp. are presented below: BERNARD CORP. Statement of Financial Position January 1, 2023 Assets Liabilities and Equity Cash ....................................................... $160,000 Accounts payable .......... Accounts receivable .............................. 144,000 Buildings and equipment...................... 600,000

$ 76,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Accumulated depreciation— buildings and equipment ................. Patents................................................... Total Assets ...........................................

(200,000) 72,000 $776,000

Common shares............. Retained earnings ......... Total Liabilities & Shareholders’ Equity .....

460,000 240,000 $776,000

$200,000 $(64,000) 32,000 60,000 (24,000) 8,000

12,000 $212,000

48,000 (100,000) (192,000) (244,000)

(60,000) 160,000 100,000 68,000 160,000 $228,000

Total assets on the December 31, 2023 statement of financial position were $1,108,000. Accumulated depreciation on the equipment sold was $56,000. The balance in the Common Shares account at December 31, 2023 was a) $260,000. b) $400,000. c) $460,000. d) $620,000. Answer: d Difficulty: Medium 22-48 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $460,000 + $160,000 = $620,000

*71. Ophelia Ltd. reported retained earnings at December 31, 2022 of $270,000, and at December 31, 2023, $218,000. Net income for calendar 2023 was $187,500. During 2023, a stock dividend was declared and distributed, which increased the common shares account by $116,500. As well, a cash dividend was declared and paid during the year. The amount of the cash dividend declared and paid was a) $93,000. b) $123,000. c) $164,500. d) $239,500. Answer: b Difficulty: Medium Learning Objective: Use a work sheet to prepare a statement of cash flows. Section Reference: Use of a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic Feedback: $270,000 + $187,500 – $116,500 – X = $218,000; X = $123,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 22-72 Classification of cash flows and transactions Assuming the company follows ASPE, provide: a) three distinct examples of investing activities. b) three distinct examples of financing activities. c) three distinct examples of significant non-cash transactions. d) two examples of transactions not shown on a statement of cash flows. Solution 22-72 Examples for each of the categories above are listed below: a) Investing activities: purchase or sale of both tangible and intangible assets purchase or sale of investments in other entities loans or collection of principal on loans to other entities b)

Financing activities: issuance or reacquiring of shares issuance or retirement of debt cash dividends paid

Significant non-cash transactions: acquiring assets by issuing shares or debt capital (finance) leases conversion or refinancing of debt non-monetary exchanges of assets

Not shown on the statement of cash flows: stock dividends stock splits

Difficulty: Easy Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. 22-73 Effects of transactions on the statement of cash flows (indirect method) Any given transaction may affect a statement of cash flows (using the indirect method) in one or more of the following ways: Cash flows from operating activities A. Net income will be increased or adjusted upward. 22-50 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Net income will be decreased or adjusted downward.

Cash flows from investing activities C. Increase as a result of cash inflows. D. Decrease as a result of cash outflows. Cash flows from financing activities E. Increase as a result of cash inflows. F. Decrease as a result of cash outflows. The statement of cash flows is not affected G. Not required to be reported on the statement. Instructions For each transaction listed below, list the letter or letters from above that describe(s) the effect of the transaction on a statement of cash flows (indirect method) assuming the company follows ASPE. Ignore any income tax effects. ___ 1. Redeemed preferred shares with a carrying value of $44,000 for $50,000. ___ 2. Wrote off uncollectible accounts receivable of $3,000 against the allowance for doubtful accounts balance of $12,200. ___ 3. Sold machinery that originally cost $3,000, with a book value of $1,800, for $5,000. ___ 4. Acquired land through the issuance of bonds payable. ___ 5. Sold 1,000 common shares for $25 per share. ___ 6. Sold treasury shares at their carrying value. ___ 7. Paid cash dividends of $8,000. ___ 8. Purchased a patent for $20,000. ____ 9. Recorded depreciation expense of $150,000 for the year. Solution 22-73 1. F 2.

B,C

D 22-51

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Ex. 22-74 Effects of transactions on the statement of cash flows (indirect method) Indicate for each of the following what should be disclosed on a statement of cash flows (indirect method), assuming the company follows ASPE. If not disclosed, write "Not shown." There may be more than one answer for some items. For an item that is added to net income, write "Add," and for an item that is deducted from net income, write "Deduct." Show financing and investing outflows in parentheses. For example, an answer might be: Deduct $4,700 or Investing ($31,000). If the item is a non-cash transaction that should be disclosed separately, write "Non-cash." a) The deferred tax liability increased $10,000. b) The balance in “Investment in Kinnear Corp.” increased $12,000 as a result of using the equity method. c) Issuance of a stock dividend increased the common shares account by $56,000. d) Amortization of bond discount, $1,600. e) Machinery, which cost $100,000 with accumulated depreciation of $48,000, was sold for $55,000. f) Issued 3,000 common shares with a market value of $15 per share for machinery. (Show the amount, too.) g) Amortization of patents, $3,000. h) Cash dividends paid, $60,000. *Solution 22-74 a) Add $10,000 b)

Deduct $12,000

Not shown

Add $1,600

Investing $55,000; Deduct $3,000 (gain)

Non-cash $45,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Add $3,000

Financing ($60,000)

*Ex. 22-75 Effects of transactions on the statement of cash flows (indirect method) Assuming ASPE, indicate for each of the following what should be disclosed on a statement of cash flows (indirect method) and in which section. If not disclosed, write, "Not shown." If an item is a noncash transaction that would not be on the statement but should be shown separately, write "noncash." If an item is added to net income, write "Add," and if an item is deducted from net income, write "Deduct." Show financing and investing outflows in parentheses. For example, an answer might be: Deduct $4,700 or Investing ($31,000). There may be more than one answer for some items. a) For 2023, net income was $650,000. b) Amortization of bond premium, $1,100. c) The balance in Retained Earnings was $485,000 at December 31, 2022 and $728,000 at December 31, 2023. A stock dividend was declared and distributed which increased common shares by $280,000. (Show calculation of the cash dividend and indicate how it and the stock dividend would be shown). d) Equipment, which cost $115,000 with accumulated depreciation of $53,000, was sold for $67,000. e) The deferred tax liability increased $18,000. f) Issued 2,000 preferred shares with a fair value of $130 per share for a parcel of land. *Solution 22-75 a) Operating, add $650,000. b)

Operating, deduct $1,100.

Retained earnings 12/31/23 Retained earnings 12/31/22 Increase Stock dividend Net income Cash dividend

$728,000 (or) 485,000 243,000 280,000 523,000 650,000 $127,000

Net income Increase in retained earnings Total dividends Stock dividends Cash dividend

$650,000 243,000 407,000 280,000 $127,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Stock dividend—Not shown Cash dividend—Financing ($127,000) d)

Investing, $67,000. Operating, deduct $5,000 (gain on disposal).

Operating, add $18,000.

Non-cash, $260,000. (2,000 x $130)

*Ex. 22-76 Preparation of statement of cash flows (indirect method) The following information is taken from Green Lake Corporation's financial statements. Green Lake adheres to ASPE: December 31 2023 2022 Cash ............................................................................................................. $ 92,000 $ 27,000 Accounts receivable .................................................................................... 95,000 80,000 Allowance for expected credit losses ......................................................... (4,500) (3,100) Inventory ..................................................................................................... 145,000 175,000 Prepaid expenses ........................................................................................ 7,500 6,800 Land ............................................................................................................. 93,000 60,000 Buildings ...................................................................................................... 287,000 244,000 Accumulated depreciation ......................................................................... (35,000) (13,000) Patents, net of accumulated amortization ................................................ 20,000 35,000 Total Assets ................................................................................................. $700,000 $611,700 Accounts payable ........................................................................................ $ 90,000 $ 84,000 Accrued liabilities ........................................................................................ 54,000 63,000 Bonds payable ............................................................................................. 125,000 60,000 Common shares .......................................................................................... 100,000 100,000 Retained earnings ....................................................................................... 346,000 312,700 Treasury shares, at cost .............................................................................. (15,000) (8,000) Total Liabilities & Shareholders’ Equity ..................................................... $700,000 $611,700 For 2023 Year 22-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Net income .................................................................................................. Depreciation expense ................................................................................. Amortization of patents .............................................................................. Cash dividends declared and paid ............................................................. Gain or loss on disposal of patents.............................................................

$53,300 22,000 7,000 20,000 none

Instructions Prepare a statement of cash flows (indirect method) for Green Lake Corporation for calendar 2023. *Solution 22-76 GREEN LAKE CORPORATION Statement of Cash Flows Year ended December 31, 2023 Cash flows provided by operating activities Net income................................................................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................................................... Amortization of patent.............................................................. Increase in accounts receivable ............................................... Decrease in inventory ............................................................... Increase in prepaid expenses ................................................... Increase in accounts payable ................................................... Decrease in accrued liabilities .................................................. Cash provided by operating activities .............................................................

$53,300

$22,000 7,000 (13,600) 30,000 (700) 6,000 (9,000)

Cash flows provided by (used in) investing activities Purchase of land ....................................................................................... Purchase of buildings ............................................................................... Sale of patent ($35,000 - $20,000 - $7,000) .............................................. Cash used in investing activities ......................................................................

(33,000) (43,000) 8,000

Cash flows provided by financing activities Sale of bonds ............................................................................................ Purchase of treasury shares ..................................................................... Payment of cash dividends ...................................................................... Cash provided by financing activities..............................................................

65,000 (7,000) (20,000)

Net increase in cash ......................................................................................... Cash, January 1, 2023....................................................................................... Cash, December 31, 2023 .................................................................................

41,700 95,000

(68,000)

38,000 $65,000 27,000 $92,000

Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. 22-55 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Classification of Cash Flows Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Ex. 22-77 Preparation of statement of cash flows Comparative statements of financial position for Burgundy Bay Ltd. are shown below: Burgandy adheres to ASPE. BURGUNDY BAY LTD. Statements of Financial Position ___December 31__ 2023 2022 Cash........................................................................................................... $30,900 $10,200 Accounts receivable (net)......................................................................... 48,300 20,300 Inventory ................................................................................................... 35,000 42,000 Long-term investments ............................................................................ 0 15,000 Property, plant & equipment ................................................................... 236,500 150,000 Accumulated depreciation....................................................................... (37,700) (25,000) Total Assets $313,000 $212,500 Accounts payable ..................................................................................... $ 19,000 $ 26,500 Accrued liabilities ..................................................................................... 19,000 17,000 Long-term notes payable ......................................................................... 70,000 50,000 Common shares........................................................................................ 130,000 90,000 Retained earnings..................................................................................... 75,000 29,000 Total Liabilities & Shareholders’ Equity $313,000 $212,500 Additional information concerning transactions and events during 2023: 1. Net income was $80,000. 2. Sold the long-term investments for $28,000. 3. Paid cash dividends of $34,000. 4. Purchased machinery costing $26,500, paid cash. 5. Purchased machinery by signing a $60,000 long-term note payable. 6. Extinguished a $40,000 long-term note payable by issuing common shares. Instructions Prepare a statement of cash flows (indirect method) for calendar 2023 for Burgundy Bay Ltd. *Solution 22-77 BURGUNDY BAY LTD. Statement of Cash Flows Year ended December 31, 2023 22-56 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash provided by operating activities Net income........................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................................................... Gain on disposal of investments ......................................... Increase in accounts receivable .......................................... Decrease in inventory .......................................................... Decrease in accounts payable ............................................. Increase in accrued liabilities ..............................................

$80,000

$12,700 (13,000) (28,000) 7,000 (7,500) 2,000 (26,800) 53,200

Cash provided by operating activities ........................................................ Cash provided by investing activities Sale of long-term investments ............................................................ Purchase of machinery........................................................................ Cash provided by investing activities .........................................................

28,000 (26,500)

Cash provided by (used in) financing activities Paid dividends ..................................................................................... Cash provided by (used in) financing activities .........................................

(34,000)

Net increase in cash .................................................................................... Cash, January 1, 2023.................................................................................. Cash, December 31, 2023 ............................................................................

1,500

(34,000) $20,700 10,200 $30,900

Ex. 22-78 Classification of cash flows (indirect method) Note that X in the following statement of cash flows identifies a dollar amount and the letters (A) through (F) identify specific items, which appear in the major sections of the statement of cash flows prepared using the indirect method. Cash flows from operating activities Net income....................................................................... X Add (deduct) non-cash expenses: Add ........................................................................ +X (A) Deduct .................................................................. –X (B) 22-57 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash provided by operating activities .................................... Cash flows from investing activities Inflows.............................................................................. Outflows ........................................................................... Cash provided by (used in) investing activities ...................... Cash flows from financing activities Inflows.............................................................................. Outflows ........................................................................... Cash provided by (used in) by financing activities ................. Net increase (decrease) in cash...............................................

X +X –X

+X –X

(E) (F) X X

Instructions For each of the following items, indicate by letter in the blank spaces below, the section or sections where the effect would be reported assuming the company follows ASPE. Use the code (A through F) from above. If the item is not required to be reported on the statement of cash flows, write the word "none" in the blank. Assume that generally accepted accounting principles have been followed in determining net income and that there are no temporary investments which are considered cash equivalents. ___ 1. Issued preferred shares in exchange for equipment. ___ 2. Accounts receivable increased by $60,000. ___ 3. Accrued estimated income taxes for the year. ___ 4. Amortization of premium on bonds payable. ___ 5. Purchase of long-term investment. ___ 6. The book value of FV-NI investments was reduced to fair value. ___ 7. Declaration of stock dividends. ___ 8. Loss on impairment of accounts receivable recorded (company uses the allowance method). ___ 9. Gain on disposal of old machinery. ___ 10. Declaration and payment of cash dividends. ___ 11. FV-NI investments sold at a loss. Solution 22-78 1. None 2.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

None

10. F 11. A Difficulty: Medium Learning Objective: Identify the major classifications of cash flows and explain the significance of each classification. Section Reference: Classification of Cash Flows Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 22-79 Calculations for statement of cash flows (direct method) Presented below is the latest income statement of Mandolin Ltd.: Sales ..................................................................................... $570,000 Cost of goods sold ............................................................... 337,500 Gross profit .......................................................................... $232,500 Operating expenses ............................................................. 127,500 Income before income taxes ............................................... 105,000 Income taxes........................................................................ 42,000 Net income........................................................................... $ 63,000 In addition, the following information related to net changes in working capital is available: Debit Credit Cash...................................................................................... $18,000 Accounts receivable (net).................................................... 12,000 Inventories ........................................................................... $29,100 Salaries payable (operating expenses) ............................... 9,000 Accounts payable ................................................................ 13,500 Income tax payable ............................................................. 4,500 Mandolin Ltd. also reports that depreciation expense for the year was $20,550 and that the deferred tax liability account increased $3,900. Instructions Prepare a schedule calculating the net cash flow from operating activities that would be shown on a statement of cash flows using the direct method. 22-59 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 22-79 MANDOLIN LTD. Statement of Cash Flows (Partial) (Direct Method) Cash flows from operating activities Cash received from customers ($570,000 – $12,000) ...................... Cash paid to suppliers ($337,500 – $29,100 – $13,500) ................... Operating expenses paid ($127,500 + $9,000 – $20,550) ................. Taxes paid ($42,000 + $4,500 – $3,900) ............................................ Net cash provided by operating activities ...............................................

$558,000 $294,900 115,950 42,600

453,450 $104,550

Difficulty: Medium Learning Objective: Prepare the operating activities section of a statement of cash flows using the direct versus the indirect method. Section Reference: Format of the Statement CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 22-80 Calculation of operating activities (direct method) The statement of income of Rebel Corporation is shown below: REBEL CORPORATION Statement of Income Year Ended October 31, 2023 Sales........................................................................................................ Cost of goods sold .................................................................................. Gross profit ............................................................................................. Operating expenses ............................................................................... Depreciation expense ............................................................................ Net income .............................................................................................

$2,125,000 1,300,000 825,000 $312,500 35,000

347,500 $ 477,500

Additional information: 1. Accounts receivable increased $105,000 during the year. 2. Inventory increased $62,500 during the year. 3. Prepaid expenses increased $53,750 during the year. 4. Accounts payable to merchandise suppliers increased $72,500 during the year. 5. Accrued expenses payable increased $40,000 during the year. Instructions Using the direct method, prepare the operating activities section of the statement of cash flows for the year ended October 31, 2023. 22-60 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 22-80 REBEL CORPORATION Statement of Cash Flows (partial) Year Ended October 31, 2023 Cash flows provided (used) by operating activities Cash receipts from customers......................................................... (1) Cash payments: To suppliers............................................................................. $1,290,000 (2) For operating expenses .......................................................... 326,250 (3) Net cash provided by operating activities .....................

$2,020,000

1,616,250 $ 403,750

(1) Sales ................................................................................................ Deduct: Increase in accounts receivable ....................................... Cash receipts from customers .......................................................

$2,125,000 (105,000) $2,020,000

(2) Cost of goods sold .......................................................................... Add: Increase in inventory.............................................................. Purchases........................................................................................ Deduct: Increase in accounts payable ........................................... Cash payments to suppliers ...........................................................

$1,300,000 62,500 1,362,500 (72,500) $1,290,000

(3) Operating expenses ........................................................................ Add: Increase in prepaid expenses ................................................ Deduct: Increase in accrued expenses payable ............................ Cash payments for operating expenses ........................................

$ 312,500 53,750 (40,000) $ 326,250

Ex. 22-81 Use the statement of cash flows and the impact of using the direct versus the indirect method a) Explain the purpose of the statement of cash flows. b) Explain how the cash flow statement is affected by choosing the direct method versus the indirect method. Solution 22-81 a) The primary purpose of the statement of cash flows is to provide information about an entity’s cash receipts and cash payments during a period. A secondary objective is to provide information on a cash 22-61 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

basis about its operating, investing, and financing activities. The statement of cash flows therefore reports cash receipts, cash payments, and the net change in cash and cash equivalents resulting from an enterprise’s operating, investing, and financing activities. It does so in a format that reconciles the beginning and ending cash and cash equivalent balances and is designed to provide relevant information. b) Only the operating activities section is affected by the choice of method. The investing and financing sections are the same under both methods. The direct method adjusts revenues and expenses to a cash basis by showing the actual cash received from customers (and any other forms of revenue) and the actual amount of cash paid out for suppliers, employees, operating expenses, interest, taxes, etc. The difference between cash revenues and cash expenses is cash net income, i.e., the net cash flow from operating activities. The indirect method adjusts accrual net income to a cash basis. This is done by starting with the accrual net income and adding or subtracting changes in the balances of current assets and current liabilities during the year and adjusting for non-cash items included in net income. Examples of noncash items include depreciation and amortization, Loss on impairment of accounts receivable, amortization of bond discount or premium, book gains and losses on disposal of assets, and equity method revenues and losses. Difficulty: Easy Learning Objective: Prepare the operating activities section of a statement of cash flows using the direct versus the indirect method. Section Reference: Format of the Statement CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

*Ex. 22-82 Calculations for statement of cash flows (indirect method) During 2023, equipment was sold for $15,000. This equipment originally cost $24,000 and had a book value of $14,000 at the date of sale. Accumulated depreciation for equipment was $65,000 at December 31, 2022 and $62,000 at December 31, 2023. Instructions Based on the above information show how the sale (including any gain or loss), and the depreciation expense for 2023 would be shown on a statement of cash flows (indirect method). Include your calculations. *Solution 22-82 1. Sale – cash inflow from investing activities ........................ 2.

Sale price ............................................................................. Book value ........................................................................... Gain on disposal ..................................................................

$15,000 $15,000 14,000 $ 1,000

Deduct from net Income 22-62

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cost ...................................................................................... Book value ........................................................................... Accumulated depreciation.................................................. Deduct decrease in accumulated depreciation ................. Depreciation expense ..........................................................

$24,000 14,000 10,000 (3,000) $ 7,000

Add to net income

*Ex. 22-83 Calculations for statement of cash flows (indirect method) Cornwall Ltd. sold a machine that cost $19,000 and had a book value of $11,000 for $13,000. Data from the corporation's comparative statements of financial position are: Dec 31/23 Dec 31/22 Machinery $200,000 $173,000 Accumulated depreciation 48,000 34,000 Instructions Based on the above information, there are four items that need to be shown on a statement of cash flows (indirect method). Calculate these four items. Show your calculations. *Solution 22-83 1. Sale – cash inflow from investing activities ........................ 2.

$13,000

$13,000 11,000 $ 2,000

Cost ...................................................................................... Book value ........................................................................... Accumulated depreciation.................................................. Add increase in accumulated depreciation ........................ Depreciation expense ..........................................................

$19,000 11,000 8,000 14,000 $22,000

Cost of machine sold ........................................................... Add increase in machinery .................................................. Purchase of machinery........................................................

$19,000 27,000 $46,000

Deduct from net income

Add to net income

Cash outflow from investing activities

Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. 22-63 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Ex. 22-84 Cash flows from operating activities (indirect and direct methods) Presented below is the latest income statement of Minx Ltd.: Sales ..................................................................................... $1,900,000 Cost of goods sold ............................................................... 1,125,000 Gross profit .......................................................................... $775,000 Operating expenses ............................................................. 425,000 Income before income taxes ............................................... 350,000 Income taxes........................................................................ 140,000 Net income........................................................................... $ 210,000 In addition, the following information related to net changes in working capital is available: Debit Credit Cash...................................................................................... $60,000 Accounts receivable (net).................................................... 40,000 Inventories ........................................................................... $77,000 Prepaid expenses ................................................................ 20,000 Salaries payable (operating expenses) ............................... 30,000 Accounts payable ................................................................ 45,000 Income tax payable ............................................................. 15,000 Minx Ltd. also reports that depreciation expense for the year was $68,500 and that the deferred tax liability account increased $13,000. Instructions Prepare a schedule calculating the net cash flow from operating activities that would be shown on a statement of cash flows: a) using the indirect method. b) using the direct method. Solution 22-84 a) MINX LTD. Statement of Cash Flows (Partial) (Indirect Method) Cash flows from operating activities Net income ........................................................................................ Adjustments to reconcile net income to net cash provided by operating activities:

$210,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Increase in accounts receivable ............................................... Decrease in inventories............................................................. Decrease in prepaid expenses .................................................. Decrease in salaries payable (operating expenses) ................. Increase in accounts payable ................................................... Decrease in income taxes payable ........................................... Depreciation expense ............................................................... Increase in future income tax liability ...................................... Net cash provided by operating activities .......................................

$(40,000) 77,000 20,000 (30,000) 45,000 (15,000) 68,500 13,000

138,500 $348,500

b) MINX LTD. Statement of Cash Flows (Partial) (Direct Method) Cash flows from operating activities Cash received from customers ($1,900,000 – $40,000) ................... Cash paid to suppliers ($1,125,000 – $77,000 – $20,000 – $45,000) Operating expenses paid ($425,000 + $30,000 – $68,500) ............... Taxes paid ($140,000 + $15,000 – $13,000) ...................................... Net cash provided by operating activities ...............................................

$1,860,000 $983,000 386,500 142,000

1,511,500 $ 348,500

Difficulty: Medium Learning Objective: Prepare a complex statement of cash flows using both methods. Section Reference: Preparing Statement of Cash Flows Using Both Methods CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 22-85 Cash flows from operating activities (indirect and direct methods) Presented below is the latest income statement of Oxford Ltd.: Sales ..................................................................................... $380,000 Cost of goods sold ............................................................... 225,000 Gross profit .......................................................................... $155,000 Operating expenses ............................................................. 85,000 Income before income taxes ............................................... 70,000 Income taxes........................................................................ 28,000 Net income........................................................................... $ 42,000 In addition, the following information related to net changes in working capital is available: Debit Credit Cash...................................................................................... $12,000 Accounts receivable (net).................................................... 8,000 Inventories ........................................................................... $19,400 Salaries payable (operating expenses) ............................... 6,000 22-65 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Accounts payable ................................................................ 9,000 Income tax payable ............................................................. 3,000 Oxford Ltd. also reports that depreciation expense for the year was $13,700 and that the deferred tax liability account increased $2,600. Instructions Prepare a schedule calculating the net cash flow from operating activities that would be shown on a statement of cash flows: a) using the indirect method. b) using the direct method. Solution 22-85 a) OXFORD LTD. Statement of Cash Flows (Partial) (Indirect Method) Cash flows from operating activities Net income ........................................................................................ Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable ............................................... Decrease in inventories............................................................. Decrease in salaries payable (operating expenses) ................. Increase in accounts payable ................................................... Decrease in income taxes payable ........................................... Depreciation expense ............................................................... Increase in future income tax liability ...................................... Net cash provided by operating activities .......................................

$42,000

$(8,000) 19,400 (6,000) 9,000 (3,000) 13,700 2,600

27,700 $69,700

b) OXFORD LTD. Statement of Cash Flows (Partial) (Direct Method) Cash flows from operating activities Cash received from customers ($380,000 – $8,000) ........................ Cash paid to suppliers ($225,000 – $19,400 – $9,000) ..................... Operating expenses paid ($85,000 + $6,000 – $13,700) ................... Taxes paid ($28,000 + $3,000 – $2,600) ............................................ Net cash provided by operating activities ...............................................

$372,000 $196,600 77,300 28,400

302,300 $ 69,700

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

Ex. 22-86 Calculating and using free cash flow Sherpa Advertising Ltd. produces the following information from its latest financial statements: Net income...................................................................................... $ 21,000 Dividends paid ................................................................................ 5,000 Average total assets ....................................................................... 210,000 Current assets ................................................................................. 150,000 Current liabilities ............................................................................ 100,000 Cash provided by operating activities ........................................... 19,000 Net capital expenditures ................................................................ 10,000 Sales ................................................................................................ 150,000 Total liabilities ................................................................................ 105,000 Total assets ..................................................................................... 175,000 Cash used in investing activities .................................................... 12,000 Instructions (a) Calculate the free cash flow. (b) Explain the importance of the free cash flow calculation. Solution 22-86 (a) Free cash flow = Cash provided by operating activities – Net capital expenditures $19,000 – $10,000 = $9,000 (b) Free cash flow is a non-GAAP performance measure that uses information provided on the statement of cash flows as an indicator of financial flexibility. It reflects net operating cash flows reduced by the capital expenditures that are needed to sustain the current level of operations. The resulting cash flow is the discretionary cash that a company has available for increasing its capacity and acquiring new investments, paying dividends, retiring debt, repurchasing its shares, or simply adding to its liquidity. In general, companies with significant free cash flow can take advantage of new opportunities or cope well during poor economic times without jeopardizing current operations. Difficulty: Medium Learning Objective: Read and interpret a statement of cash flows. Section Reference: Analyzing the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 22-87 Choices of statement of cash flows categories under IFRS Under IFRS, choices are allowed in the categorization of interest paid and received and dividends received. Explain what these choices are. 22-67 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution 22-87 Under IFRS, there are several choices available for these items: 1. Interest paid/received and dividends received (except dividends received from a significant influence investment) can be recognized in operating activities (assuming they are included in calculating net income). 2.

Interest paid can also be treated as a financing outflow.

Interest and dividends received can also be treated as investing inflows.

Dividends paid can be treated as a financing outflow (highlighting the fact they are returns to shareholders), or an as operating outflow (as a measure of the ability of operations to cover returns to shareholders).

Note, however, once management makes the appropriate choices, they must be applied consistently. Difficulty: Easy Learning Objective: Identify differences in IFRS and ASPE, and explain what changes are expected to standards for the statement of cash flows. Section Reference: IFRS/ASPE Comparison CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Communication

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 22-88 Preparation of statement of cash flows (direct method) Oswald Ltd. has recently decided to go public and has hired you as its independent accountant. It wishes to adhere to IFRS and knows that it must prepare a statement of cash flows. Its financial statements for 2023 and 2022 are provided below: Statements of Financial Position Dec 31/23 Cash .................................................................... $ 51,000 Accounts receivable ........................................... 45,000 Merchandise inventory ...................................... 48,000 Property, plant and equipment ......................... $76,000 Less accumulated depreciation ................. (40,000) 36,000 Total Assets $180,000 Accounts payable ............................................... $ 22,000 Income taxes payable ........................................ 44,000 Bonds payable .................................................... 45,000 Common shares ................................................. 27,000 Retained earnings .............................................. 42,000 Total Liabilities & Shareholders’ Equity $180,000

Dec 31/22 $ 24,000 27,000 60,000 $120,000 (38,000)

82,000 $193,000 $ 12,000 49,000 75,000 27,000 30,000 $193,000

Income Statement Year ended December 31, 2023 Sales...................................................................................................................................... $1,050,000 Cost of sales .......................................................................................................................... 894,000 Gross profit ........................................................................................................................... 156,000 Selling and administrative expenses ................................................................................... 99,000 Income from operations ...................................................................................................... 57,000 Interest expense ................................................................................................................... 9,000 Income before taxes ............................................................................................................. 48,000 Income taxes ........................................................................................................................ 12,000 Net income ........................................................................................................................... $ 36,000 The following additional data were provided for calendar 2023: 1. Dividends declared and paid were $24,000. 2. Equipment was sold for $30,000. This equipment originally cost $44,000 and had a book value of $36,000 at the time of sale. The loss on sale was included in “selling and administrative expenses,” as was the depreciation expense for the year. 3. Bonds were retired during the year at par. Instructions a) From the information above, prepare a statement of cash flows (direct method) for calendar 2023. 22-69 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CRITICAL THINKING: The company CFO reviews the statement of cash flows and expresses a preference for using the indirect method rather than the direct method that you prepared. Explain to the CFO why the direct method was chosen. As part of your explanation provide a rational for the use of the direct method versus the indirect method.

Solution 22-88 a) OSWALD LTD. Statement of Cash Flows (direct method) Year ended December 31, 2023 Cash provided by operating activities Cash received from customers (1) ...................................................... Cash paid to suppliers (2) .................................................................... Operating expenses paid (3) ............................................................... Interest paid......................................................................................... Taxes paid ($49,000 + $12,000 – $44,000) ........................................... Net cash provided by operating activities..................................................

$1,032,000 $872,000 83,000 9,000 17,000

981,000 51,000

Cash provided by (used in) investing activities Sale of equipment ............................................................................... Cash provided by financing activities Retirement of bonds............................................................................ Payment of cash dividend ................................................................... Cash used by financing activities................................................................ Net increase in cash .................................................................................... Cash, January 1, 2023.................................................................................. Cash, December 31, 2023 ............................................................................ 1. 2. 3.

30,000

(30,000) (24,000) (54,000) 27,000 24,000 $ 51,000

$1,050,000 – $18,000 (increase in A/R) $894,000 – $12,000 (decrease in Inventory) – $10,000 (increase in A/P) $99,000 – $10,000 (depreciation) – $6,000 (loss on sale of equipment)

b) CRITICAL THINKING: The direct method adjusts revenues and expenses to a cash basis. The difference between cash revenues and cash expenses is cash net income, which is equal to net cash flow from operating activities (effectively, reporting income on a cash basis). The indirect method involves adjusting accrual net income to a cash basis. This is done by starting with accrual net income, adjusting for changes in working capital items and adding or subtracting non-cash items included in net income. Public companies generally prefer the indirect method, whereas lending officers and investors tend to prefer the direct method, because of the additional information provided. The only section affected by use of the direct vs indirect methods is the operating activities. IFRS and ASPE also encourage the use of the direct method. The principal advantage of the direct method is that it shows operating cash receipts and payments 22-70 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

and is more consistent with the primary objective of a statement of cash flows, which is to provide information about an entity’s cash receipts and cash payments during a specific period. Advocates of this method maintain that such information is useful for estimating future cash flows. A possible disadvantage is that many companies say their data collection methods do not gather the information required to use the direct method, although this argument may be a bit weak given the powerful computer systems available today. As well, supporters of the indirect method say the direct method may incorrectly suggest that net cash flow from operating activities is as good as (or even better than) accrual net income as a performance measure. The principal advantage of the indirect method is that it focuses on the difference between net income reported on the income statement and the actual cash flow from operating activities. Other advantages offered by indirect method advocates are that it is the “familiar” method which has been used for many years, and that it is cheaper to develop the information compared to the information required for the direct method. Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 22-89 Preparation of statement of cash flows (direct method) White Horse Ltd. has prepared the following comparative statements of financial position at December 31, 2022 and 2023: White Horse adheres to ASPE. 2023 2022 Cash................................................................................................. $ 99,000 $ 51,000 Accounts receivable ....................................................................... 53,000 39,000 Inventory ......................................................................................... 50,000 60,000 Prepaid expenses ........................................................................... 6,000 9,000 Property, plant & equipment ......................................................... 420,000 350,000 Accumulated depreciation............................................................. (150,000) (125,000) Goodwill .......................................................................................... 51,000 58,000 $529,000 $442,000 Accounts payable ........................................................................... $ 51,000 $ 56,000 Accrued liabilities ........................................................................... 20,000 14,000 Mortgage payable ........................................................................... — Preferred shares ............................................................................. 215,000 — Common shares.............................................................................. 200,000 200,000 Retained earnings........................................................................... 43,000 22,000 $529,000 $442,000 1.

The Accumulated Depreciation account has been credited only for the depreciation expense for the year. There were no disposals of property, plant and equipment, but new equipment was purchased during 2023. 22-71

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2. 3.

The condensed income statement for 2023 is as follows: Sales ..................................................................................... Cost of sales ......................................................................... Gross profit .......................................................................... Operating expenses ............................................................. Net income...........................................................................

$660,000 363,000 297,000 230,000 $ 67,000

Instructions From the information above, prepare a statement of cash flows (direct method) for calendar 2023. Solution 22-89 WHITE HORSE LTD. Statement of Cash Flows (direct method) Year ended December 31, 2023 Cash provided by operating activities Cash received from customers (1) ...................................................... Cash paid to suppliers (2) Operating expenses paid (3) ............................................................... Net cash provided by operating activities..................................................

$646,000 $358,000 189,000

Cash provided by (used in) investing activities Purchase of plant assets ..................................................................... Cash provided by financing activities Payment of cash dividend ................................................................... Payment of mortgage payable............................................................ Sale of preferred shares ...................................................................... Cash provided by financing activities......................................................... Net increase in cash .................................................................................... Cash, January 1, 2023.................................................................................. Cash, December 31, 2023 ............................................................................ 1. 2. 3.

547,000 99,000

(70,000)

(46,000) (150,000) 215,000 19,000 48,000 51,000 $ 99,000

$660,000 – $14,000 (increase in A/R) $363,000 – $10,000 (decrease in INVT) + $5,000 (decrease in A/P) $230,000 – $25,000 (depreciation) – $7,000 (impairment of goodwill) – $3,000 (decrease in prepaid expenses) – $6,000 (increase in accrued liabilities)

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 22-90 Preparation of statement of cash flow (direct method) The financial statements of Panda Express Limited appear below: PANDA EXPRESS LIMITED Comparative Statements of Financial Position March 31 Assets Cash ........................................................................................................ Accounts receivable ............................................................................... Inventory ................................................................................................ Property, plant, and equipment ............................................................ Accumulated depreciation .................................................................... Total ................................................................................................

2023 $118,000 62,000 40,000 100,000 (40,000) $280,000

2022 $ 46,000 68,000 30,000 156,000 (48,000) $252,000

Liabilities and Shareholders' Equity Accounts payable ................................................................................... Income tax payable ................................................................................ Mortgage payable................................................................................... Common shares ..................................................................................... Retained earnings .................................................................................. Total ................................................................................................

$ 30,000 26,000 18,000 78,000 128,000 $280,000

$ 46,000 16,000 66,000 48,000 76,000 $252,000

PANDA EXPRESS LIMITED Statement of Income Year Ended March 31, 2023 Sales...................................................................................................................................... Cost of goods sold ................................................................................................................ Gross profit ........................................................................................................................... Operating expenses ............................................................................................................. Interest expense ................................................................................................................... Income before income tax ................................................................................................... Income tax expense ............................................................................................................. Net income ...........................................................................................................................

$760,000 580,000 180,000 72,000 8,000 100,000 20,000 $ 80,000

Additional information regarding fiscal 2023: 1. Dividends declared and paid were $28,000. 2. During the year, equipment was sold for $24,000 cash. This equipment cost $56,000 originally and 22-73 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

3. 4. 5. 6.

had a carrying amount of $24,000 at the time of sale. Depreciation expense is included in operating expenses. All sales and purchases are on account. Accounts payable pertain to merchandise suppliers. All operating expenses except for depreciation were paid in cash.

Instructions Using the direct method, prepare a statement of cash flows for the year ended March 31, 2023. Panda uses ASPE. Solution 22-90 PANDA EXPRESS LIMITED Statement of Cash Flows Year Ended March 31, 2023 Operating activities Cash receipts from customers ($760,000 + $6,000) ....................... Cash payments: To suppliers............................................................................. For operating expenses .......................................................... For interest expense ............................................................... For income tax ($20,000 – $10,000) ........................................ Net cash provided by operating activities .....................

$766,000 $606,000 (1) 48,000 (2) 8,000 10,000

Investing activities Sale of equipment .......................................................................... Net cash provided by investing activities ..............................

$ 24,000

Financing activities Repayment of mortgage ................................................................ Issue of common shares ................................................................. Payment of cash dividend .............................................................. Net cash used by financing activities .....................................

$(48,000) 30,000 (28,000)

672,000 94,000

24,000

(46,000)

Net increase in cash ............................................................................... Cash, January 1 ...................................................................................... Cash, December 31 .................................................................................

72,000 46,000 $118,000

(1) Cost of goods sold .......................................................................... Add: Increase in inventory.............................................................. Purchases........................................................................................ Add: Decrease in accounts payable ............................................... Cash payments to suppliers ...........................................................

$580,000 10,000 590,000 16,000 $606,000

(2) Operating expenses ........................................................................ Less: Depreciation expense............................................................

$ 72,000 (24,000)* 22-74

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash payments for operating expenses ........................................

$ 48,000

*$48,000 – $32,000 = $16,000 balance in accumulated depreciation after sale. Ending balance, $40,000 – $16,000 = $24,000 depreciation expense. Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the direct method. Section Reference: Preparing a Statement of Cash Flows Using the Direct Method CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 22-91 Preparation of statement of cash flows (indirect method) Comparative statements of financial position for Jabber Jaws Corporation appear below: Jabber Jaws CORPORATION Comparative Statements of Financial Position July 31 Assets July 31, 2023 Cash ............................................................................................. $ 78,000 Accounts receivable .................................................................... 146,000 Prepaid insurance ....................................................................... 38,000 Land ............................................................................................. 36,000 Equipment ................................................................................... 140,000 Accumulated depreciation—equipment .................................... (40,000) Total assets .......................................................................... $398,000

July 31, 2022 $ 62,000 120,000 34,000 80,000 120,000 (26,000) $390,000

Liabilities and Shareholders' Equity Accounts payable ........................................................................ $ 22,000 Bonds payable ............................................................................. 54,000 Common shares .......................................................................... 280,000 Retained earnings ....................................................................... 42,000 Total liabilities and shareholders' equity ........................... $398,000

$ 12,000 38,000 230,000 110,000 $390,000

Additional information regarding fiscal 2023: 1. A loss of $50,000 was reported for the year. 2. Cash dividends were declared and paid. 3. Land was sold for cash at a loss of $20,000. This was the only land transaction during the year. 4. Equipment with a cost of $30,000 and accumulated depreciation of $20,000 was sold for $10,000 cash. 5. The bonds were originally issued at face value. $24,000 worth of bonds were retired during the year at their carrying amount. 6. Equipment was exchanged for common shares. The fair value of the shares at the time of the 22-75 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

exchange was $50,000. Instructions Using the indirect method, prepare a statement of cash flows for the year ended July 31, 2023. Solution 22-91 JABBER JAWS CORPORATION Statement of Cash Flows Year Ended July 31, 2023 Operating activities Loss ........................................................................................................... Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation expense (a) .................................................................. Loss on sale of land........................................................................... Increase in accounts receivable ....................................................... Increase in prepaid expenses ........................................................... Increase in accounts payable ........................................................... Net cash used by operating activities ......................................

$(50,000)

$ 34,000 20,000 (26,000) (4,000) 10,000

Investing activities Proceeds from the sale of land (b) ........................................................... Proceeds from the sale of equipment ..................................................... Net cash provided by investing activities.................................

$24,000 10,000

Financing activities Retirement of bonds payable................................................................... Issue of bonds payable (c) ........................................................................ Payment of dividends (d) ......................................................................... Net cash used by financing activities .......................................

$(24,000) 40,000 (18,000)

34,000 (16,000)

34,000

(2,000)

Increase in cash ................................................................................................ Cash, August 1 .................................................................................................. Cash, July 31 .....................................................................................................

16,000 62,000 $ 78,000

Noncash investing and financing activities Purchase of equipment through issue of common shares ...................

$50,000

(a) Accumulated depreciation, July 31, 2022 ............................................... Accumulated depreciation, July 31, 2023 ............................................... Difference.................................................................................................. Add: accumulated depreciation on equipment sold .............................. Depreciation expense ...............................................................................

$26,000 40,000 14,000 20,000 $34,000

(b) Cost of land sold ....................................................................................... Less loss on sale of land ...........................................................................

$44,000 (20,000) 22-76

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Proceeds from sale of land.......................................................................

$24,000

(c) Bonds payable, July 31, 2022 ................................................................... Bonds payable, July 31, 2023 ................................................................... Increase..................................................................................................... Add retirement of bonds .......................................................................... New bonds issued.....................................................................................

$38,000 54,000 16,000 24,000 $40,000

(d) Retained earnings, July 31, 2022 ............................................................. Less loss for year....................................................................................... Less retained earnings, July 31, 2023 ...................................................... Dividends declared ...................................................................................

$110,000 (50,000) (42,000) $ 18,000

Pr. 22-92 Preparation of statement of cash flows (indirect method) White Horse Ltd. has prepared the following comparative statements of financial position at December 31, 2022 and 2023: White Horse adheres to ASPE. 2023 2022 Cash................................................................................................. $99,000 $51,000 Accounts receivable ....................................................................... 53,000 39,000 Inventory ......................................................................................... 50,000 60,000 Prepaid expenses ........................................................................... 6,000 9,000 Property, plant & equipment ......................................................... 420,000 350,000 Accumulated depreciation............................................................. (150,000) (125,000) Goodwill .......................................................................................... 51,000 58,000 $529,000 $442,000 Accounts payable ........................................................................... Accrued liabilities ........................................................................... Mortgage payable ........................................................................... Preferred shares ............................................................................. Common shares.............................................................................. Retained earnings...........................................................................

$51,000 20,000 — 215,000 200,000 43,000 $529,000

$56,000 14,000 150,000 — 200,000 22,000 $442,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

2. 3.

Depreciation expense and a charge for impairment of goodwill have both been included in operating expenses. The Retained Earnings account was debited for cash dividends declared and paid of $46,000 and credited for the net income for the year. The condensed income statement for 2023 is as follows: Sales ..................................................................................... Cost of sales ......................................................................... Gross profit .......................................................................... Operating expenses ............................................................. Net income...........................................................................

$660,000 363,000 297,000 230,000 $ 67,000

Instructions From the information above, prepare a statement of cash flows (indirect method) for calendar 2023. Solution 22-92 WHITE HORSE LTD. Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash provided by operating activities Net income........................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................................................... Impairment of goodwill ....................................................... Increase in accounts receivable .......................................... Decrease in inventory .......................................................... Decrease in prepaid expenses ............................................. Decrease in accounts payable ............................................. Increase in accrued liabilities .............................................. Cash provided by operating activities ........................................................

$67,000

25,000 7,000 (14,000) 10,000 3,000 (5,000) 6,000

32,000 99,000

(70,000)

(46,000) (150,000) 215,000 19,000 48,000 51,000 $99,000 22-78

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

*Pr. 22-93 Preparation of statement of cash flows (indirect method) Brown Derby adheres to ASPE. The net changes in the statement of financial position accounts of Brown Derby Corp. for calendar 2023 are shown below: Account Debit Credit Cash ............................................................................................................. $ 92,000 FV-NI investments ....................................................................................... $121,000 Accounts receivable .................................................................................... 73,200 Allowance for expected credit losses ......................................................... 13,300 Inventory ..................................................................................................... 74,200 Prepaid expenses ........................................................................................ 22,800 Long-term investment (100% owned subsidiary) ...................................... 20,000 Plant and equipment .................................................................................. 235,000 Accumulated depreciation ......................................................................... 155,000 Accounts payable ........................................................................................ 80,700 Accrued liabilities ........................................................................................ 16,500 Deferred tax liability .................................................................................... 15,500 Long-term bonds......................................................................................... 80,000 Common shares .......................................................................................... 240,000 Retained earnings ....................................................................................... 98,000 __________ $668,600 $668,600 Other information regarding the corporation’s 2023 year: An analysis of the Retained Earnings account shows: Retained earnings, December 31, 2022 ...................................................... Add: Net income .......................................................................................... Subtotal ....................................................................................................... Deduct: Cash dividend ............................................................................ Stock dividend........................................................................... Retained earnings, December 31, 2023 ...................................................... 1. 2. 3. 4.

$1,300,000 287,000 1,587,000 $145,000 240,000

385,000 $1,202,000

On January 2, 2023, FV-NI investments costing $121,000 were sold for $150,000. The company paid the cash dividend on February 1, 2023 and distributed the stock dividend on August 1, 2023. Accounts receivable of $16,200 and $19,400 were considered uncollectible and written off in 2023 and 2022, respectively. Major repairs of $25,000 to the equipment were debited to the Plant and Equipment account during 22-79

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

5. 6. 7.

the year. The 100% owned subsidiary reported a net loss for the year of $20,000. At January 1, 2023, the cash balance was $136,000. Long-term bonds were issued at par.

Instructions Prepare a statement of cash flows (indirect method) for calendar 2023. *Solution 22-93 BROWN DERBY CORP. Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash provided by operating activities Net income........................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Equity investment loss ......................................................... Depreciation expense .......................................................... Gain on disposal of FV-NI investments ................................ Decrease in deferred tax liability ......................................... Increase in accounts receivable .......................................... Increase in inventory............................................................ Decrease in prepaid expenses ............................................. Decrease in accounts payable ............................................. Increase in accrued liabilities .............................................. Cash provided by operating activities ........................................................

$287,000

$20,000 155,000 (29,000) (15,500) (59,900) (74,200) 22,800 (80,700) 16,500

Cash flows provided by (used in) investing activities Sale of FV-NI investments ................................................................... Purchase of plant and equipment ...................................................... Major repairs to equipment ................................................................ Net cash provided by (used in) investing activities ...................................

150,000 (210,000) (25,000)

Cash provided by (used in) financing activities Payment of cash dividend ................................................................... Sale of bonds ....................................................................................... Net cash provided by (used in) financing activities ...................................

(145,000) 80,000

(45,000) 242,000

(85,000)

(65,000) 92,000 136,000 $228,000

Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method 22-80 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

*Pr. 22-94 Complex statement of cash flows (indirect method) The net changes in the statement of financial position accounts of Black Beauty Inc. for the calendar year 2023 are shown below: Account Cash ............................................................................................................. Accounts receivable .................................................................................... Allowance for expected credit losses ......................................................... Inventory ..................................................................................................... Prepaid expenses ........................................................................................ Long-term investments............................................................................... Land ............................................................................................................. Buildings ...................................................................................................... Machinery .................................................................................................... Office equipment......................................................................................... Accumulated depreciation: Buildings .............................................................................................. Machinery ............................................................................................ Office equipment ................................................................................. Accounts payable ........................................................................................ Accrued liabilities ........................................................................................ Dividends payable ....................................................................................... Bonds payable ............................................................................................. Preferred shares .......................................................................................... Common shares .......................................................................................... Retained earnings .......................................................................................

Debit $ 62,800

Credit $ 32,000 7,000

108,600 10,000 72,000 150,000 300,000 50,000 14,000 12,000 10,000 6,000 91,600 36,000 64,000 416,000 30,000 43,600 $852,600

189,600 __________ $852,600

Additional information: 1. Net income for the year was $70,000. 2. Cash dividends of $64,000 were declared December 15, 2023, payable January 15, 2024. A 5% common stock dividend was issued March 31, 2023, when the market value was $22.00 per share. At the time there were 36,000 common shares outstanding. 3. The long-term investments were sold for $70,000. 4. A building which had cost $240,000, with a book value of $150,000, was sold for $200,000, and a new one was purchased. 5. The following entry was made to record an exchange of an old machine for a new one: Machinery .......................................................................................... 80,000 Accumulated Depreciation—Machinery .......................................... 20,000 22-81 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Machinery ............................................................................ Cash ..................................................................................... 6. A fully depreciated copier machine, which cost $14,000, was written off. 7. Preferred shares originally issued for $30,000 were redeemed for $40,000. 8. Black Beauty sold 6,000 common shares on June 15, 2023 for $25 a share. 9. Bonds were sold at 104 on December 31, 2023. 10. Land with a book value of $120,000 was sold for $54,000.

30,000 70,000

Instructions Prepare a statement of cash flows (indirect method) for calendar 2023. *Solution 22-94 BLACK BEAUTY INC. Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash provided by operating activities Net income........................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense—buildings ............................................... Depreciation expense—machinery ............................................. Depreciation expense—office equipment .................................. Gain on disposal of building ........................................................ Loss on disposal of long-term investments ................................ Loss on disposal of land .............................................................. Decrease in accounts receivable (net) ........................................ Increase in inventory ................................................................... Increase in prepaid expenses ...................................................... Decrease in accounts payable ..................................................... Increase in accrued liabilities ...................................................... Cash provided by operating activities ........................................................ Cash provided by (used in) investing activities Sale of long-term investments ............................................................ Proceeds from sale of land.................................................................. Purchase of land .................................................................................. Proceeds from sale of building ........................................................... Purchase of building............................................................................ Purchase of machinery........................................................................ Cash provided by (used in) investing activities .......................................... Cash provided by financing activities Sale of bonds ....................................................................................... Retirement of preferred shares ........................................................... Sale of common shares .......................................................................

$ 70,000

$102,000 30,000 8,000 (50,000) 2,000 66,000 39,000 (108,600) (10,000) (91,600) 36,000

(1) (2) (3) (4) (5) (6)

22,800 92,800

70,000 54,000 (270,000) (7) 200,000 (540,000) (8) (70,000) (556,000)

416,000 (9) (40,000) 150,000 (10) 22-82

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash provided by financing activities.........................................................

526,000

Net increase in cash ....................................................................................

$ 62,800

(1) Net change ........................................................................... Debit to accumulated depreciation on sale ....................... Depreciation expense ..........................................................

$12,000 90,000 $102,000

(2) Net change ........................................................................... Debit to accumulated depreciation on exchange .............. Depreciation expense ..........................................................

$10,000 20,000 $30,000

(3) Net change ........................................................................... Write-off ............................................................................... Depreciation expense ..........................................................

$(6,000) 14,000 $ 8,000

(4) Sale price of building ........................................................... Book value .......................................................................... Gain on disposal ..................................................................

$200,000 150,000 $ 50,000

(5) Carrying value of long-term investments ........................... Sale price ............................................................................. Loss on disposal ..................................................................

$72,000 70,000 $ 2,000

(6) Book value of land ............................................................... Sale price ............................................................................. Loss on disposal ..................................................................

$120,000 54,000 $ 66,000

(7) Net change ........................................................................... Cost of land sold ..................................................................

$150,000 120,000 $270,000

(8) Net change ........................................................................... Cost of building sold ............................................................

$300,000 240,000 $540,000

(9) $400,000 x 1.04 = $416,000. (10) 6,000 × $25 = $150,000. Common shares Sale Stock dividend Net change

6,000 × $25 36,000 x 5% × $22

= =

$150,000 39,600 $189,600

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Net income .................................................... Dividends (cash) ............................................ Dividends (stock) ........................................... Preferred share redemption ......................... Net change.....................................................

$ 70,000 (64,000) (39,600) (10,000) $(43,600)

Pr. 22-95 Statement of cash flows (indirect method) and statement analysis Maribal Company’s junior controller prepared the following statement of cash flows for 2023: MARIBAL COMPANY INC. Statement of Cash Flows Year Ended December 31, 2023 Operating activities Net income

$78,000

Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation expense Loss on disposal of equipment Increase in accounts receivable Decrease in inventory Increase in accounts payable Increase in income tax payable Net cash provided by operating activities Investing activities Purchase of equipment Proceeds from disposal of equipment Net cash used by investing activities Financing activities Repayment of mortgage payable Payment of cash dividend Net cash used by financing activities Net decrease in cash Cash, January 1

$ 8,500 (1,245) (4,500) 1,785 (780) (7,450)

(3,690) 74,310

(57,840) 6,750 (51,090) (34,580) 6,575 (28,005) (4,785) 4,250 22-84

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash, December 31

$ (535)

The CFO is reviewing the work completed by the junior controller and thinks the statement is incorrect. Instructions a) Prepare a corrected statement cashflows. b) Briefly comment on Maribal’s performance, include a calculation of free cash flow. Solution Pr.22-95 a) The following is the corrected statement of cash flows for Maribal Company Inc.: MARIBAL COMPANY INC. Statement of Cash Flows Year Ended December 31, 2023 Operating activities Net income

$78,000

$ 8,500 1,245 (4,500) 1,785 780 7,450

15,260 93,260

(57,840) 6,750 (51,090) (34,580) (6,575) (41,155) 1,015 4,250 $ 5,265

Overall, the cash flows have increased and there is a net increase in cash of $1,105 as a result of operating activities. Both investing and financing activities were a use of cash. The free cash flow is $42,170. 22-85

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Free Cash Flow = Cash provided by operating activities – net capital expenditures Free Cash Flow: $93,260 – $51,090 = $42,170 Difficulty: Medium Learning Objective: Prepare a statement of cash flows using the indirect method. Section Reference: Preparing a Statement of Cash Flows Using the Indirect Method Learning Objective: Read and interpret a statement of cash flows. Section Reference: Analyzing the Statement of Cash Flows CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 23 OTHER MEASUREMENT AND DISCLOSURE ISSUES CHAPTER STUDY OBJECTIVES 1. Understand the importance of disclosure from a business perspective. Information disclosure is important to the proper functioning of capital markets and the allocation of capital. The information provided in financial statements helps investors compare the performance of companies and assess the relative risks and returns of different investments. Financial statement preparers must keep in mind both the costs and benefits of disclosure when making their disclosure decisions. Financial statements are just one of many sources of information for investors and creditors

2. Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. The full disclosure principle calls for financial reporting of any financial facts that are significant enough to influence the judgement of an informed reader. Implementing the full disclosure principle is difficult because the cost of disclosure can be substantial and the benefits difficult to assess. Disclosure requirements for public entities have increased because of (1) the growing complexity of the business environment, (2) the necessity for timely information, and (3) sustainability and ESG reporting. For private entities, disclosure requirements are lower due to the lesser complexity of many private entities and the fact that many stakeholders of private entities have greater access to information. Notes are the accountant’s means of amplifying or explaining the items presented in the main body of the statements. Information that is pertinent to specific financial statement items can be explained in qualitative terms, and supplementary quantitative data can be provided to expand the information in the financial statements. Accounting policy notes explain the accounting methods and policies chosen by the company, allowing greater comparability among companies.

3. Describe the disclosure requirements for major segments of a business. If only consolidated amounts are available to the analyst, much information regarding the composition of these figures is hidden in the aggregated figures. There is no way to tell from the consolidated data how much each product line contributes to the company’s profitability, risk, and growth potential. As a result, segment information is required by the profession for public entities, including general information about reportable segments; segment revenues, profit and loss, assets, liabilities, and related information; reconciliations; information about products and services; geographical area information; and information about revenues from major customers.

4. Describe the requirements and accounting problems associated with interim reporting. Interim reports cover periods of less than one year. There are two viewpoints regarding interim reports. The discrete view holds that each interim period should be treated as a separate accounting period. In contrast, the integral view holds that the interim report is an integral part of the annual report and 23-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

that deferrals and accruals should consider what will happen for the entire year. IFRS encourages the discrete view approach. The same accounting principles that are used for annual reports should generally be used for interim reports; however, there are several unique reporting problems, such as seasonality and presentation of earnings per share.

5. Discuss the accounting issues for related-party transactions. Related-party transactions pose special accounting issues. Because the transactions are not at arm’s length, they may have to be remeasured under ASPE, as the exchange amount is not necessarily representative of the market or fair value. Without reliable information, the transaction may have to be remeasured to reflect historical values or carrying amounts. IFRS does not require remeasurement of related-party transactions, whereas ASPE does.

6. Identify the accounting issues relating to subsequent events and those faced by unincorporated businesses. There are two types of subsequent everts. The first provides additional evidence about an event that existed at the statement of financial position date. These events should be reflected in the SFP and income statement. The second type of event provides evidence about events or transactions that did not exist at the SFP date. These events should be disclosed in notes if they will have a material impact on the company’s future. The accounting issues faced by unincorporated businesses are similar to those that are incorporated, with a few exceptions such as (a) defining the economic entity (b) the need to clearly indicate salaries, interest, or similar items accruing to owners (c) the lack of a requirement for a provision for income taxes, and (d) the need detail the changes in owners’ equity during the period in the financial statements.

7. Identify the major considerations relating to bankruptcy and receivership. Bankruptcy is a legal process that occurs when a company (or individual) is unable to pay its debts. The Office of the Superintendent of Bankruptcy administers the bankruptcy process in Canada. Companies facing bankruptcy can make a proposal to pay their creditors a percentage of what was owed at the time of the proposal, or they could request an extension to the time available to pay off their debts (or both). A receivership process is typically started by a secured creditor, or a group of secured creditors, if a company defaults on a loan. A receiver is appointed by the bankruptcy court. A receivership and a bankruptcy could occur at the same time, and two different companies could be appointed for the roles of receiver and trustee in bankruptcy.

8. Identify the major disclosures found in the auditor’s report. If the auditor is satisfied that the financial statements present fairly, in all material respects, the financial position, its financial performance and its cash flows in accordance with GAAP, the auditor expresses an unmodified opinion. A qualified opinion contains an exception to the standard opinion; however, the exception would not be significant enough to invalidate the statements as a whole. An adverse opinion is required in any report in which the exceptions to fair presentation are so pervasive that a qualified opinion is not justified. A disclaimer of an opinion is appropriate when the auditor has gathered insufficient information on the financial statements so that no opinion can be expressed 23-2 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

9. Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Various techniques are used in the analysis of financial statement data. These include ratio analysis, common-size analysis, trend analysis, and examination of related data (in notes and other sources). No one technique is always more useful than another. Every situation faced by the analyst is different, and the answers needed are often obtained only on close examination of the interrelationships among all the data provided. Ratio analysis is a starting point in developing information desired by an analyst. While the basic concepts and tools for analysis are provided, keep in mind that there are limitations inherent in individual financial statement analysis techniques. For more complex techniques, you should refer to textbooks and courses that focus extensively on financial statement analysis.

10. Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Differences are noted in the chapter and the comparison chart in Illustration 23.12. No significant changes are expected in the near future. However, the OSC has released proposed amendments to its continuous disclosure requirements. In addition, IASB plans to update its Management Commentary Practice statement and issued a new Exposure Draft in 2021 to start the process.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer b a d c c d b d b c a d c b a b b d b a a c c b c d d c d c c d a d a b d c c b a c c

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Components of annual report Increased disclosure requirements Disclosure of significant accounting policies Definition of errors and irregularities Criteria for reporting segmented information Financial statement notes Disclosure differences between IFRS and ASPE Segment revenue test Segment revenue test IFRS disclosures for reportable segments IFRS requirements for reporting segmented information Operating segment characteristics Identification of reportable segments Identification of a reportable segment Identification of a reportable segment Identification of a reportable segment Identification of a reportable segment IFRS requirements for interim reporting Discrete view for interim reporting Discrete view for interim reporting IFRS requirements for interim reporting Problems with interim reporting Bonus expense on quarterly income statement Property taxes and repairs recognized in interim period Annual expenses to be reported in interim statements One time only and annual expense to be reported in interim statements Related-party transactions Related-party transactions Related party transaction – ASPE Related party transaction – IFRS Subsequent events requiring adjustments Subsequent events requiring disclosure only Accounting for unincorporated businesses Accounting for unincorporated businesses Determine reportable segments Auditor’s unmodified opinion Auditor’s qualified opinion Auditor’s adverse opinion Auditor’s report Limitations of financial statement analysis Ratios reflecting financial strength Ratios assessing management performance Profitability ratios 23-4

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d b c Answer c a d b b

44. 45. 46. No. 47. 48. 49. 50. 51.

Activity ratios Calculate current ratio Calculate inventory turnover Description Calculate profit margin on sales Calculate debt to asset ratio Calculate debt to equity ratio Calculate accounts receivable turnover Guidance given by ASPE and IFRS

EXERCISES Item E23-52 E23-53 E23-54 E23-55 E23-56 E23-57 E23-58 E23-59 E23-60

Description Public company key disclosure requirements IFRS Practice Statement Notes to financial statements Segmented reporting and disclosure requirements Interim reporting Income taxes at interim dates Ratios for financial analysis Related Party disclosures Activity financial ratios

PROBLEMS Item P23-61 P23-62 P23-63 P23-64 P23-65 P23-66 P23-67 P23-68 P23-69

Description Segmented reporting (IFRS requirements) Segmented reporting and disclosure requirements Interim reporting Types of subsequent events Bankruptcy and types of creditors Auditor’s report Uncertainty and financial information Ratio analysis Ratio Analysis

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS 1. Which of the following items found in an annual report is NOT subject to GAAP? a) financial statements b) management discussion and analysis c) inventory methods d) accounting policies Answer: b Difficulty: Easy Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

2. Reasons for increased disclosure requirements do NOT include a) the current government trend toward reducing income taxes. b) the necessity for timely information. c) the complexity of the business environment. d) accounting as a control and monitoring device. Answer: a Difficulty: Easy Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

3. Which of the following does NOT need be disclosed in a Summary of Significant Accounting Policies? a) inventory valuation method(s) b) revenue recognition method(s) c) depreciation and amortization method(s) d) claims of shareholders Answer: d

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

4. Errors and irregularities are defined as intentional distortions of facts. Yes or No? Errors Irregularities a) yes yes b) yes no c) no yes d) no no Answer: c Difficulty: Medium Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

5. Which of the following facts concerning property, plant and equipment should be included in the Summary of Significant Accounting Policies? Depreciation Composition Method of Assets a) no yes b) yes yes c) yes no d) no no Answer: c Difficulty: Medium Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

6. Which of the following is INCORRECT regarding the notes to the financial statements? a) The notes are often overlooked because they are highly technical. b) The notes are the accountant’s means of amplifying items presented in the statements. c) The notes present information that is not included in the financial statements. d) The notes often have limited value for users. Answer: d Difficulty: Easy Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

7. Which of the following statements best describes the difference in the disclosure requirements between IFRS and ASPE? a) The disclosure requirements are generally the same under both IFRS and ASPE. b) The disclosure requirements for publicly traded companies have increased substantially in the past two decades. c) The disclosure requirements are more pervasive under ASPE. d) Privately held companies using IFRS do not need to adhere to the same reporting disclosure requirements as publicly traded companies. Answer: b Difficulty: Easy Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

8. According to IFRS, an operating segment is a reportable segment if a) its operating profit is 10% or more of the combined operating profit of profitable segments only. b) its operating loss is 10% or more of the combined operating losses of segments that incurred an operating loss. c) the absolute amount of its operating profit or loss is 10% or more of the greater, in absolute amount, of (a) the combined reported operating profit of all operating segments that incurred a loss, and (b) the combined reported profit of all operating segments that did report a profit. d) the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, 23-8 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

of (a) the combined reported operating profit of all operating segments that did not incur a loss, or (b) the combined reported loss of all operating segments that did report a loss. Answer: d Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

9. According to IFRS, a segment of a business is to be reported separately when its reporting revenue (including both sales to external customers and intersegment sales or transfers) exceeds 10% of the a) total domestic sales only. b) combined revenues of all the enterprise's operating segments. c) combined revenues of all the enterprise’s profitable operating segments. d) combined net income of all the enterprise’s profitable operating segments. Answer: b Difficulty: Easy Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

10. IFRS requires that all of the following information about each reportable segment must be provided except a) total liabilities. b) interest revenue. c) cost of goods sold. d) income tax expense or benefit. Answer: c Difficulty: Easy Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

11. Although ASPE does NOT offer guidance for reporting segmented information, IFRS requires that a) financial statements include selected information on a single basis of segmentation. b) financial statements include selected information on multiple bases of segmentation. c) financial statements disclose results for every segment, regardless of how many there are. d) management segment the enterprise on a geographical basis only. Answer: a Difficulty: Easy Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

12. Which of the following is NOT a component or characteristic of operating segments? a) The operating segment engages in business activities from which it earns revenues and incurs expenses. b) The segments operating results are regularly reviewed by the company’s chief operating decisionmaker to assess segment performance and allocate resources to the segment. c) The operating segment(s) have discrete financial information available for it. d) Operating segments must be aggregated together for reporting purposes. Answer: d Difficulty: Easy Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

13. Gooseberry Corp. is a multidivisional corporation that has both intersegment sales and sales to external customers. Gooseberry should report segmented financial information for each division meeting which of the following IFRS criteria? a) segment profit or loss is 10% or more of consolidated profit or loss b) segment profit or loss is 10% or more of combined profit or loss of all company segments c) segment revenue is 10% or more of combined revenue of all the company segments d) segment revenue is 10% or more of consolidated net income Answer: c Difficulty: Medium 23-10 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

14. Presented below are four segments that have been identified by Mango Corp.: Operating Segments Total Revenue Profit (Loss) Assets A $300,000 $40,000 $1,200,000 B 800,000 (70,000) 1,200,000 C 300,000 6,000 600,000 D 120,000 8,000 300,000 According to IFRS, which segments would be considered reportable segments? a) Segments A, B, and C b) Segments A, B, C, and D c) Segments A and B d) Segments A and D Answer: b Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Revenue test: Total revenue = $1,520,000 × 10% = $152,000 Operating profit test: $54,000 × 10% = $5,400 Asset test: Total assets = $3,300,000 × 10% = $330,000

15. Presented below are four segments that have been identified by Banana Corp.: Operating Segments Total Revenue Profit (Loss) Assets A $300,000 $40,000 $1,200,000 B 100,000 (50,000) 300,000 C 30,000 6,000 100,000 D 12,000 2,000 30,000 According to IFRS, which segments would be considered reportable segments? a) Segments A, B, and C b) Segments A, B, C, and D c) Segments A and B d) Segments A and D 23-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: a Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Revenue test: Total revenue = $442,000 × 10% = $44,200 Operating profit test: $48,000 × 10% = $4,800 Asset test: Total assets = $1,630,000 × 10% = $163,000

16. Melon Corp. is engaged in manufacturing operations in various industries. The following data pertain to the industries in which operations were conducted for the year ended December 31, 2023. Assets Industry Revenue Profit 12/31/23 A $10,000,000 $1,650,000 $20,000,000 B 8,000,000 1,400,000 17,500,000 C 6,000,000 1,200,000 12,500,000 D 3,000,000 550,000 6,500,000 E 4,250,000 675,000 7,000,000 F 1,500,000 225,000 3,000,000 $32,750,000 $5,700,000 $66,500,000 According to IFRS, how many reportable segments does Melon have? a) three b) four c) five d) six Answer: b Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Revenue test: $32,750,000 × 10% = $3,275,000 Profit test: $5,700,000 × 10% = $570,000 Asset test: $66,500,000 × 10% = $6,650,000 A, B, C, E

17. The following information pertains to Freeman Corp. and its various divisions for the year ended 23-12 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

December 31, 2023: Sales to external customers ..................................................................... $2,250,000 Intersegment sales of products similar to those sold to external customers ........................................................................... 675,000 Interest earned on loans to other operating segments .......................... 45,000 According to IFRS, Freeman has a reportable segment if that segment's revenue equals or exceeds a) $297,000. b) $292,500. c) $229,500. d) $225,000. Answer: b Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($2,250,000 + $675,000) × 10% = $292,500

18. For interim reporting, IFRS does NOT require a a) comprehensive income statement. b) statement of shareholders’ equity. c) statement of cash flows. d) detailed statement of financial position. Answer: d Difficulty: Easy Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

19. When using the discrete view to prepare interim statements, two exceptions that are permitted deal with the calculation of a) depreciation and income tax expense. b) income tax expense and employer’s payroll tax expense. c) depreciation and unearned revenue. d) unearned revenue and employer’s payroll tax expense.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Easy Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

20. Under the discrete view to interim financial reporting a) each interim period should be treated as a separate accounting period. b) each interim period should be treated as an integral part of the annual period. c) the total estimated annual income tax expense is allocated to the interim period. d) all of the above statements are consistent with the discrete view to interim financial reporting. Answer: a Difficulty: Easy Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

21. Which of the following statements is INCORRECT regarding IFRS requirements for interim reporting? a) Only a statement of financial position and statement of comprehensive income are required. b) The same accounting policies should be used as for the annual statements. c) When an accounting change is applied retrospectively, the enterprise must present a statement of financial position for the beginning of the earliest comparative period. d) Condensed financial statements are permitted. Answer: a Difficulty: Easy Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

22. Problems with interim reporting include a) how to record depreciation. b) inventory valuation. c) how to present a change in accounting policy/principle. d) revenue recognition. Answer: c Difficulty: Easy Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

23. In January 2023, Ricardo Ltd. estimated that its year-end bonuses to executives for calendar 2023 would be $960,000. In February 2023, $870,000 was paid in bonuses for the 2022 year end. The estimate for 2023 is subject to year-end adjustment. How much bonus expense should be reflected in Ricardo’s interim income statement for the three months ended March 31, 2023? a) $960,000 b) $870,000 c) $240,000 d) $217,500 Answer: c Difficulty: Medium Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $960,000 ÷ 4 = $240,000

24. On January 15, 2023, Link Corp. paid $480,000 in property taxes on its factory building for the calendar year 2023. In the first week of April 2023, the corporation made unanticipated repairs to its plant equipment at a cost of $1,200,000. How should these expenses be reflected in Link’s quarterly income statements? Three Months Ended 3/31/23 6/30/23 9/30/23 12/31/23 a) $120,000 $520,000 $520,000 $520,000 23-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c) d)

$120,000 $480,000 $420,000

$1,320,000 $1,200,000 $420,000

$120,000 $-0$420,000

Answer: b Difficulty: Medium Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $480,000 ÷ 4 = $120,000

25. Mason Corp. has estimated that total depreciation expense for the 2023 calendar year will be $240,000, and that 2023 year-end bonuses to employees will be $480,000. In Mason’s interim income statement for the six months ended June 30, 2023, what total expense relating to these two items should be reported? a) $0 b) $120,000 c) $360,000 d) $720,000 Answer: c Difficulty: Medium Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($240,000 + $480,000) ÷ 2 = $360,000

26. Blueberry Corp. had the following transactions during the quarter ended March 31, 2023: Loss due to theft ....................................................................................... $189,000 Payment of fire insurance for calendar year 2023................................... 270,000 What amount should be included in Blueberry’s income statement for the quarter ended March 31, 2023? Loss from Theft Insurance Expense a) $0 $270,000 b) $189,000 $270,000 c) $31,500 $67,500 23-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

$189,000

$67,500

Answer: d Difficulty: Medium Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: Loss from theft = $189,000 Insurance expense = $270,000 ÷ 4 = $67,500

27. Regarding related-party transactions, a) transactions between related parties are usually presumed to take place at arms length. b) related parties do not include members of the immediate family of company management. c) both IFRS and ASPE deal only with disclosure requirements for such transactions. d) ASPE requires that some related-party transactions be remeasured. Answer: d Difficulty: Easy Learning Objective: Discuss the accounting issues for related-party transactions. Section Reference: Related-Party Transactions CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

28. Grapes Ltd. has a 55% ownership interest in Merlot Corp. as of its December 31st year end. Grapes sells product to Merlot on a regular basis. Of the total $3,500,000 sales for the year, $700,000 of sales was to Merlot, which is used as an input in its production process. All inventory is sold by year end. How would Merlot report this disclosure in the notes of its financial statements? a) Inter-Company Sales $700,000 b) Inter-Company Sales $3,500,000 c) Inter-Company Cost of Goods Sold $700,000 d) Inter-Company Cost of Goods Sold $3,500,000 Answer: c Difficulty: Easy Learning Objective: Discuss the accounting issues for related-party transactions. Section Reference: Related-Party Transactions CPA: Financial Reporting 23-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

29. Under ASPE, when related party transactions are remeasured to carrying value, the difference between the carrying amounts of the items exchanged is booked as a) an adjustment to the related liability account. b) an adjustment to the related asset account. c) an adjustment to the related expense account. d) a charge or credit to equity. Answer: d Difficulty: Easy Learning Objective: Discuss the accounting issues for related-party transactions. Section Reference: Related-Party Transactions CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

30. Under IFRS, related party transactions should be remeasured when a) there is a lack of economic substance. b) the transaction is not in the normal course of operations. c) IFRS does not require the remeasurement of related party transactions. d) the transaction does not result in a significant change in ownership. Answer: c Difficulty: Easy Learning Objective: Discuss the accounting issues for related-party transactions. Section Reference: Related-Party Transactions CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

31. Which of the following subsequent events (post-statement of financial position events) would require adjustment of the accounts before issuance of the financial statements? a) major losses as a result of a fire in the company’s plant b) decline in the fair value of investments c) loss on an account receivable (on the books at statement of financial position date) resulting from a customer’s bankruptcy d) lawsuit arising from a customer’s injury due to a defective product Answer: c 23-18 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Identify the accounting issues relating to subsequent events and those faced by unincorporated businesses. Section Reference: Other Accounting Issues CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

32. Which of the following subsequent events (post-statement of financial position events) would generally require disclosure in the financial statement notes, but NOT adjustment of the accounts? a) retirement of the company president b) settlement of a lawsuit when the event that gave rise to the action occurred prior to the statement of financial position date c) strike by the company’s unionized workers d) issue of a significant number of common shares Answer: d Difficulty: Medium Learning Objective: Identify the accounting issues relating to subsequent events and those faced by unincorporated businesses. Section Reference: Other Accounting Issues CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

33. Accounting issues involved for unincorporated businesses include a) the definition of the economic entity. b) who owns the issued shares. c) segregating the salaries expense for the owner(s) from the salaries expense for the employees. d) provision for income taxes. Answer: a Difficulty: Easy Learning Objective: Identify the accounting issues relating to subsequent events and those faced by unincorporated businesses. Section Reference: Other Accounting Issues CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

34. Which of the following issues does NOT apply to unincorporated businesses? a) whether of not the entity is a separate legal entity b) salaries, interest, or similar items accruing to owners should be clearly indicated c) No provision for income taxes should be made. d) the share structure and ownership Answer: d Difficulty: Easy Learning Objective: Identify the accounting issues relating to subsequent events and those faced by unincorporated businesses. Section Reference: Other Accounting Issues CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

35. In which order of preference are a company’s creditors paid in the event of bankruptcy? a) Secured first, then preferred, then unsecured b) Preferred first, then secured, then unsecured c) Secured first, then unsecured, then preferred d) Any may be applied, according to agreements among the creditors. Answer: a Difficulty: Easy Learning Objective: Identify the major considerations relating to bankruptcy and receivership. Section Reference: Bankruptcy and Receivership CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

36. When an auditor expresses an unmodified opinion about a company’s financial statements, it means that the financial statements a) are free from error. b) present fairly the financial position, results of operations, and cash flows in accordance with GAAP. c) indicate that the company is doing well and would make a good investment. d) contain exceptions due to a departure from GAAP. Answer: b Difficulty: Easy Learning Objective: Identify the major disclosures found in the auditor’s report. Section Reference: Auditor’s Reports CPA: Financial Reporting 23-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

37. When an auditor expresses a qualified opinion about a company’s financial statements, it means that the financial statements a) are free from error. b) present fairly the financial position, results of operations, and cash flows in accordance with GAAP. c) indicate that the company is doing well and would make a good investment. d) contain exceptions due to a departure from GAAP. Answer: d Difficulty: Easy Learning Objective: Identify the major disclosures found in the auditor’s report. Section Reference: Auditor’s Reports CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

38. An auditor’s adverse opinion a) although very rare in the past, is frequently seen nowadays. b) means the financial statements are prepared in accordance with GAAP. c) is given when the auditor deems a qualified opinion is not justified. d) means there are some minor exceptions due to a departure from GAAP. Answer: c Difficulty: Easy Learning Objective: Identify the major disclosures found in the auditor’s report. Section Reference: Auditor’s Reports CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

39. Which of the following reporting standards is NOT required with the auditor's report? a) The report must contain an expression of opinion regarding the compliance of the financial statements with GAAP. b) The report must identify circumstances in which the auditor was unable to complete his or her work. c) The report must clearly state whether the company has appropriate internal controls in place. d) The report must contain all of the information listed here. Answer: c 23-21 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Identify the major disclosures found in the auditor’s report. Section Reference: Auditor’s Reports CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

40. Which of the following is NOT a limitation of financial statement analysis? a) Financial statements report on the past. b) Ratio and trend analyses will help identify strengths and weaknesses of a company. c) A single ratio, by itself, is not likely to be very useful. d) Financial statement analysis is not likely to reveal why things are as they are. Answer: b Difficulty: Easy Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

41. The ratios that reflect financial strength are a) liquidity and coverage ratios. b) liquidity and profitability ratios. c) profitability and activity ratios. d) activity and coverage ratios. Answer: a Difficulty: Easy Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

42. The ratios that assess management performance are a) liquidity and coverage ratios. b) liquidity and profitability ratios. 23-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) profitability and activity ratios. d) activity and coverage ratios. Answer: c Difficulty: Easy Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

43. Profitability ratios a) measure the enterprise’s long-term ability to pay its maturing obligations. b) measure how effectively the enterprise is using its assets. c) measure financial performance and shareholder value creation for a specific time period. d) measure a company’s ability to meet its long-term obligations. Answer: c Difficulty: Easy Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

44. Activity ratios a) measure the enterprise’s short-term ability to pay its maturing obligations. b) measure financial performance and shareholder value creation for a specific time period. c) measure a company’s ability to meet its long-term obligations. d) measure how effectively the enterprise is using its assets. Answer: d Difficulty: Easy Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 23-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

45. Power Corp. reported the following data for calendar 2023: Total assets ............................................................................................... Current assets ........................................................................................... Total liabilities .......................................................................................... Long-term liabilities ................................................................................. Inventories, December 31/22 ................................................................... Inventories, December 31/23 ................................................................... Net sales.................................................................................................... Gross profit ............................................................................................... Net income................................................................................................ To two decimals, Power Corp.’s current ratio for 2023 is a) 1.08. b) 2.10. c) 2.08. d) 0.92.

$ 625,000 325,000 300,000 145,000 110,000 100,000 1,550,000 920,000 205,000

Answer: b Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $325,000 ÷ ($300,000 – $145,000) = 2.10

46. Power Corp. reported the following data for calendar 2023: Total assets ............................................................................................... Current assets ........................................................................................... Total liabilities .......................................................................................... Long-term liabilities ................................................................................. Inventories, December 31/22 ................................................................... Inventories, December 31/23 ................................................................... Net sales.................................................................................................... Gross profit ............................................................................................... Net income................................................................................................ To two decimals, Power Corp.’s inventory turnover for 2023 is a) 14.76. b) 12.81. c) 6.00. d) 3.00.

$ 625,000 325,000 300,000 145,000 110,000 100,000 1,550,000 920,000 205,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: ($1,550,000 – $920,000) ÷ [($100,000 + $110,000) ÷ 2] = 6.00

47. Power Corp. reported the following data for calendar 2023: Total assets ............................................................................................... Current assets ........................................................................................... Total liabilities .......................................................................................... Long-term liabilities ................................................................................. Inventories, December 31/22 ................................................................... Inventories, December 31/23 ................................................................... Net sales.................................................................................................... Gross profit ............................................................................................... Net income................................................................................................ Power Corp.’s profit margin on sales for 2023 is a) 7.56%. b) 168.48%. c) 13.23%. d) 59.35%.

$ 625,000 325,000 300,000 145,000 110,000 100,000 1,550,000 920,000 205,000

48. Power Corp. reported the following data for calendar 2023: Total assets ............................................................................................... Current assets ........................................................................................... Total liabilities ..........................................................................................

$ 625,000 325,000 300,000 23-25

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Long-term liabilities ................................................................................. Inventories, December 31/22 ................................................................... Inventories, December 31/23 ................................................................... Net sales.................................................................................................... Gross profit ............................................................................................... Net income................................................................................................ Power Corp.’s debt to asset ratio for 2023 is a) 48.0%. b) 23.2%. c) 208.3%. d) 224.1%.

145,000 110,000 100,000 1,550,000 920,000 205,000

Answer: a Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 ÷ $625,000 x 100 = 48.0%

49. Power Corp. reported the following data for calendar 2023: Total assets ............................................................................................... Current assets ........................................................................................... Total liabilities .......................................................................................... Long-term liabilities ................................................................................. Inventories, December 31/22 ................................................................... Inventories, December 31/23 ................................................................... Sales .......................................................................................................... Gross profit ............................................................................................... Net income................................................................................................ Power Corp.’s debt to equity ratio for 2023 is a) 44.6%. b) 48.0%. c) 23.2%. d) 92.3%.

$ 625,000 325,000 300,000 145,000 110,000 100,000 1,550,000 920,000 205,000

Answer: d Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. 23-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 ÷ ($625,000 – $300,000) x 100 = 92.31%.

50. Prune Juice Corp. reported the following data on its 2023 financial statements: Net sales.................................................................................................... $1,350,000 Net income................................................................................................ $240,000 Average net receivables ........................................................................... $185,000 To two decimals, the accounts receivable turnover for 2023 is a) 5.63. b) 7.30. c) 8.59. d) 0.14. Answer: b Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $1,350,000 ÷ $185,000 = 7.30

51. Which statement is INCORRECT regarding guidance given by IFRS and ASPE? a) IFRS provides guidance for interim reporting, while ASPE does not. b) ASPE provides guidance for segmented reporting, while IFRS does not. c) IFRS provides guidance for segmented reporting, while ASPE does not. d) IFRS does not provide guidance for reporting on unincorporated businesses. Answer: b Difficulty: Easy Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ASPE Comparison CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. 23-52 Public company key disclosure requirements The Ontario Securities Commission provides guidance on the key disclosure requirements for public companies. Instructions a) Identify the seven key disclosure documents required as per the OSC. b) CRITICAL THINKING: Are the disclosure requirements different under ASPE? Explain why or why not? Solution 23-52 a) The Ontario Securities Commission (OSC) lists the following key disclosure documents for public companies on its website: • Annual information forms • Financial statements • Management information circulars • Management’s discussion and analysis (MD&A) • Material change reports • News releases relating to material changes and earnings releases • Prospectuses b) CRITICAL THINKING: Generally, there are fewer disclosure requirements under ASPE because many private entities have less complex business transactions and stakeholders have greater access to information about the entity. Difficulty: Medium Learning Objective: Understand the importance of disclosure from a business perspective Section Reference: The Importance of Disclosure from a Business Perspective Learning Objective: Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future. Section Reference: IFRS/ ASPE Comparison CPA: Communication CPA: Financial Reporting Bloomcode: Application AACSB: Communication

Ex. 23-53 IFRS Practice Statement The IASB issued “Management Commentary: A Framework for Presentation” as an IFRS Practice Statement in December 2010 to help guide companies and regulators. What three things should a company provide as suggested by the Practice Statement? Solution 23-53 23-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

The Practice Statement suggests that companies provide management’s perspective on the company’s performance, financial position, and progress (for example, how it has grown and is expected to change and grow in the future). Difficulty: Easy Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes Section Reference: Full Disclosure Principle CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Communication

Ex. 23-54 Notes to financial statements An article in Dun's Review made the following comments: "At least every other year, businesses should print the notes in big type and the financial figures in smaller ones." Instructions a) Explain why you think that Dun’s Review made this comment. As part of your answer consider the role and basic purposes that the notes to the financial statements serve. b) What are the general types of notes? Solution 23-54 a) Notes are an integral part of the financial statements of a business enterprise. They are the accountant's method of more fully disclosing data relevant to the interpretation of the statements. Information pertinent to specific financial statement items can be explained in qualitative terms, and supplementary data of a quantitative nature can be provided to expand on the information in the financial statements. Restrictions imposed by financial arrangements or basic contractual agreements can also be explained in notes. b) The more common types of notes disclose such items as the following: (1) accounting methods used for depreciation, amortization and inventory, (2) contingent assets or liabilities, (3) restrictions required by loan covenants, (4) revenue recognition methods, and (5) purchase commitments. Difficulty: Easy Learning Objective: Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. Section Reference: Full Disclosure Principle CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Laser Corporation is a publicly traded company. It's most recent (condensed) income statement is presented below: Revenues .......................................................................................................... $2,500,000 Expenses ........................................................................................................... $1,600,000 Income before taxes ......................................................................................... 900,000 Income tax expense ......................................................................................... 270,000 Net income ....................................................................................................... $ 630,000 The following data relates to Laser’s operating segments: Percent Identified with Segment Printing Digital Media 60% 35% 5% 63 35 2

Revenues Expenses

Instructions Based only on the above information, which segments must be reported and why? Show your work. Solution 23-55

Revenues Expenses Operating profit Taxes Net Income Operating Segment Test Revenue 10% Net Income 10%

Operating Segment Printing Digital Media Totals $1,500,000 $875,000 $125,000 $2,500,000 1,008,000 560,000 32,000 1,600,000 $ 492,000 $315,000 $ 93,000 $ 900,000 147,600 94,500 27,900 270000 $ 344,400 $220,500 $ 65,100 $ 630,000 Met Met

Met Met

Not met Met

All three segments are reportable. Printing and Digital satisfy the revenue test; while all three satisfy the Net Income test. Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 23-56 Interim reporting Years ago, a publishing company reported a quarterly net profit figure that exceeded sales for that quarter. Such a situation suggests there are some difficult accounting issues involved in interim reporting. Instructions 23-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) b) c)

What are the major accounting problems related to interim reports? What problem exists with income taxes in interim reports and how does IFRS recommend that income taxes should be reported? Many academics have attempted to predict the year's net income after the first quarter's income is reported. These attempts are generally unsuccessful, no matter how sophisticated the prediction model. What might be the reason for this inability to predict?

Solution 23-56 a) The major accounting issues related to interim reporting are the treatment of (1) annually determined items such as income taxes, pension costs, and executive compensation based on annual net income, (2) retrospective accounting changes, (3) earnings per share, and (3) the problem of seasonality. b)

The basic question with income taxes is whether, in the preparation of interim income statements, the provision for taxes should reflect the anticipated effective tax rate for the year or be calculated on the basis of actual results for that interim period. IFRS recommends that at the end of each interim period the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. This rate should then be used in estimating income taxes on a current year-to-date basis.

The prediction models are probably unsuccessful because accountants have not treated the problem of seasonality correctly in their interim reports. One of the problems is that fixed nonmanufacturing costs are not charged in proportion to sales. Instead, these costs are charged as incurred, or spread evenly over each quarter. As a result, it is extremely difficult to make accurate predictions because some artificial concepts are used for matching purposes.

Difficulty: Medium Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 23-57 Income taxes at interim dates The CEO of Umbrella Inc. wants an exact figure for the corporate taxes owing in F2023, the company year end is July 31. If is now January 15, 2023, and the CEO would like you to provide this information to him by January 31. The CEO is certain the net income before tax will be $10,000,000, this represents a 10% year over year increase, and that the income tax rate will remain steady at 25%. Instructions As the controller, how do you respond to the CEO’s request? Solution 23-57 It is not feasible to prepare an accurate estimate of income taxes on interim statements as the tax rate 23-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

is often dependent on the total taxable income for the year. As a result, interim income taxes are estimated using the annual estimated tax rate applied to the estimated interim taxable income and temporary differences. Difficulty: Medium Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 23-58 Ratios for financial analysis Alberta Company is a privately held company that would like to provide more useful information to the users of its financial statements. Specifically, it would like to make the information easy to analyze and access. The CEO would like to move away from paper-based reporting and make all of Alberta Company’s information available on the internet. As the controller you have been asked to provide your recommendation on this. Instructions As part of your response please answer the following questions: a) Identify the major categories of ratios that can be used for analysis. Describe how the ratios for each category would be used and provide examples of each. b) Identify and discuss the advantages and disadvantages of internet versus paper-based reporting.

Solution 23-58 a) The four major types of ratios are: 1. Liquidity ratios, which measure the enterprise’s short-term ability to pay obligations as they become due. Examples are the current ratio and the acid-test ratio. 2.

Activity ratios, which measure how effectively the enterprise is using its assets, as well as how quickly the asset’s value is realized. Examples are the inventory turnover and asset turnover ratios.

Profitability ratios, which measure financial performance and shareholder value creation for a specific time frame. Examples are profit margin on sales and rate of return on common shareholders’ equity.

Coverage (solvency) ratios, which measure the degree of protection for long-term creditors and investors, or the enterprise’s ability to meet long-term obligations. Examples are debt to total assets and times interest earned.

Liquidity and coverage ratios generally reflect financial strength, i.e., the ability to satisfy the financial requirements of non-ownership interests.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Activity and profitability ratios are generally used to assess management performance. b) Advantages of internet reporting include the possibility of communicating with more users, lower costs of communication, the ability of users to use internet and computer tools to help in analysis of financial statements, more timely information, and the possibility of increased availability of information. Possible disadvantages are the differential access due to less than universal access to the internet and issues around reliability of the information, including the possibility of data corruption by hackers and the unaudited nature of much of the information. Difficulty: Medium Learning Objective: Describe the requirements and accounting problems associated with interim reporting. Section Reference: Interim Reporting Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. 23-59 Related Party disclosures The CEO of Melet Plastics Inc. authorized an inter-company transfer from Reliable Resins to Melet. Melet is a major customer of Reliable Resins and the CEO of Melet Plastics is the sole shareholder of Melet and a 50% shareholder of Reliable Resins. The controller issues the transfer but recommends that the details of the transfer be disclosed in the financial statements. The CEO disagrees. He believes that only publicly traded companies require disclosures for related party transactions and since both companies are privately held and report under ASPE, no disclosures are required. Instructions As the controller provide a response to the CEO. As part of your explanation include a discussion regarding all the types of disclosures that are recommended under ASPE versus IFRS. Solution 23-59 An accountant, in this case the controller, is expected to report the economic substance rather than the legal form of related party transactions under ASPE and to make adequate disclosures. The following disclosures are recommended: 1. The nature of the relationship(s) involved 2. A description of the transactions 3. The recorded amounts of transactions 4. The measurement basis that was used 5. Amounts due from or to related parties and the related terms and conditions 6. Contractual obligations with related parties 7. Contingencies involving related parties

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Under IFRS, management compensation and the name of the entity’s parent company as well as its ultimate controlling entity or individual

Difficulty: Easy Learning Objective: Discuss the accounting issues for related-party transactions Section Reference: Related-Party Transactions CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Communication

Ex. 23-60 Activity financial ratios The following select information is taken from Mercury Corp.’s statements of financial position at December 31, 2022 and 2023, and their income statement for calendar 2023: 2023 2022 Accounts receivable ............................................................ 570,000 480,000 Inventory .............................................................................. 195,000 217,500 Total assets .......................................................................... $2,700,000 $2,475,000 Net income .................................................................................. Net Sales (all on credit) ............................................................... Cost of goods sold .......................................................................

$315,000 2,700,000 1,050,000

Instructions From the above information, to one decimal, calculate the following for 2023: a) Inventory turnover b) Receivables turnover c) Asset turnover Solution 23-60 a) Inventory turnover (cost of goods sold ÷ average INVT): $1,050,000 ÷ [($195,000 + $217,500) ÷ 2] = 5.1 times b) Receivables turnover (net sales ÷ average A/R): $2,700,000 ÷ [$570,000 + $480,000 ÷ 2] = 5.1 times c) Asset turnover (net sales ÷ average total assets): $2,700,000 ÷ [$2,700,000 + $2,475,000 ÷ 2] = 1.04 times Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting 23-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. 23-61 Segmented reporting (IFRS requirements) A central issue in reporting on operating segments of a business enterprise is the determination of which segments are reportable under IFRS. Instructions a) According to IFRS, what are the tests to determine whether or not an operating segment is reportable? b) What is the test to determine if enough operating segments have been separately reported upon, and what is the guideline on the maximum number of operating segments to be shown? Solution 23-61 a) There are three basic tests to be applied to segments of an industry to see if they are significant enough to be separately reportable. If a segment meets any one of the tests, it is deemed significant and reportable. The first test is based on revenue. If a segment's revenue from sales to external customers and intersegment sales and transfers is equal to 10% or more of the enterprise's combined revenues, the segment is reportable. The second test is based on profits or losses. A segment is deemed reportable if the absolute amount of its profit or loss is 10% or more of the greater, in absolute amount, of: The combined profits of all operating segments reporting profits. The combined losses of all operating segments reporting losses. Third, a segment is reportable if its assets equal or exceed 10% of the combined assets of all operating segments of the enterprise. b) Enough operating segments must be separately reported so that the total of revenues from sales to external customers for the reportable segments equals or exceeds 75% of the combined sales to external customers for the entire enterprise. If applying the prescribed tests does not yield the required percentage of revenues described above, additional segments must be reported on until the 75% test is met. The profession recognizes that if an enterprise has many reportable segments, the benefit to the reader may be lost if more than 10 segments are reported. Therefore, it has proposed ten segments as an upper limit for the number of reportable segments. Note that ASPE does not provide guidance for reporting segmented information. Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting CPA: Financial Reporting 23-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

Pr. 23-62 Segmented reporting and disclosure requirements Tangerine Corporation is a publicly traded company. It's most recent (condensed) income statement is presented below: Revenues ..................................................................................................... $2,500,000 Expenses Cost of goods sold ............................................................................... $1,000,000 Operating and administrative expenses ............................................ 500,000 Depreciation expense .......................................................................... 100,000 1,600,000 Income before taxes .................................................................................... 900,000 Income tax expense .................................................................................... 270,000 Net income .................................................................................................. $ 630,000 Earnings per share (100,000 shares) ...........................................................

$6.30

The following data relates to Tangerine's operating segments:

Revenues Cost of goods sold Operating and administrative expenses Depreciation expense

Percent Identified with Segment Hotels Grains Candy 42% 50% 8% 48 49 3 35 50 15 46 42 12

Included in the amounts allocated to each segment on the above percentages are the following expenses, which relate to general corporate activities: Operating Segment Hotels Grains Candy Totals Operating and administrative expenses $30,000 $22,000 $8,000 $60,000 Depreciation expense 4,000 5,000 3,000 12,000 Instructions a) Prepare a schedule showing the amounts distributed to each segment. b) Based only on the above information, which segments must be reported and why? c) CRITICAL THINKING: A junior accountant with Tangerine does not understand why all of this work related to Tangerine’s operating segments needs to be done. As the controller how do you explain this to the junior accountant? Solution 23-62 a) Revenues (1) Expenses

Operating Segment Hotels Grains Candy $1,050,000 $1,250,000 $200,000

Totals $2,500,000 23-37

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cost of goods sold (1) Operating and admin. expense (2) Depreciation expense (3) Total expenses Operating profit

480,000 145,000 42,000 667,000 $ 383,000

490,000 228,000 37,000 755,000 $ 495,000

30,000 67,000 9,000 106,000 $ 94,000

1,000,000 440,000 88,000 1,528,000 $ 972,000

(1) Total times segment percentage. (2) Hotels = ($500,000 × 35%) – $30,000 = $145,000 Grains = ($500,000 × 50%) – $22,000 = $228,000 Candy = ($500,000 × 15%) – $8,000 = $67,000 (3) Hotels = ($100,000 × 46%) – $4,000 = $42,000 Grains = ($100,000 × 42%) – $5,000 = $37,000 Candy = ($100,000 × 12%) – $3,000 = $9,000 b) Two segments, Hotels and Grains, must be reported because they satisfy the revenue test; that is, the segment's revenues are 10% or more of the combined revenues of all operating segments. In addition, both the Hotels and the Grains segments meet the 10% of the operating profit test. c) CRITICAL THINKING: Tangerine is a publicly traded company and must follow IFRS. IFRS requires that an enterprise report the following segmented information: 1. General information about its reportable segments. 2.

Segment revenues, profit and loss, assets, liabilities, and related information.

3. Reconciliation of the total of the segments’ revenues to total revenues, a reconciliation of the total of operating segments’ profits and losses to its income before income taxes and discontinued operations, and a reconciliation of the total of the operating segments’ assets and liabilities to total assets and liabilities. Reconciliations for other significant items that are disclosed should also be presented. 4.

Information about products and services (revenue from external customers).

5. Revenues from external customers (domestic vs foreign) and capital assets and goodwill (domestic vs. foreign). If the amounts are material, foreign information must be disclosed by country. 6. If 10% or more of the revenues are derived from a single customer, the enterprise must disclose the total amount of revenues from each of these customers by segment. Note that ASPE does not provide guidance for reporting segmented information. Difficulty: Medium Learning Objective: Describe the disclosure requirements for major segments of a business. Section Reference: Segmented Reporting 23-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 23-63 Interim reporting There is ongoing discussion as to the proper method of reflecting results of operations at interim dates. Accordingly, IFRS has made recommendations regarding interim financial reporting. Instructions a) Discuss generally how revenue should be recognized at interim dates and specifically how revenue should be recognized for industries subject to large seasonal fluctuations in revenue and for long-term contracts using the percentage-of-completion method. b) Discuss generally how product and period costs should be recognized at interim dates. Also discuss how inventory values should be treated at interim dates. c) Discuss how the provision for income taxes is calculated and reported in interim financial statements. Solution 23-63 a) Sales and other revenues should be recognized for interim financial statement purposes in the same manner as for annual reporting purposes. This means normally at the point of sale or, in the case of services, at completion of the earnings process. In the case of industries whose sales vary greatly due to the seasonality, revenues should still be recognized as earned, but a disclosure should be made of the seasonal nature of the business. In the case of long-term contracts recognizing earnings on the percentage-of-completion basis, the current state of completion of the contract should be estimated and revenue recognized at interim dates in the same manner as at the normal year-end. b) For interim reporting purposes, product costs (costs directly attributable to the production of goods or services) should be matched with the product and associated revenues in the same manner as for annual reporting purposes. Period costs (costs not directly associated with the production of a particular good or service) should be charged to earnings as incurred or allocated among interim periods based on an estimate of time expired, benefit received, or other activity associated with the particular interim period(s). Also, if a gain or loss occurs during an interim period and is a type that would not be deferred at year end, the gain or loss should be recognized in full in the interim period in which it occurs. Finally, in allocating period costs among interim periods, the basis for allocation must be supportable and may not be based on merely an arbitrary assignment of costs between interim periods. Inventory losses from a decline in market value at interim dates should be recognized in the appropriate period unless they are temporary and no loss is expected for the fiscal year. c) A corporation would prepare its tax return at year end and assess taxes payable and related tax balances. It is normally neither cost effective nor feasible (since tax rates are often graduated) to do this for each interim period. Therefore, an annual estimated tax rate is calculated, then an estimate is made of interim taxable income and temporary differences and then the annual estimated tax rate is applied. 23-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pr. 23-64 Types of subsequent events Identify and describe the difference between the two types of subsequent events. Solution 23-64 Type 1 events provide additional evidence about situations that existed at the statement of financial position date, affecting the estimates used in preparing the financial statements and, therefore, will result in required adjustments. These items should be reflected in the final financial statements. To ignore these subsequent transactions is to miss an opportunity to improve the accuracy of the financial statements. Type 2 events provide evidence about situations that did not exist at the statement of financial position date. They arise subsequent to the statement of financial position date, and no adjustments are made to the accounts. However, they should be afforded note disclosure if they will have a material impact on the future of the enterprise. Difficulty: Easy Learning Objective: Identify the accounting issues relating to subsequent events and those faced by unincorporated businesses. Section Reference: Other Accounting Issues CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Pr. 23-65 Bankruptcy and types of creditors Brylan Enterprises Inc. has recently run into financial difficulty and is having difficulty meeting its financial obligations. The company is publicly traded and has the following liabilities: Current Liabilities Bank Indebtedness .......................................................................................... $500,000 Accounts Payable ............................................................................................. 150,000 Wages Payable.................................................................................................. 75,000 GST Payable...................................................................................................... 50,000 Deferred Revenues ........................................................................................... 112,500 Total Current Liabilities ............................................................................ $887,500 Non-Current Liabilities 23-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bank Loan Payable ........................................................................................... $ 850,000 Mortgage Payable............................................................................................. 4,500,000 Bonds Payable .................................................................................................. 1,750,000 Total Non-Current Liabilities ................................................................... $7,100,000 The CEO has asked you, as the controller for your advice. Instructions Prepare a response for the CEO outlining the options available to the company. Include an explanation of the different types of creditors and how they are affected under these options. Identify what types of creditors Brylan has. Solution 23-65 Companies facing bankruptcy can make a proposal to either pay their creditors a percentage of what was owed at the time of the proposal, or they could request an extension to the amount of time available to pay their debts (or both). The main categories of creditors affected are: • Secured creditors. These creditors may have a lien (a legal claim on assets to secure the payment of a debt) against all or part of a debtor’s property (such as a bank with a lien on the company’s inventory that acts as security or collateral for a loan). This may include bank indebtedness, the mortgage payable and possibly the bank loan payable and bonds payable if assets have been pledged against the loans. Otherwise, the bank loan payable and bonds payable may be unsecured. • Preferred creditors. These creditors have the first priority when claiming any funds that are available (after, for example, secured creditors take possession and dispose of their collateral). Preferred creditors typically include employee claims for unpaid wages and GST payable. • Unsecured creditors. These creditors do not have any security or collateral for the debts owed to them. This would include accounts payable, deferred revenues, and possible the bank and bonds payable as identified above. Difficulty: Easy Learning Objective: Identify the major considerations relating to bankruptcy and receivership. Section Reference: Bankruptcy and Receivership CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Communication

Pr. 23-66 Auditor’s report Identify and describe the major disclosures found in the auditor’s report. Solution 23-66 If the auditor is satisfied that the financial statements fairly present the financial position, results of operations, and cash flows, in all material respects, in accordance with generally accepted accounting principles, an unmodified opinion is expressed.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

A qualified opinion contains an exception to the standard opinion; ordinarily the exception is not of sufficient magnitude to invalidate the statements as a whole. A qualified opinion may also be given if there is a scope limitation where the auditor has not been able to obtain sufficient and appropriate evidence. An adverse opinion is required in any report in which the exceptions to fair presentation are so material that a qualified opinion is not justified. A disclaimer of an opinion is appropriate when the auditor has gathered so little information on the financial statements that no opinion can be expressed. In such a case, the financial statements taken as a whole are not presented in accordance with generally accepted accounting principles. Difficulty: Easy Learning Objective: Identify the major disclosures found in the auditor’s report. Section Reference: Auditor’s Reports CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Pr. 23-67 Uncertainty and financial information Harmat Inc. is currently assessing an opportunity to invest in Max Systems, a relatively new financial technology start-up. Max Systems has been in operations for 18 months and has made its most recent set of accountant prepared financial statements available to Harmat to assist it with making the investment decision. Harmat approaches you as a CPA to ask for advice. It specifically wants to know how reliable the financial statements are Instructions Provide Harmat with a report explaining all of the sources of uncertainty when considering the usefulness of financial statement information to a decision-maker. Solution 23-67 A research study identified the following four sources of uncertainty as being important when considering the usefulness of financial statement information to a decision-maker. 1. Uncertainty about the nature and role of financial statements. Misunderstanding the nature, purpose, terminology used, and method of preparation of financial statements can lead users to misinterpret and/or place inappropriate reliance on the information. 2.

Uncertainty about the nature of business operations portrayed in the financial statements. The unpredictability of business activities due to factors such as economic environment, technology, and competitors’ actions causes uncertainty. Knowledge of the type of business activities carried out is important in determining the extent of the uncertainties that characterize these activities.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

resulting measurements and disclosures are not well understood, are thought to be incomplete or lack relevance in a particular decision context. 4.

Uncertainty about management’s motives and intentions. Management is responsible for determining the accounting policies and methods used to prepare the financial statements. Choice of a policy or method should be based on reflecting underlying economic reality. This source of uncertainty suggests, however, that users may suspect that management’s choices are more motivated by a need to “manage earnings” to maximize bonuses over time, or to avoid debt covenant violations.

Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Communication CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

Pr. 23-68 Ratio analysis The following select information is taken from Blueberry Pie Corp.’s statements of financial position at December 31, 2022 and 2023, and their income statement for calendar 2023: 2023 2022 Assets: Cash........................................................ $ 18,000 $ 22,000 FV–NI investments ................................. 25,000 -0Accounts receivable .............................. 38,000 42,000 Inventory ................................................ 61,000 52,000 Prepaid insurance.................................. 6,000 9,000 Long-term investments ......................... 49,000 20,000 Equipment (net) .................................... 130,000 130,000 Land ....................................................... 33,000 33,000 Goodwill ................................................. 55,000 55,000 Total assets ............................................ $415,000 $363,000 Net income .................................................... Sales (all on credit) ........................................ Cost of goods sold ......................................... Interest expense ............................................ Income tax expense ......................................

$ 62,250 305,000 123,000 15,600 17,450

Instructions From the above information, to one decimal, calculate the following for 2023: a) Inventory turnover 23-43 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) c) d)

Receivables turnover Rate of return on assets Times interest earned.

Solution Pr. 23-68 a) Inventory turnover (cost of goods sold ÷ average INVT): $123,000 ÷ [($61,000 + $52,000) ÷ 2] = 2.2 times b) Receivables turnover (net sales ÷ average A/R): $305,000 ÷ [($38,000 + $42,000) ÷ 2] = 7.6 times c) Rate of return on assets (net income ÷ average total assets): $62,250 ÷ [($415,000 + $363,000) ÷ 2] x 100 = 16% d) Times interest earned (income before interest and taxes ÷ interest exp): ($62,250 + $15,600 + $17,450) ÷ $15,600 = 6.1 times Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. 23-69 Ratio analysis The following select information is taken from Mulberry Corp.’s statements of financial position at December 31, 2022 and 2023, and their income statement for calendar 2023: 2023 2022 Assets: Cash........................................................ $ 18,000 $22,000 FV–NI investments ................................. 25,000 -0Accounts receivable .............................. 38,000 42,000 Inventory ................................................ 61,000 B Prepaid insurance.................................. 6,000 9,000 Long-term investments ......................... 49,000 20,000 Equipment (net) .................................... 130,000 130,000 Land ....................................................... 33,000 33,000 Goodwill ................................................. 55,000 55,000 Total assets ............................................ $415,000 C Net income .................................................... Sales (all on credit) ........................................ Gross Profit ....................................................

D A 181,000 23-44

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Operating expenses…………………………. Interest expense ............................................ Income tax expense ......................................

F 15,600 E

Mulberry has calculated the following ratios for 2023 (all rounded to one decimal place): Inventory Turnover 2.2 times Receivables Turnover 7.6 times Rate of Return on Assets 16% Times Interest earned 6.1 times Instructions Solve for the missing variables in the financial statements above. Round to the nearest whole number. (Hint: solve for the variables in alphabetical order) Solution Pr. 23-69 A: Receivables turnover (net sales ÷ average A/R): A ÷ [($38,000 + $42,000) ÷ 2] = 7.6 times A= 7.6 times x [($38,000 + $42,000) ÷ 2] = $304,000 B: Inventory turnover (cost of goods sold ÷ average inventory): COGS = $304,000 – 181,000 = $123,000 $123,000 ÷ [($61,000 + B) ÷ 2] = 2.2 times $123,000 ÷ 2.2 = [($61,000 + B) ÷ 2] B= $50,818 C: $22,000 + 0 + $42,000 + $50,818 + $9,000 + $20,000 + $130,000 +$33,000 + $55,000 = $361,818 D: Rate of return on assets (net income ÷ average total assets): D ÷ [($415,000 + $361,818) ÷ 2] x 100 = 16% D = 16% x [($415,000 + $361,818) ÷ 2] = $62,145 E: Times interest earned (income before interest and taxes ÷ interest exp): ($62,145 + $15,600 + E) ÷ $15,600 = 6.1 times E = 6.1 times x $15,600 – ($62,145 – $15,600) = $17,415 F: $181,000 – $15,600 – $62,145 – $17,145 = $86,110 Difficulty: Medium Learning Objective: Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. Section Reference: Financial Statement Analysis CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

A PPENDIX C THE ACCOUNTING INFORMATION SYSTEM CHAPTER LEARNING OBJECTIVES 1. Understand basic accounting terminology, double-entry rules, and the accounting equation. It is important to understand the following terms: (1) event, (2) transaction, (3) account, (4) permanent and temporary accounts, (5) ledger, (6) journal, (7) posting, (8) trial balance, (9) adjusting entries, (10) financial statements, (11) closing entries, and (12) reversing entries. The left side of any account is the debit side; the right side is the credit side. All asset and expense accounts are increased on the left or debit side and decreased on the right or credit side. Conversely, all liability and revenue accounts are increased on the right or credit side and decreased on the left or debit side. Shareholders’ equity accounts, Common Shares, and Retained Earnings are increased on the credit side, whereas the shareholders’ equity related Dividends account is increased on the debit side. In a double-entry accounting system, for every debit there must be a credit, and vice versa. This leads us to the basic accounting equation for corporations: Assets = Liabilities + Shareholders’ Equity. The effect of individual transactions on the statement of financial position can be explained using the basic accounting equation. The shareholders’ equity portion of the equation can also be expanded to illustrate the effect of transactions on components of equity such as common shares and retained earnings. Whenever a transaction occurs, the elements of the equation change, but the equality of the two sides of the equation remains unaffected.

2. Identify the steps in the accounting cycle and the steps in the recording process. The basic steps in the accounting cycle are (1) identification and measurement of transactions and other events, (2) journalizing, (3) posting, (4) the unadjusted trial balance, (5) adjustments, (6) the adjusted trial balance, (7) statement preparation, and (8) closing. The first three steps in the accounting cycle form the basis of the recording process used by most medium-sized companies on a daily basis. The simplest journal form is a chronological listing of transactions and events that are expressed as debits and credits to particular accounts. The items entered in a general journal must then be transferred (posted) to the general ledger. To help prepare financial statements, an unadjusted trial balance should be prepared at the end of a specific period (usually a month, quarter, or year) after the entries have been recorded in the journals and posted to the general ledger.

3. Explain the reasons for and prepare adjusting entries. Adjustments achieve a proper matching of expenses and revenues, which is needed to determine the correct net income for the current period and to achieve an accurate statement of the end-of-the-period balances in assets, liabilities, and shareholders’ equity accounts. When preparing adjusting journal entries, you must first determine how the original transaction was recorded. For example, was an asset created earlier in the fiscal year (such as prepaid rent) when the initial payment was made? If so, an adjustment for the related Appendix_C-1 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

expense is required. Alternatively, if an income statement account was used initially, an adjustment may be required to set up the proper statement of financial position account at the end of the period.

4. Explain how the type of ownership structure affects the financial statements. The type of ownership structure that a business enterprise uses determines the types of accounts that are part of the equity section. In a corporation, ordinary or common shares, contributed surplus, retained earnings, and accumulated other comprehensive income are commonly shown separately on the statement of financial position. In a proprietorship or partnership, a capital account is used to indicate the investment in the company by the owner(s). An owners’ drawings or withdrawal account may be used to indicate withdrawals by the owner(s). These two accounts are grouped or netted under owners’ equity.

5. Prepare closing entries and consider other matters relating to the closing process. In the closing process, all of the revenue and expense account balances (income statement items) are transferred to a clearing account called Income Summary, which is used only at the end of the fiscal year. Revenues and expenses are matched in the Income Summary account. The net result of this matching, which represents the net income or net loss for the period, is then transferred to a shareholders’ equity account (Retained Earnings for a corporation and capital accounts for proprietorships and partnerships). Reversing entries may be used for reversing accrued revenues and accrued expenses. Prepayments may also be reversed if the initial entry to record the transaction is made to an expense or revenue account.

6. Prepare a 10-column work sheet and financial statements. The 10-column work sheet provides columns for the first trial balance, adjustments, adjusted trial balance, statement of comprehensive income, and statement of financial position. The work sheet does not replace the financial statements. Instead, it is the accountant’s informal device for accumulating and sorting the information that is used for the financial statements.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE QUESTIONS Answer d b d b d a a b d c b a d c c c d b d c d b d c d d c b a c c c a c d b b c d c c d c

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Description Purpose of an accounting system Definition of transaction Purpose of an accounting system Identification of a temporary account Accounting equation Accounting equation Criteria for recording transactions Normal balances Reporting under IFRS Internal event Definition of journal Impact of transaction on the accounting equation Transaction analysis Transaction analysis Event recording Double-entry accounting system Event recording Trial balance Trial balance Trial balance Event Recording General Journal Uses of adjusting entries Adjusting for accrued expenses Adjusting for accrued revenues Adjusting entries Factors to consider in estimating depreciation Contra-asset account Effect of not recording depreciation Adjusting for bad debts Definition of accrued revenue Adjusting entry for prepaid lease Adjusting entry for interest receivable Adjusting entry for interest expense Adjusting entry for bad debts Adjusting entry for bad debts Adjusting entry for unearned rent Adjusting entry for interest receivable Calculate property tax adjustment Calculate balance in unearned revenue Adjusting entry for investments Adjusting entry for investments Calculate cash received for interest

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a c c Answer d d c c c b c c c c c c b b c a d c b a a a d b

44. 45. 46. No. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

Calculate cash paid for salaries Calculate cash paid for insurance Calculate insurance expense Description Calculate interest revenue Calculate salary expense Valuation of entity-specific asset Calculate accrued interest payable Calculate balance of unearned revenues Calculate prepaid insurance Calculate interest receivable Calculate accrued salaries Calculate royalty revenue Types of ownership structure Types of ownership structure Types of ownership structure Closing process Definition of unearned revenue Closing process Fair value adjustments for investments Closing process Closing net income or loss Post-closing trial balance Trial balance–correct statement Effect of understating ending inventory Closing entry Closing entry Closing entry

EXERCISES Item EC-71 EC-72 EC-73 EC-74 EC-75 EC-76 EC-77 EC-78 EC-79 EC-80 EC-81 EC-82 EC-83

Description Definitions Definitions Recordable events The accounting cycle Adjusting entries Adjusting entries Adjusting entries Calculation of expense Calculation of revenue Preparing financial statements Calculation of expense Type of ownership structure Reversing entries

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Item PC-84 PC-85 PC-86 PC-87 PC-88 PC-89 PC-90 PC-91 PC-92 PC-93 PC-94 PC-95

Description Journal entries Adjusting entries Adjusting entries Adjusting and closing entries Adjusting and closing entries Closing entries Adjusting entries Trial balance correction Accrual accounting Ten-column work sheet Preparation of financial statements Preparation of financial statements

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

MULTIPLE CHOICE 1. Which of the following statements regarding accounting information systems is true? a) Both large and small firms should use the same type of accounting system. b) All firms should have the same types of transactions. c) The volume of data to be handled should not vary between firms. d) The kind of information that management requires of an accounting system will vary, depending on the type of firm. Answer: d Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

2. An external event involving a transfer or exchange between two or more entities or parties is called a(n) a) account. b) transaction. c) ledger. d) accounting system. Answer: b Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

3. Which of the following does NOT influence the structure of an accounting system: a) nature of the business b) size of the firm c) volume of data to be handled d) external reporting requirements Answer: d Appendix_C-6 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

4. An example of temporary accounts is a) unearned revenue. b) expenses. c) inventory. d) prepaid expenses. Answer: b Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

5. Which of the following equations is correct? a) Assets plus Liabilities = Equity b) Assets = Liabilities minus Equity c) Liabilities = Assets plus Equity d) Equity = Assets minus Liabilities Answer: d Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

6. The accounting equation must remain in balance a) throughout each step in the accounting cycle. Appendix_C-7 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) only when journal entries are recorded. c) only at the time the trial balance is prepared. d) only when formal financial statements are prepared. Answer: a Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

7. Which of the following criteria does NOT have to be met before an event or transaction should be recorded for accounting purposes? a) The event or transaction must be an external event. b) The event or transaction can be measured objectively in financial terms. c) The event or transaction is relevant and reliable. d) The event or transaction must meet the definition of an element. Answer: a Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

8. Which of the following accounts do NOT have a normal debit balance? a) Dividends b) Accumulated Depreciation c) Prepaid Expenses d) Sales Return and Allowances Answer: b Difficulty: Medium Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Appendix_C-8 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bloomcode: Comprehension AACSB: Analytic

9. Which of the following statements is NOT true for a company that has fair value OCI investments? a) If an AOCI balance represent accumulated gains it must be added to SHE. b) AOCI is part of the expanded accounting equation. c) AOCI functions similarly to retained earnings. d) AOCI must be reported under IFRS and ASPE. Answer: d Difficulty: Medium Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

10. Which of the following is an internal event? a) sale of goods or services b) payment of dividends c) using raw materials in production d) purchase of materials Answer: c Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

11. The book of original entry where transactions and other selected events are first recorded is called the a) ledger. b) journal. c) account. d) statement of financial position. Answer: b

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

12. The debit and credit analysis of a transaction normally takes place a) before an entry is recorded in a journal. b) when the entry is posted to the ledger. c) when the trial balance is prepared. d) when the financial statements are prepared. Answer: a Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

13. Performing a service for a client on account will a) increase one asset and decrease another asset. b) decrease an asset and decrease a liability. c) increase an asset and decrease equity. d) increase an asset and increase equity. Answer: d Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

14. The account credited for a receipt of cash on account is a) Unearned Revenue. b) Service Revenue. c) Accounts Receivable. d) Accounts Payable.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Medium Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

15. Which of the following in NOT a reason for not recording an event? a) The service has been provided but the cash has not yet been received. b) The service has not been provided but the cash has already been received. c) The measurement is too complex. d) The amounts are not material. Answer: c Difficulty: Medium Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

16. The double-entry accounting system means a) each transaction is recorded with two journal entries. b) each item is recorded in a journal entry, then in a general ledger account. c) the dual effect of each transaction is recorded with debits and credits of equal amount. d) the statements will always balance. Answer: c Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

17. Which of the following criteria are NOT required for an event or item to be recorded for accounting purposes? a) The event or item can be measured objectively in financial terms. b) The event or item is relevant and reliable. Appendix_C-11 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

c) The event or item is an element. d) The cash must be collected or paid. Answer: d Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

18. A trial balance a) is a list of all the accounts in the ledger. b) is a list of all the accounts and the balances at a specific date. c) cannot be used in the preparation of financial statements. d) cannot be used as a basis for preparation of adjusting entries. Answer: b Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

19. A trial balance will NOT balance if a) an amount is posted to the wrong account. b) a transaction has been entered twice. c) a transaction has been omitted. d) only the debit side of a journal entry has been posted. Answer: d Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

a) to serve as a basic internal control. b) to assist in preparation of the financial statements. c) to prove the mathematical equality of debits and credits after posting. d) to uncover errors in journalizing and posting. Answer: c Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

21. Which of the following is a correct partial entry for a company that has just paid $95 for freight for an inventory purchase and uses a periodic inventory system? a) Dr. Freight-out $95 b) Dr. Cash $95 c) Dr. Freight in $95 d) Dr. Inventory $95 Answer: d Difficulty: Medium Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

22. The book of original entry is referred to as the a) general ledger. b) general journal. c) trial balance. d) statement elements. Answer: b Difficulty: Easy Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic Appendix_C-13 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

23. Adjusting entries are necessary to 1. obtain a proper matching of revenue and expense. 2. achieve an accurate statement of assets and equities. 3. adjust assets and liabilities to fair market value. a) 1 and 3 b) 2 and 3 c) 3 d) 1 and 2 Answer: d Difficulty: Easy Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

24. If, during an accounting period, an expense item has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve a) a liability account and an asset account. b) an asset or contra-asset and an expense account. c) a liability account and an expense account. d) a receivable account and a revenue account. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

25. For adjusting entries relating to accrued revenues, a) a liability-revenue account relationship exists. b) the adjusting entry involves a credit to an asset account and a debit to a revenue account. c) if an adjustment is not made, assets will be overstated. d) before adjustment, both assets and revenues are understated. Answer: d

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

26. Which of the following would NOT be a correct form for an adjusting entry? a) a debit to a revenue and a credit to a liability b) a debit to an expense and a credit to a liability c) a debit to a liability and a credit to a revenue d) a debit to an asset and a credit to a liability Answer: d Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

27. Which of the following must be considered in estimating depreciation on an asset for an accounting period? a) only the original cost of the asset b) only the asset’s useful life c) both the original cost of the asset and its useful life d) the decline in its fair market value Answer: c Difficulty: Easy Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

28. The type of account and normal balance of “Accumulated Depreciation -Equipment” is a) Asset, Credit. b) Contra-asset, Credit. c) Contra-asset, Debit. d) Liability, Credit. Appendix_C-15 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: b Difficulty: Easy Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

29. If the accountant forgets to record an adjustment for Accumulated Depreciation–Building at the end of the accounting period, this will cause a) an overstatement of assets. b) an understatement of assets. c) an overstatement of expenses. d) an overstatement of liabilities. Answer: a Difficulty: Easy Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

30. An adjusting entry for bad debts will generally a) increase an expense account and decrease an asset account. b) increase an expense account and increase an asset account. c) increase an expense account and increase a contra-asset account. d) increase an expense account and increase a liability account. Answer: c Difficulty: Easy Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

31. An accrued revenue can best be described as an amount a) collected and currently matched with expenses. Appendix_C-16 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

b) collected and not currently matched with expenses. c) not collected and currently matched with expenses. d) not collected and not currently matched with expenses. Answer: c Difficulty: Easy Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

32. On September 1, 2023, Regal Corp. made the annual lease payment of $24,000 for its fleet of delivery trucks. The payment covered the period September 1, 2023 to August 31, 2024. Assuming the entire amount had originally been debited to Lease Expense, the required adjustment at December 31, 2023 is a) debit Lease Expense and credit Prepaid Expenses $8,000. b) debit Prepaid Expenses and credit Lease Expense $8,000. c) debit Prepaid Expenses and credit Lease Expense $16,000. d) debit Lease Expense and credit Prepaid Expenses $16,000. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $24,000 – ($24,000 x 4 ÷ 12) = $16,000

33. Principle Place determines that it has NOT yet recorded the 2023 accrual for interest income to be received in 2024. Assuming the amount to be recorded for 2023 is $6,000, the required adjustment at December 31, 2023, is a) debit Interest Receivable and credit Interest Income $6,000. b) debit Interest Income and credit Interest Receivable $6,000. c) debit Interest Payable and credit Interest Income $6,000. d) No adjusting entry is required. Answer: a Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Appendix_C-17 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: No calculation necessary ($6,000 is figure given in the question.)

34. On November 1, 2023, Halton Corp. purchased equipment by signing a 6-month, 4% note for $180,000. The December 31, 2023, adjusting entry required in connection with this note is a) debit Interest Expense and credit Interest Payable, $7,200. b) debit Interest Expense and credit Interest Payable, $3,600. c) debit Interest Expense and credit Interest Payable, $1,200. d) debit Interest Expense and credit Cash, $1,200. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $180,000 x 4% × 2 ÷ 12 = $1,200

35. Tabby Corp.’s account balances at December 31, 2023, included Accounts Receivable, $192,500 debit; Allowance for Doubtful Accounts, $1,250 credit. From a review of the receivables, Blue estimates that $7,000 of the December 31 receivables will be uncollectible. The required adjusting entry would include a credit to the allowance account for a) $ 1,250. b) $8,250. c) $7,000. d) $5,750. Answer: d Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $7,000 – $1,250= $5,750

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

36. Siamese Corp.’s account balances at December 31, 2023, included Accounts Receivable, $360,000 debit; Allowance for Doubtful Accounts, $400 debit. Sales during 2023 were $920,000. It is estimated that 2% of sales will be uncollectible. The required adjusting entry would include a credit to the allowance account for a) $14,400. b) $18,400. c) $7,200. d) $15,300. Answer: b Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $920,000 × 2% = $18,400. (Allowance for Doubtful Accounts balance is irrelevant)

37. On September 1, 2023, Rudolph Corporation received $54,000 cash from a tenant for one year’s rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2023, required adjusting entry in connection with this would be a) debit Rent Revenue and credit Unearned Rent, $18,000. b) debit Rent Revenue and credit Unearned Rent, $36,000. c) debit Unearned Rent and credit Rent Revenue, $18,000. d) debit Cash and credit Unearned Rent, $9,000. Answer: b Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: 8 ÷ 12 × $54,000 = $36,000

38. On October 31, 2023, Kiwi Inc. lent $63,000 to Plum Inc. in return for a three-month, 4% interestbearing note. What adjusting entry should Kiwi Inc. make on December 31, 2023, in connection with this note? a) Debit Interest Receivable and credit Interest Income, $630. b) Debit Cash and credit Interest Income, $420. c) Debit Interest Receivable and credit Interest Income, $420. Appendix_C-19 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

d) Debit Interest Income and credit Interest Receivable, $210. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $63,000 x 4% x 2 ÷ 12 = $420

39. Lime Limited has received an invoice for $75,000 in property taxes for the calendar year 2023. The invoice was received and paid in June 2023 and the entire amount was debited to Property Tax Expense. Assuming Lime does NOT prepare interim financial statements, the required adjustment on December 31, 2023, related to the property taxes is a) debit Property Tax Expense and credit Prepaid Expenses $31,250. b) debit Prepaid Expenses and credit Property Tax Expense $37,500. c) debit Property Tax Expense and credit Prepaid Expenses $37,500. d) No adjusting entry is required. Answer: d Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: No calculation necessary (No adjusting entry is required as prepaid balance at December 31 is zero)

40. On December 10, 2023, Bella Inc. received a cheque for $13,625 from a customer for services that Bella will be performing in December 2023 and January 2024. By December 31, 2023, Bella had earned 60% of that amount. Assuming the appropriate year-end adjustments were made, the 2023 balance in Bella Unearned Revenue account will be a) $8,175. b) $6,812.50. c) $5,450. d) zero. Answer: c Difficulty: Medium Appendix_C-20 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $13,625 x 40% = $5,450

41. On May 15, 2023, Bagle Corp. purchased 1,000 common shares of Holter Inc. for $24,000, as a Fair Value through Other Comprehensive Income (FV–OCI) equity investment. At December 31, 2023, the fair value of these shares was $26,550. The required adjusting entry to reflect this is a) debit FV–OCI Investment, credit Unrealized Gain or Loss (OCI) $26,550. b) debit Unrealized Gain or Loss (OCI), credit FV–OCI Investment $26,550. c) debit FV–OCI Investment, credit Unrealized Gain or Loss (OCI) $2,550. d) debit Unrealized Gain or Loss (OCI), credit FV–OCI Investment $2,550. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $26,550 – $24,000 = $2,550 gain

42. On May 15, 2023, Croissant Corp. purchased 1,000 common shares of Holter Inc. for $24,000, as a Fair Value through Net Income (FV–NI) equity investment. At December 31, 2023, the fair value of these shares was $23,100. The required adjusting entry to reflect this is a) debit FV-NI Investments, credit Unrealized Gain or Loss–OCI $23,100. b) debit Unrealized Gain or Loss - OCI, credit FV-NI Investments $23,100. c) debit FV-NI Investments, credit Investment Income or Loss $15,900. d) debit Investment Income or Loss, credit FV-NI Investments $900. Answer: d Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $23,100 – $24,000 = $900 loss

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Use the following information for questions 43–45. Orange Corp reported the following items on its calendar 2023 statement of comprehensive income: Interest income.................................................................... $84,200 Salaries expense .................................................................. 72,000 Insurance expense ............................................................... 10,600 As well, its comparative statement of financial position showed the following balances: December 31, 2022 December 31, 2023 Interest receivable ........................................... $10,100 $8,800 Salaries payable .............................................. 9,800 5,400 Prepaid insurance............................................ 1,500 1,600

43. The cash received for interest during 2023 was a) $82,900. b) $84,200. c) $85,500. d) $74,100. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $10,100 + $84,200 – $8,800 = $85,500

44. The cash paid for salaries during 2023 was a) $76,400. b) $72,000. c) $67,600. d) $81,800. Answer: a Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $9,800 + $72,000 – $5,400 = $76,400 Appendix_C-22 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

45. The cash paid for insurance premiums during 2023 was a) $ 9,100. b) $ 9,000. c) $10,700. d) $10,600. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $10,600 + $1,600 – $1,500 = $10,700 Use the following information for questions 46–48. During the 2023 calendar year, Purple Corp. paid or collected for the following items: Insurance premiums paid ................................................... $ 14,200 Interest collected ................................................................ 21,700 Salaries paid ........................................................................ 131,300 As well, the comparative statement of financial position showed the following balances: December 31, 2022 December 31, 2023 Prepaid Insurance ........................................... $ 1,400 $ 1,500 Interest Receivable .......................................... 2,800 2,100 Salaries Payable .............................................. 14,700 12,900

46. The insurance expense on the 2022 statement of comprehensive income was a) $12,700. b) $12,800. c) $14,100. d) $14,200. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Appendix_C-23 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Feedback: $14,200 – $1,500 + $1,400 = $14,100

47. The interest income on the 2023 statement of comprehensive income was a) $22,400. b) $21,700. c) $19,600. d) $21,000. Answer: d Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $21,700 + $2,100 - $2,800 = $21,000

48. The salary expense on the 2023 statement of comprehensive income was a) $118,400. b) $133,100. c) $131,300. d) $129,500. Answer: d Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $131,300 +$12,900 - $14,700 = $129,500

49. Amazing Company acquires a trade name from Fantastic Ltd. Amazing estimates it will receive $7,200 per year from the name over the next 9 years. Using a discount rate of 4%, what is the value in use to Amazing for this trade name? a) $45,528 b) $58,398 c) $53,534 d) $55,676 Answer: c Appendix_C-24 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

50. On September 1, 2022, Culver Corp. issued a 9% note payable to National Bank for $750,000, payable in three equal annual principal payments of $250,000, plus interest. On this date, the bank's prime rate was 8%. The first payment for interest and principal was made on September 1, 2023. At December 31, 2023, Culver should record accrued interest payable of a) $13,333. b) $22,500. c) $15,000. d) $10,000. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting CPA: Problem Solving and Decision Making Bloomcode: Application AACSB: Analytic Feedback: ($750,000 – $250,000) × 9% × 4 ÷ 12 = $15,000

51. Rathbone Corp. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenues. This account had a balance of $1,100,000 at December 31, 2023, before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $325,000 at December 31, 2023. Service contracts still outstanding at December 31, 2023, expire as follows: During 2024 $140,000 During 2025 210,000 During 2026 99,000 What amount should be reported as Unearned Service Revenues on Rathbone's December 31, 2023, statement of financial position? a) $774,000 b) $325,000 c) $449,000 d) $124,000 Appendix_C-25 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $140,000 + $210,000 + $99,000 = $449,000

52. On December 1, 2023, Flynn Consulting paid $27,000 for a three-year insurance policy (December 1, 2023 to November 30, 2026) and debited the entire amount to Prepaid Insurance. The December 31, 2023, required adjusting entry in connection with this policy would be a) debit Prepaid Insurance and credit Insurance Expense $750. b) debit Insurance Expense and credit Prepaid Insurance $750. c) debit Insurance Expense and credit Prepaid Insurance $26,250. d) debit Prepaid Insurance and credit Insurance Expense $26,250. Answer: b Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $27,000 x 1 ÷ 36 = $750

53. On June 1, 2023, Carr Corp. loaned Farr Corp. $600,000 on a 5% note, payable in five annual instalments of $120,000 (plus interest), beginning January 2, 2024. Interest on the note is payable on the first day of each month beginning July 1, 2023. Farr made timely payments through November 1, 2023. On January 2, 2024, Carr received payment of the first principal instalment plus all interest due. At December 31, 2023, Carr's interest receivable on this loan is a) $0. b) $2,500. c) $5,000. d) $7,500. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries Appendix_C-26 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $600,000 × 5% × 2 ÷ 12 = $5,000

54. Grant Limited pays all salaried employees on a biweekly basis. However, 0vertime pay is paid in the next biweekly period. Grant accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2023 are as follows: Last payroll was paid on Dec 27, 2023, for the two-week period ended Dec 27, 2023. Overtime pay earned in the two-week period ended Dec 27, 2023 was $7,000. Remaining workdays in 2023 were December 28, 29, 30, on which days there was no overtime. The regular biweekly salaries total $100,000. Assuming a five-day work week, Grant should record a liability at December 31, 2023 for accrued salaries of a) $24,000. b) $29,000. c) $37,000. d) $53,000. Answer: c Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $7,000 + ($100,000 ÷ 10 × 3) = $37,000

55. Mark-Wall Corp.'s trademark was licensed to Rodgers Inc. for royalties of 12% of sales of the trademarked items. Royalties are payable semi-annually on March 15 for sales in July through December of the previous year, and on September 15 for sales in January through June of the same year. Mark-Wall received the following royalties from Rodgers: March 15 September 15 During 2022 $5,000 $9,000 During 2023 8,000 6,000 Rodgers estimates that sales of the trademarked items would total $67,000 for July through December 2023. On its statement of comprehensive income for calendar 2023, Mark-Wall’s royalty revenue should be a) $8,040. b) $14,000. c) $14,040. d) $21,000. Answer: c Appendix_C-27 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $6,000 + ($67,000 × 12%) = $14,040 56. Which of the following is NOT an account appearing in the equity section of a corporation’s statement of financial position? a) Contributed Surplus b) Common Shares c) Owner’s Equity d) Accumulated Other Comprehensive Income Answer: c Difficulty: Easy Learning Objective: Explain how the type of ownership structure affects the financial statements. Section Reference: Financial Statements and Ownership Structure CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

57. Zack Jones operates a sole proprietorship, selling sporting equipment. He has recently prepared financial statements for the fiscal year end of the business. Which equity accounts would you expect to see on the balance sheet? a) Common Shares, Dividends, and Owner’s Equity b) Common Shares, Capital, and Owner’s Drawings c) Capital and Owner’s Drawings, grouped or added under Owner’s Equity d) Owner’s Equity and Dividends, netted together as Retained Earnings Answer: c Difficulty: Easy Learning Objective: Explain how the type of ownership structure affects the financial statements. Section Reference: Financial Statements and Ownership Structure CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

58. Marvin holds 10% of the common shares of Pink Limited. For the 2023 fiscal year end, all Appendix_C-28 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

shareholders received a cash payment to represent their share in the net income of Pink Limited. How would this cash payment be reported in the equity section of Pink Limited’s financial statements? a) as a reduction in the Owner’s Equity account b) as an owner withdrawal, reducing Shareholder’s Equity of Pink Limited c) as a dividend, reducing Shareholder’s Equity of Pink Limited d) This payment would not impact the equity section of the financial statements. Answer: c Difficulty: Easy Learning Objective: Explain how the type of ownership structure affects the financial statements. Section Reference: Financial Statements and Ownership Structure CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

59. What account are net revenues and expenses transferred to at the end of the accounting period? a) Comprehensive Income b) Retained Earnings c) Accumulated Other Comprehensive Income d) Share Capital Answer: b Difficulty: Easy Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic 60. An unearned revenue can best be described as an amount a) collected and currently matched with expenses. b) collected and not currently matched with expenses. c) not collected and currently matched with expenses. d) not collected and not currently matched with expenses. Answer: b Difficulty: Easy Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Knowledge Appendix_C-29 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

AACSB: Analytic

61. Which type of account is always debited during the closing process? a) dividends b) expense c) revenue d) retained earnings Answer: c Difficulty: Easy Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

62. Which of the following statements is INCORRECT regarding fair value adjustments for investments? a) Both FV–NI investments and FV–OCI investments could include equity investments but not investments in debt securities. b) FV–OCI investments include debt securities. c) At each period end, an estimate is made of the fair value of both FV–NI and FV–OCI investments. d) An adjusting entry is required to record a holding gain or loss on FV–NI investments. Answer: a Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Comprehension AACSB: Analytic

63. In the closing process, all the revenue and expense accounts are transferred to a clearing account called a) Other Comprehensive Income. b) Common Shares. c) Retained Earnings. d) Income Summary. Answer: d Difficulty: Easy Appendix_C-30 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

64. A corporation’s net income or loss is closed at year end to a) Accumulated Other Comprehensive Income. b) Common Shares. c) Retained Earnings. d) Other Comprehensive Income. Answer: c Difficulty: Easy Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

65. A post-closing trial balance a) includes temporary accounts only. b) includes permanent accounts only. c) includes both temporary and permanent accounts. d) may include expense accounts. Answer: b Difficulty: Easy Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

66. Which of the following statements about the trial balance is correct? a) The debits and credits must balance. b) The equality of credits and debits ensures that no errors were made. c) The post-closing trial balance includes temporary accounts only. d) The post-closing trial balance is used to prepare the financial statements. Answer: a Appendix_C-31 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Easy Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

67. If the inventory account at the end of the year is understated, the effect will be to a) overstate the cost of goods sold. b) understate the net purchases. c) overstate the gross profit on sales. d) overstate the goods available for sale. Answer: a Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

68. Frog Corporation had revenues of $300,000, expenses of $325,000, and dividends of $15,000. When Income Summary is closed to Retained Earnings, the amount of the debit or credit to Retained Earnings is a a) debit of $25,000. b) debit of $40,000. c) credit of $25,000. d) credit of $40,000. Answer: a Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $300,000 – $325,000= $25,000 debit

Use the following information for questions 69–70.

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Pearl Inc. is currently preparing closing entries. The company had total revenues of $2,500,000, total expenses of $1,950,000 and dividends of $10,000 for the year.

69. Which of the following partial entries would NOT be made during the closing process? a) Cr. Income summary $2,500,000 b) Cr. Retained earnings $550,000 c) Dr. Income summary $1,950,000 d) Dr. Dividends $10,000 Answer: d Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $2,500,000 – $1,950,000 = $550,000

70. Based on the information provided, what is the impact on the retained earnings? a) Increase of $2,500,000 b) Increase of $540,000 c) Decrease of $10,000 d) Decrease of $1,950,000 Answer: b Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Application AACSB: Analytic Feedback: $2,500,000 – $1,950,000 - 10,000 = $540,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

EXERCISES Ex. C-71 Definitions Define the following terms: 1. Event 2. Work sheet 3. Permanent accounts 4. Temporary accounts 5. Income summary 6. General ledger Solution C-71 1. An event is something of consequence that happens. For a business, an event is generally the source or cause of changes in assets, liabilities, and equity. 2.

Work sheets are used as informal tools to help accountants prepare financial statements.

Permanent accounts are assets, liability, and equity accounts. Unlike temporary accounts, permanent accounts are NOT closed.

Temporary accounts include revenue, expense and dividend accounts. Unlike permanent accounts, they are periodically closed.

The Income Summary is an account that is used as part of the closing process. It facilitates the closing of the temporary accounts at year end.

A general ledger is a collection of all the business’ accounts and may include subsidiary ledgers for specific accounts.

Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Communication

Ex. C-72 Definitions Provide clear, concise answers for the following: 1. What is the accrual basis of accounting? 2. What is an accrued expense? 3. What is accrued revenue? Appendix_C-34 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

4. 5. 6.

What is a prepaid expense? What is unearned revenue? State the rule that indicates which adjusting entries for prepaid and unearned items should be reversed.

Solution C-72 1. The accrual basis of accounting recognizes revenue when the performance obligation is satisfied and recognizes expenses in the period incurred. 2.

An accrued expense is an expense that is incurred but not paid in cash or recorded.

An accrued revenue is a revenue that is recognized but not yet received in cash or recorded.

A prepaid expense is an expense paid in cash and recorded as an asset before it is used.

Unearned revenues are the revenues received in cash and recorded as liabilities before they are recognized.

Reversing entries are used for accrued revenues and accrued expenses.

Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. C-73 Recordable events Before transactions are entered into a corporation's accounting system, the underlying event must be analyzed, to determine how (and if) it should be recorded. The situations below relate to Maxwell Corporation: Instructions Indicate whether the items listed below should be recorded. 1. A new mortgage contract for its new factory building is signed. 2. The first mortgage payment is made. 3. Wages for the current month are paid. 4. A new secretary is hired. 5. Property taxes are paid. 6. HST collections for the current month are forwarded to the CRA. Solution C-73 1. Not recordable Appendix_C-35 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Recordable

Not recordable

Recordable

Difficulty: Easy Learning Objective: Understand basic accounting terminology, double-entry rules, and the accounting equation. Section Reference: Accounting System Overview CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic

Ex. C-74 The accounting cycle Summarize the steps in the accounting cycle. Solution C-74 The accounting cycle may be summarized in 10 steps as follows: 1. identification and measurement of transactions and other events 2.

journalization of current period's entries into journals

posting of journals to the general ledger

preparation of trial balance (unadjusted)

preparation and posting of adjusting entries

preparation of adjusted trial balance

preparation of financial statements

preparation and posting of closing entries

preparation of post-closing trial balance

10. preparation and posting of reversing entries (optional) Difficulty: Easy Appendix_C-36 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Communication CPA: Financial Reporting Bloomcode: Knowledge AACSB: Analytic Ex. C-75 Adjusting entries Prepare the adjusting entries that are required on July 31, 2023, the end of the fiscal year, for each of the following: 1. The supplies inventory on August 1, 2022, was $8,350. Supplies costing $16,650 were purchased during the fiscal year and debited to Supplies Inventory. A count on July 31, 2023, indicated supplies on hand of $6,810. 2. On April 30, a ten-month, 4% note for $40,000 was received from a customer. 3. On March 1, $8,400 was collected as rent for one year and a nominal (temporary) account was credited. Solution C-75 1. Supplies Expense (8,350 + 16,650 – 6,810)............................................... Supplies............................................................................................. 2.

18,190 18,190

Interest Receivable (40,000 x 4% x 3 ÷ 12) ............................................... Interest Income .................................................................................

400

Rent Revenue (8,400 x 7 ÷ 12 unearned) .................................................. Unearned Revenue ...........................................................................

4,900

400

4,900

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. C-76 Adjusting entries Reed Co. wishes to record receipts and payments so that adjustments at the end of the period will NOT require reversing entries at the beginning of the next period. Instructions Record the following initial transaction and the subsequent adjusting entry on December 31, 2023 (two entries for each part). 1. An insurance policy for two years was purchased on April 1, 2023, for $18,000. 2. Rent of $12,000 for six months for a portion of the building was received on November 1, 2023. Appendix_C-37 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution C-76 1. Prepaid Insurance .................................................................................... Cash ...................................................................................................

18,000 18,000

Insurance Expense (18,000 x 9 ÷ 24)......................................................... Prepaid Insurance .............................................................................

6,750

Cash........................................................................................................... Unearned Rent Revenue ...................................................................

12,000

Unearned Rent Revenue(12,000 x 2 ÷ 6) .................................................. Rent Revenue ....................................................................................

4,000

6,750

12000

4,000

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. C-77 Adjusting Entries Road Runner Corporation prepares monthly financial statements. Below is a list of selected trial balance accounts and the corresponding balances on the March 31. No adjustments have been made for the month of March. All accounts have normal balances. Road Runner CORPORATION March 31, 2023 Cash .................................................................................................................. Supplies ............................................................................................................ Equipment ........................................................................................................ Accumulated depreciation–Equipment .......................................................... Accounts payable ............................................................................................. Unearned revenue............................................................................................ Common shares ............................................................................................... Retained earnings ............................................................................................ Rent revenue .................................................................................................... Salaries expense ............................................................................................... Insurance expense ...........................................................................................

$7,300 3,000 19,500 1,200 1,100 1,200 10,000 17,500 6,360 1,150 6,600

Additional information: 1. A physical count of supplies revealed $1,200 on hand on March 31. 2. A two-year insurance policy was purchased on March 1 for $6,600 and was fully expensed. 3. The equipment was purchased on January 1 for $19,500 and has an estimated useful life of three years and a salvage value of $1,500. Appendix_C-38 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

4. 5.

Rent received in advance that remains unearned at March 31 is $350. Income tax of $2,500 is owed.

Instructions Using the above information, prepare the adjusting entries that should be made by Road Runner on March 31 (adjusting entries are made monthly). Solution C-77 1. Supplies Expense...................................................................................... Supplies............................................................................................. ($3,000 – $1,200 = $1,800) 2.

$1,800 $1,800

Prepaid Insurance .................................................................................... Insurance Expense ............................................................................ ($6,600 / 24 = $275, $6,600 – $275 = $6,325)

$6,325

Depreciation Expense............................................................................... Accumulated Depreciation ............................................................... ($19,500 – $1,500) / 3 years x 1/12 = $600

$600

Unearned Revenue ................................................................................... Revenue............................................................................................. ($1,200 – $25 0 = $950)

$950

Income tax expense .................................................................................. Income tax payable ..........................................................................

$2,500

$6,325

$600

$950

$2,500

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. C-78 Calculation of expense The records for Jay Inc. provided the following information for 2023: Jan 1 Accrued expenses ............................................ $2,000 Prepaid expenses ............................................ 900 Cash paid during the year for expenses..........

Dec 31 $3,600 800 $55,000

Instructions Calculate the total amount of expenses that should be reported on the 2023 statement of comprehensive income. Appendix_C-39 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Solution C-78 $55,000 – $2,000 + $3,600 + $900 – $800 = $56,700. Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. C-79 Calculation of revenue The records for Oriole Corp. provided the following information for 2023: Jan 1 Dec 31 Unearned revenue ........................................... $3,000 $3,400 Accrued revenue .............................................. 1,400 1,100 Cash collected during the year from revenue $85,000 Instructions Show the calculation of the amount of revenue that should be reported on the 2023 statement of comprehensive income. Solution C-79 $85,000 + $3,000 – $3,400 – $1,400 + $1,100 = $84,300. Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. C-80 Preparing financial statements The adjusted trial balance of Ryan Financial Planners appears below. Instructions Using the information from the adjusted trial balance, prepare the following statements for the month ended December 31: a) an income statement b) a retained earnings statement c) a balance sheet Ryan Financial Planners Adjusted Trial Balance December 31, 2023 Appendix_C-40 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash .................................................................................................................. Accounts Receivable ........................................................................................ Supplies ............................................................................................................ Equipment ....................................................................................................... Accumulated Depreciation—Equipment......................................................... Accounts Payable ............................................................................................. Unearned Revenue ........................................................................................... Common Shares ............................................................................................... Retained Earnings ............................................................................................ Dividends .......................................................................................................... Service Revenue ............................................................................................... Supplies Expense ............................................................................................. Depreciation Expense ...................................................................................... Rent Expense ....................................................................................................

Debit $ 2,900 2,200 1,800 16,000

Credit

$ 4,000 3,300 5,000 10,000 4,400 2,000 4,200 600 2,500 2,900 _________ $30,900 $30,900

Solution C-80 a) Ryan Financial Planners Income Statement For the Month Ended December 31, 2023 Revenues Service revenue ........................................................................................ Expenses Rent expense ............................................................................................ Depreciation expense ............................................................................... Supplies expense ...................................................................................... Total expenses .................................................................................. Net loss .............................................................................................................

$ 4,200 $2,900 2,500 600 6,000 $(1,800)

b) Ryan Financial Planners Statement of Retained Earnings For the Month Ended December 31, 2023 Retained earnings, December 1 ....................................................................... Less: Net loss .................................................................................................... Dividends ................................................................................................. Retained earnings, December 31 .....................................................................

$ 4,400 $1,800 2,000

3,800 $ 600

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Assets Cash .................................................................................................................. Accounts receivable ......................................................................................... Supplies ............................................................................................................ Equipment ........................................................................................................ Less: Accumulated depreciation–equipment ................................................. Total assets ................................................................................................

$ 2,900 2,200 1,800 $16,000 4,000

12,000 $18,900

Liabilities and Shareholders’ Equity Liabilities Accounts payable ...................................................................................... Unearned revenue ..................................................................................... Total liabilities ..................................................................................

$ 3,300 5,000

Shareholders’ Equity Common shares ......................................................................................... Retained earnings ...................................................................................... Total liabilities and shareholders’ equity ........................................

10,000 600

$ 8,300

10,600 $18,900

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. C-81 Calculation of expense Sales salaries paid during 2023 were $90,000. Advances to salesmen were $1,300 on January 1, 2023, and $800 on December 31, 2023. Sales salaries payable were $1,300 on January 1, 2023, and $1,400 on December 31, 2023. Instructions Calculate the Sales Salaries Expense for calendar 2023. Solution C-81 $90,000 + $1,300 – $800 – $1,300 + $1,400 = $90,600. Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process Appendix_C-42 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Ex. C-82 Type of ownership structure Explain whether the financial statement excerpt below is from the financial statements of a corporation, a sole proprietorship, or a partnership: Abhrams, Capital ........................ $20,000 Johnston, Capital ....................... 25,000 Zinck, Capital .............................. 20,000 Total ............................................ $65,000 Solution C-82 This is an excerpt from partnership financial statements. A corporation would have share capital accounts (common shares and, possibly, preferred shares) and would report Retained Earnings of the firm. Therefore, we know that this excerpt is not a corporation. Since there are capital accounts for more than one individual, it cannot be a sole proprietorship. Therefore, based on the multiple owners’ capital accounts, it can be concluded that this is an excerpt from a partnership’s financial statements. Difficulty: Easy Learning Objective: Explain how the type of ownership structure affects the financial statements. Section Reference: Financial Statements and Ownership Structure Bloomcode: Knowledge CPA: Communication CPA: Financial Reporting AACSB: Communication

Ex. C-83 Reversing Entries Wiley E Coyote Corp. has a fiscal year-end of July 31. Employees are paid bi-weekly and in the current year the bi-weekly pay period ends on July 25; the next period extends from July 26 to August 8. Total bi-weekly payroll is $21,000 and is based on a seven-day work week. Wiley E prepares reversing entries for all its accrued expenses at year-end. Instructions: Prepare all necessary entries related to the August 8 payroll, including any closing entries. Explain if or how the entries might be different if the company did not use reversing entries. Solution C-83 July 31 Salaries and Wages Expense ............................................................ Salaries and Wages Payable ..................................................... ($21,000 / 14 x 6 days) July 31 Income Summary.............................................................................. Salaries and Wages Expense .....................................................

9,000 9,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Reversing entry Aug. 1 Salaries and Wages Payable ............................................................. Salaries and Wages Expense .....................................................

9,000

Aug. 9

21,000

Salaries and Wages Expense ............................................................ Cash ...........................................................................................

9,000

21,000

If the company did not do reversing entries, the August 1 entry would not be made and the entry on August 9 would be as follows: Aug. 9

Salaries and Wages Expense ............................................................ Salaries and Wages Payable ............................................................. Cash ...........................................................................................

12,000 9,000 21,000

Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process Bloomcode: Application CPA: Financial Reporting AACSB: Communication

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

PROBLEMS Pr. C-84 Journal entries Jonathan Green owns Gopher Greenhouses, a gardening centre (as a sole proprietorship). His first year of operations included the following selected events and transactions: January: 1. He invested $300,000 in his business. 2. He bought a greenhouse for $100,000 cash. May: 3. He hired a greenhouse supervisor at an annual salary of $34,000. June: 4. He ordered and paid for a shipment of flowers with a cost of $80,000. 5. He sold flowers for $40,000. Half of these sales were made on account. August: 6. He received a deposit of $5,000 from a customer to put merchandise "on hold". 7. He paid current month's salaries of $3,000. Instructions Prepare all required journal entries. Solution C-84 1. Cash........................................................................................................... Capital ...............................................................................................

300,000

100,000

Building ..................................................................................................... Cash .............................................................................................

300,000

100,000

No entry required.

Inventory ................................................................................................... Cash ...................................................................................................

80,000

Cash........................................................................................................... Accounts Receivable ................................................................................ Sales ..................................................................................................

20,000 20,000

Cash........................................................................................................... Unearned Revenue ...........................................................................

5,000

Salaries Expense ....................................................................................... Cash ...................................................................................................

3,000

80,000

40,000

5,000

3,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Learning Objective: Identify the steps in the accounting cycle and the steps in the recording process. Section Reference: The Accounting Cycle and the Recording Process CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. C-85 Adjusting entries The information shown below relates to Flower Corporation. At December 31, 2023, Flower's general ledger shows the following balances: Prepaid lease .............................. $7,000 Debit Prepaid insurance....................... $1200 Debit Unearned revenue ...................... $84,000 Credit In addition, the following information is available: 1. The entire amount shown as prepaid lease has expired. 2. One-third of the amount shown as prepaid insurance has expired. 3. Half of the amount shown as unearned revenue has now been earned. Instructions Prepare all adjusting entries that are required at December 31, 2023. Solution C-85 1. Lease Expense .......................................................................................... Prepaid Expenses.............................................................................. 2.

7,000 7,000

Insurance Expense (1,200 x 1 ÷ 3) ............................................................ Prepaid Insurance .............................................................................

400

Unearned Revenue (84,000 x ½) .............................................................. Revenue.............................................................................................

42,000

400

42,000

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. C-86 Adjusting entries Part I Maison Corp. has reported pre-tax income of $250,000 for calendar 2023, before considering the five items below. Prepare the adjusting entries needed at December 31, 2023 in order to correctly state the 2023 pre-tax income. If no entry is needed, write NONE. Appendix_C-46 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

1. 2.

3. 4. 5.

Interest on a $42,000, 7%, six-year note payable was last paid on September 1, 2022. On May 31, 2023, Maison entered a contract to provide services to a customer for 18 months beginning June 1. The customer paid the $18,000 fee in full on June 1 and Maison credited it to Service Revenue. On August 1, 2023, Maison paid a year’s rent in advance on a warehouse and debited the $48,000 payment to Prepaid Rent. Depreciation on office equipment for 2023 is $17,000. On December 18, 2023, Maison paid the local newspaper $1,000 for an advertisement to be run in January of 2024, debiting it to Prepaid Expenses.

Part II Show the effect of each adjusting entry in Part I on previously reported pre-tax income, and indicate the correct amount of pre-tax income. Reported 2023 pre-tax income ..................... $250,000 Add (deduct) Item (1) (2) (3) (4) (5) Correct 2023 pre-tax income ........................$__________ Solution C-86 Part I 1. Interest Expense (42,000 x 7% x 4 ÷ 12) ................................................... Interest Payable ................................................................................ 2.

980 980

Service Revenue (18,000 x 11 ÷ 18 unearned) ......................................... Unearned Revenue ...........................................................................

11,000

Rent Expense (48,000 x 5 ÷ 12) ................................................................. Prepaid Rent .....................................................................................

20,000

Depreciation Expense............................................................................... Accumulated Depreciation - Equipment .........................................

17,000

11,000

20,000

17,000

NONE

Part II Reported 2023 pre-tax income ..................... Add (deduct) Item (1) (980) (2) (11,000) (3) (20,000) (4) (17,000) (5) 0 Correct 2023 pre-tax income ........................

$250,000

(48,980) $201,020

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Section Reference: Adjusting Entries CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. C-87 Adjusting and closing entries The following trial balance was taken from the books of Kaslo Corporation at December 31, 2023: Account Debit Credit Cash .................................................................................................................. $ 40,000 Accounts Receivable ........................................................................................ 108,000 Note Receivable ............................................................................................... 8,000 Allowance for Doubtful Accounts .................................................................... $ 1,800 Inventory .......................................................................................................... 54,000 Prepaid Insurance ............................................................................................ 4,800 Equipment ........................................................................................................ 138,000 Accumulated Depreciation–Equipment .......................................................... 15,000 Accounts Payable ............................................................................................. 10,800 Common Shares ............................................................................................... 44,000 Retained Earnings ............................................................................................ 65,000 Sales Revenue .................................................................................................. 410,000 Cost of Goods Sold ........................................................................................... 128,000 Salaries and Wages Expense ............................................................................ 53,000 Rent Expense .................................................................................................... 12,800 __________ Totals ........................................................................................................ $546,600 $546,600 At year end, the following items have not yet been recorded. 1. Insurance expired during the year, $3,000. 2. Estimated bad debts, 1 percent of gross sales. 3. Depreciation on equipment, 10% per year. 4. Interest at 9% is receivable on the note for one full year. 5. Rent paid in advance at December 31, $6,800 (originally debited to expense). 6. Accrued salaries at December 31, $6,200. Instructions a) Prepare the necessary adjusting entries. b) Prepare the necessary closing entries. Solution C-87 a) Adjusting Entries 1. Insurance Expense.................................................................................... Prepaid Insurance .............................................................................

3,000 3,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Bad Debt Expense (410,000 x 1%) ............................................................ Allowance for Doubtful Accounts .....................................................

4,100

Depreciation Expense (138,000 x 10%) .................................................... Accumulated Depreciation - Equipment .........................................

13,800

Interest Receivable (8,000 x 9%) .............................................................. Interest Income .................................................................................

720

Prepaid Rent ............................................................................................. Rent Expense.....................................................................................

6,800

Salaries and Wages Expense .................................................................... Salaries and Wages Payable ..............................................................

6,200

b) Closing Entries Sales.................................................................................................................. Interest Income ................................................................................................ Income Summary ..................................................................................... Income Summary ............................................................................................. Salaries and Wages Expense .................................................................... Rent Expense ............................................................................................ Depreciation Expense............................................................................... Bad Debt Expense..................................................................................... Insurance Expense.................................................................................... Cost of Goods Sold ................................................................................... Income Summary ............................................................................................. Retained Earnings .....................................................................................

4,100

13,800

720

6,800

6,200

410,000 720 410,720 214,100 59,200 6,000 13,800 4,100 3,000 128,000 196,620 196,620

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: Adjusting Entries Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Application AACSB: Analytic

Pr. C-88 Adjusting and closing entries Charles Corporation Adjusted Trial Balance December 31, 2023 Cash ..................................................................................................................

Debit $ 33,400

Credit

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Accounts Receivable ........................................................................................ 87,400 Inventory .......................................................................................................... 90,000 Supplies ........................................................................................................... 7,000 Equipment ........................................................................................................ 266,000 Accumulated Depreciation—Equipment......................................................... $ 80,000 Notes Payable................................................................................................... 82,000 Accounts Payable ............................................................................................. 117,000 Common Shares ............................................................................................... 200,000 Retained Earnings ............................................................................................ 16,000 Sales.................................................................................................................. 1,494,400 Sales Returns and Allowances ......................................................................... 8,400 Cost of Goods Sold ........................................................................................... 994,800 Salaries Expense............................................................................................... 280,000 Advertising Expense ......................................................................................... 52,800 Utilities Expense ............................................................................................... 28,000 Repair Expense ................................................................................................. 24,200 Delivery Expense .............................................................................................. 33,400 Rent Expense .................................................................................................... 48,000 Supplies Expense ............................................................................................. 4,000 Depreciation Expense ..................................................................................... 32,000 Interest Expense ............................................................................................... 22,000 Interest Payable ............................................................................................... ____________ 22,000 Totals.......................................................................................................... $2,011,400 $2,011,400 Instructions 1. Using the above adjusted trial balance of Charles Corporation, prepare the adjusting entries. 2. Using the above adjusted trial balance of Charles Corporation, prepare the closing entries. Solution C-88 1. Supplies Expense...................................................................................... Supplies.............................................................................................

4,000 4,000

Depreciation Expense............................................................................... Accumulated Depreciation-Equipment ...........................................

32,000

22,000

Sales .......................................................................................................... Income Summary..............................................................................

1,494,400

Income Summary ..................................................................................... Sales Returns and Allowances.......................................................... Cost of Goods Sold............................................................................ Salaries Expense ............................................................................... Advertising Expense..........................................................................

1,527,600

32,000

22,000

1,494,400

8,400 994,800 280,000 52,800

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Utilities Expense ............................................................................... Repair Expense ................................................................................. Delivery Expense ............................................................................... Rent Expense..................................................................................... Supplies Expense .............................................................................. Depreciation Expense ....................................................................... Interest Expense ...............................................................................

28,000 24,200 33,400 48,000 4,000 32,000 22,000

Retained Earnings .................................................................................... Income Summary..............................................................................

33,200 33,200

Pr. C-89 Closing entries Below is a selection of account balances for Howard Ltd. at December 31, 2023: Sales ....................................................... $856,000 Sales returns and allowances ............... 40,000 Cost of goods sold ................................. 456,000 Advertising expense .............................. 38,000 Salaries expense .................................... 113,000 Depreciation expense............................ 31,000 Insurance expense ................................. 9,000 Administrative expenses ....................... 10,000 All accounts have their normal balances. Instructions Prepare all necessary closing entries at December 31, 2023. Solution C-89 Sales.................................................................................................................. Sales returns and allowances .................................................................. Income summary ...................................................................................... Income summary ............................................................................................. Administrative expense ............................................................................ Advertising expense .................................................................................

856,000 40,000 816,000 657,000 10,000 38,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Depreciation expense ............................................................................... Cost of goods sold .................................................................................... Insurance expense .................................................................................... Salaries expense ....................................................................................... Income summary ............................................................................................. Retained earnings...........................................................

31,000 456,000 9,000 113,000 159,000 159,000

Pr. C-90 Adjusting entries Data relating to the balances of various accounts affected by adjusting or closing entries appear below. (The entries, which caused the changes in the balances, are not given.) You are asked to supply the missing journal entries, which would logically account for the changes in the account balances. 1. Interest receivable at January 1, 2023, was $2,000. During 2023, cash received from debtors for interest on outstanding notes receivable was $4,700. The 2023 statement of comprehensive income showed Interest Revenue of $4,900. You are to prepare the missing adjusting entry that must have been made, assuming reversing entries are not made. 2. Unearned rent at January 1, 2023 was $5,300, and at December 31, 2023 was $6,000. The records indicate cash receipts from rental sources during 2023 were $45,000, all of which were credited to the Unearned Rent Account. You are to prepare the missing adjusting entry. 3. Accumulated Depreciation—Equipment at January 1, 2023, was $120,000, and at December 31, 2023, was $150,000. During 2023, one piece of equipment was sold. The equipment had an original cost of $10,000 and was three-quarters depreciated when sold. You are to prepare the missing adjusting entry. 4. Allowance for doubtful accounts on January 1, 2023, was $50,000. The balance in the allowance account on December 31, 2023, after making the annual adjusting entry, was $65,000. During 2023 bad debts of $30,000 were written off. You are to provide the missing adjusting entry. 5. Prepaid rent at January 1, 2023, was $24,000. During 2023 rent payments of $160,000 were made and debited to Rent Expense. The 2023 statement of comprehensive income shows Rent Expense of $180,000. You are to prepare the missing adjusting entry that must have been made, assuming reversing entries are not made. 6. Retained earnings at January 1, 2023, was $150,000 and at December 31, 2023, it was $210,000. During 2023, cash dividends of $50,000 were paid, which were correctly debited to Retained Earnings. You are to prepare the missing closing entry to close the Income Summary account. Solution C-90 Appendix_C-52 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Interest Receivable ................................................................................... Interest Income ................................................................................. Interest income per books $4,900 Interest income received related to 2023 ($4,700 – $2,000) 2,700 Interest accrued $2,200

2,200

Unearned Rent Revenue .......................................................................... Rent Revenue .................................................................................... Cash receipts $45,000 Beginning balance 5,300 Ending balance (6,000) Rent revenue $44,300

44,300

Depreciation Expense............................................................................... Accumulated Depreciation—Equipment ......................................... Ending balance $150,000 Beginning balance 120,000 Difference 30,000 Write-off at time of sale 3 ÷ 4 × $10,000 (debit) 7,500 $ 37,500

37,500

Bad Debt Expense..................................................................................... Allowance for Doubtful Accounts ..................................................... Ending balance $65,000 Beginning balance 50,000 Difference 15,000 Written off 30,000 $45,000

45,000

Rent Expense ............................................................................................ Prepaid Rent ..................................................................................... Rent expense $180,000 Less cash paid 160,000 Reduction in prepaid rent account $ 20,000

20,000

Income Summary ..................................................................................... Retained Earnings ............................................................................. Ending balance $210,000 Beginning balance 150,000 Difference 60,000 Cash dividends 50,000 Net income must be $110,000

110,000

2,200

44,300

37,500

45,000

20,000

110,000

Difficulty: Medium Learning Objective: Explain the reasons for and prepare adjusting entries. Appendix_C-53 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Section Reference: Adjusting Entries Learning Objective: Prepare a 10-column work sheet and financial statements. Section Reference: Using a Work Sheet CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. C-91 Trial balance correction The Controller of SHD Corporation asks his assistant to correct the company's December 31, 2023, trial balance. The preliminary trial balance, which does not balance, is reproduced below: SHD Corporation Trial Balance December 31, 2023

Cash .................................................................................................................. Accounts Receivable ........................................................................................ Prepaid Insurance ............................................................................................ Equipment ........................................................................................................ Inventory .......................................................................................................... Accounts Payable ............................................................................................. Common Shares ............................................................................................... Sales.................................................................................................................. Salaries ............................................................................................................. Supplies ............................................................................................................ Depreciation Expense ......................................................................................

Debit $ 10,000 15,000 600 40,000 9,000

Credit

$ 11,590 110,000 17,100 64,000 2,150 2,550 __________ $143,300 $138,690

The assistant's review uncovered the following errors: 1. The accounts payable for the purchase of inventories in the amount of $6,560 was recorded as $5,650 in error. 2. Depreciation expense was understated by $450. 3. Office supplies were overstated by $150. 4. A collection from a customer in the amount of $4,000 was not posted to the receivable ledger. Instructions Prepare a corrected trial balance. Solution C-91 SHD Corporation Corrected Trial Balance December 31, 2023 Appendix_C-54 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Cash .................................................................................................................. Accounts Receivable ($15,000 – $4,000) .......................................................... Prepaid Insurance ............................................................................................ Equipment ........................................................................................................ Inventory .......................................................................................................... Accounts Payable ($11,590 + $6,560 – $5,650) ................................................ Common Shares ............................................................................................... Sales.................................................................................................................. Salaries ............................................................................................................. Supplies ($2,150 – $150)................................................................................... Depreciation Expense ($2,550 + $450).............................................................

Debit 10,000 11,000 600 40,000 9,000

Credit

12,500 110,000 17,100 64,000 2,000 3,000 __________ $139,600 $139,600

Difficulty: Medium Learning Objective: Explain how the type of ownership structure affects the financial statements. Section Reference: Financial Statements and Ownership Structure CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. C-92 Accrual accounting Prudence Corp.'s records provide the following information concerning certain account balances and changes in these account balances during the current year. Transaction information is missing from each item below. Instructions Prepare the entry to record the missing information for each account. (Consider each independently.) 1. Accounts Receivable: Jan 1, balance $30,000, Dec 31, balance $37,000, uncollectible accounts written off during the year, $4,000; accounts receivable collected during the year, $134,000. Prepare the entry to record sales for the year. 2. Allowance for Doubtful Accounts: Jan 1, balance $3,800, Dec 31 balance $7,700, uncollectible accounts written off during the year, $28,000. Prepare the entry to record bad debt expense. 3. Accounts Payable: Jan 1, balance $20,000, Dec 31, balance $33,000, purchases on account for the year, $110,000. Prepare the entry to record payments on account. 4. Interest Receivable: Jan 1 accrued, $3,000, Dec 31 accrued, $3,500, earned for the year, $14,000. Prepare the entry to record cash interest received. Solution C-92 1. Ending balance Beginning balance Difference Uncollectible accounts Receivables collected Sales for period

$ 37,000 30,000 7,000 4,000 134,000 $145,000

Ending balance Plus: Rec. collected Write-offs OR Less: Beginning balance Sales for period

$ 37,000 134,000 4,000 175,000 30,000 $145,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Accounts Receivable ................................................................................. Sales ............................................................................................... 2.

Ending balance Beginning balance Difference Write-off Adjusting entry

$ 7,700 3,800 3,900 28,000 $31,900

Ending balance Beginning balance Difference Purchases Payments

$ 33,000 20,000 13,000 110,000 $ 97,000

Revenue Earned Less: Dec. 31 accrual Plus: Jan. 1 accrual Cash received

$14,000 (3,500) 3,000 $13,500

$ 7,700 28,000 35,700 3,800 $31,900

OR Beginning balance Adjusting entry 31,900

31,900

Beginning balance Plus purchases

$ 20,000 110,000 130,000 33,000 $ 97,000

OR Less ending balance Payments

Accounts Payable ...................................................................................... Cash ................................................................................................ 4.

145,000

Ending balance Write-off

Bad Debts Expense .................................................................................... Allowance for Doubtful Accounts.................................................. 3.

145,000

Beginning balance Plus revenue earned OR Less ending balance Cash received

97,000 97,000 $ 3,000 14,000 17,000 3,500 $13,500

Cash............................................................................................................ 13,500 Interest Income.............................................................................. 13,500 (This entry assumes that the $14,000 interest earned was first recorded as a receivable.) Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. C-93 Ten-column work sheet The work sheet and trial balance of Santos Corporation is reproduced below. The information given below is relevant to the preparation of adjusting entries needed to both properly match revenues and expenses for the period and reflect the proper balances in the permanent and temporary accounts. Instructions Appendix_C-56 Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

As the accountant for Santos, you are to prepare adjusting entries based on the following data, entering the adjustments on the work sheet and completing the additional columns with respect to the income statement and statement of financial position. Carefully key your adjustments and label all items. (An adjusted trial balance is not required, but is included in the solution.) Round all calculations to the nearest dollar. (a) After an aging of accounts receivable, it was determined that three percent of the accounts will become uncollectible. (b) Depreciation is calculated using the straight-line method, with an eight-year life and $1,000 residual (salvage) value. (c) Salesmen are paid commissions of 11% of sales. Commissions on sales for the last week of December have not been paid. (d) The note was issued on October 1, 2023, with interest at 8%, due Feb. 1, 2024. (e) A physical inventory of supplies indicated $280 of supplies currently on hand. (f) Provisions of the company’s lease contract specify rent payments must be made one month in advance, with monthly payments of $900/mo. This provision has been complied with as at Dec. 31, 2023. Santos Corporation Work Sheet Year ended December 31, 2023 Trial Balance Accounts Dr. Cr. Cash $ 5,400 Trading investments 4,050 Accounts Receivable 40,000 Allow. for D.Accounts $420 Inventory 16,800 Supplies 1,040 Equipment 49,000 Accum. Depr.–Equip. 9,500 Accounts Payable 4,400 Notes Payable 4,250 Common Shares 40,000 Retained Earnings 25,340 Cost of Goods Sold 238,520 Office Salaries 20,800 Sales Comm. Exp, 29,000 Rent Expense 7,200 Misc. Expense 2,200 Sales _________ 330,100 Totals $414,010 $414,010

Adjustments Dr.

Cr.

Adjusted Trial Balance Dr.

Cr.

Statement of Comp. Income Dr.

Cr.

Statement of Fin. Position Dr

Cr.

Solution C-93 Santos Corporation Work Sheet December 31, 2023 Adjusted Trial

Statement of

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Trial Balance Adjustments Balance Comp. Income Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 5,400 5,400 Trading Investments 4,050 4,050 Accounts Receivable 40,000 40,000 Allow. for D.Accounts 420 (a)780 1,200 Inventory 16,800 16,800 Supplies 1,040 (e) 760 280 Equipment 49,000 49,000 Accum. Depr.–Equip. 9,500 (b) 6,000 15,500 Accounts Payable 4,400 4,400 Notes Payable 4,250 4,250 Common Shares 40,000 40,000 Retained Earnings 25,340 25,340 Cost of Goods Sold 238,520 238,520 238,520 Office Salaries 20,800 20,800 20,800 Sales Commission Exp. 29,000 (c) 7,311 36,311 36,311 Rent Expense 7,200 (f) 900 6,300 6,300 Misc. Expense 2,200 2,200 2,200 Sales _________ 330,100 330,100 330,100 Totals 414,010 414,010

Fin. Position Dr Cr. 5,400 4,050 40,000 1200 16,800 280 49,000 15,500 4,400 4,250 40,000 25,340

Bad Debt Expense (a) 780 780 780 Depr. Expense (b) 6,000 6,000 6,000 Sales Com. Payable (c) 7,311 7,311 7,311 Interest Expense (d) 85 85 85 Interest Payable (d) 85 85 85 Supplies Expense (e) 760 760 760 Prepaid Rent (f) 900________ 900 __________________ 900________ Totals 15,836 15,836 311,756 330,100 116,430 98,086 Net Income ___________________ 18,344 __________________ 18,344_________ _________ 18,344 Totals 428,186 428,186 330,100 330,100 116,430 116,430

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Santos Corporation Work Sheet Adjusted Trial Balance Accounts Debit Cash .................................................................................................................. 5,400 Trading Investments ........................................................................................ 4,050 Accounts Receivable ........................................................................................ 40,000 Allowance for Doubtful Accounts. ................................................................... Inventory .......................................................................................................... 16,800 Supplies ............................................................................................................ 280 Equipment ........................................................................................................ 49,000 Accumulated Depreciation–Equipment. ......................................................... Accounts Payable ............................................................................................. Notes Payable................................................................................................... Common Shares ............................................................................................... Retained Earnings ............................................................................................ Cost of Goods Sold ........................................................................................... 238,520 Office Salaries ................................................................................................... 20,800 Sales Commission Expense ............................................................................. 36,311 Rent Expense .................................................................................................... 6,300 Miscellaneous Expense .................................................................................... 2,200 Sales.................................................................................................................. _________ Bad Debt Expense ............................................................................................ Depreciation Expense ...................................................................................... Sales Com. Payable .......................................................................................... Interest Expense ............................................................................................... Interest Payable ............................................................................................... Supplies Expense ............................................................................................. Prepaid Rent ..................................................................................................... Totals ........................................................................................................

Credit

1,200

15,500 4,400 4,250 40,000 25,340

330,100

780 6,000 7,311 85 85 760 900 428,186

428,186

Adjusting entries and explanations 1. Bad Debt Expense...................................................................................... 780 Allowance for Doubtful Accounts ...................................................... 780 (3% of accounts receivable is 3% × $40,000, which is $1,200. Since the allowance account has a credit balance . of $420 before adjustment, $780 must be added to the allowance account.) 2.

Depreciation Expense................................................................................ Accumulated Depreciation–Equipment ........................................... ($49,000 – $1,000 is $48,000. One-eighth of $48,000 is $6,000.)

6,000 6,000

Sales Commission Expense .......................................................................... 7,311 Sales Commissions Payable ................................................................. 7,311 (11% of sales is 11% × $330,100, which is $36,311. The balance in the Sales Commissions account

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

is $29,000 ...... before adjustment, indicating that $7,311 of commissions are accrued but unpaid.) 4.

Interest Expense ........................................................................................... Interest Payable .................................................................................... ($4,250 × .08 × 3 ÷ 12 = $85)

85 85

Supplies Expense.......................................................................................... 760 Supplies................................................................................................. 760 (The balance of $1,040 in the Supplies account before adjustment less the correct ending balance of $280 is $760.)

Prepaid Rent ................................................................................................. 900 Rent Expense......................................................................................... 900 (Since the trial balance contains no account for prepaid rent, the $900 lease payment has apparently been debited to Rent Expense. An account must be set up for the Prepaid Rent.)

Difficulty: Medium Learning Objective: Prepare closing entries and consider other matters relating to the closing process. Section Reference: The Closing Process CPA: Financial Reporting Bloomcode: Analysis AACSB: Analytic

Pr. C-94 Preparation of financial statements The following is an alphabetical listing of Poison Ivy Inc.’s accounts at their year end December 31, 2023. All accounts have normal balances. Accounts Payable ............................................................................................. Accounts Receivable ........................................................................................ Accrued Liabilities ............................................................................................ Accumulated Depreciation–buildings ............................................................. Accumulated Depreciation–equipment .......................................................... Allowance for Doubtful Accounts .................................................................... Buildings ........................................................................................................... Cash .................................................................................................................. Common Shares ............................................................................................... Cost of Goods Sold ........................................................................................... Equipment ........................................................................................................ Income Tax Expense......................................................................................... Interest Expense ............................................................................................... Interest Income ................................................................................................ Inventory .......................................................................................................... Land .................................................................................................................. Note payable – due in 4 years .......................................................................... Operating Expenses .........................................................................................

$60,000 58,000 12,000 88,000 29,250 6,000 352,000 $25,000 250,000 285,600 117,000 2,250 3,400 19,750 79,000 125,000 125,000 137,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Preferred Shares............................................................................................... Prepaid Expenses ............................................................................................. Restricted Cash................................................................................................. Retained Earnings ............................................................................................ Sales.................................................................................................................. Trading Investments ........................................................................................ Unearned Revenue ...........................................................................................

100,000 7,000 21,000 124,250 420,000 40,000 18,000

Prepare the income statement and classified balance sheet assuming the company follows ASPE. Solution C-94 Poison Ivy Income Statement Year Ending December 31, 2023 Revenues .......................................................................................................... Cost of Goods Sold ........................................................................................... Gross Profit ....................................................................................................... Operating Expenses ......................................................................................... Operating Income ............................................................................................ Other Revenues and Expenses Interest Income ........................................................................................ Interest Expense ....................................................................................... Income before Tax............................................................................................ Income Tax ....................................................................................................... Net Income .......................................................................................................

$420,000 285,600 134,400 137,000 (2,600) 19,750 3,400

16,350 13,750 2,250 $11,500

Poison Ivy Balance Sheet December 31, 2023 Assets Current Assets Cash........................................................................................................... Trading Investments ................................................................................ Accounts Receivable ................................................................................ Less: Allowance for Doubtful Accounts ................................................... Inventory ................................................................................................... Prepaid Expenses ..................................................................................... Total Current Assets.......................................................................... Non-Current Assets Restricted Cash ......................................................................................... Land .......................................................................................................... Building ..................................................................................................... Accumulated Depreciation–building .......................................................

25,000 40,000 58,000 6000

52,000 79,000 7,000 203,000 21,000 125,000

352,000 8,000

264,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Equipment ................................................................................................ Accumulated Depreciation–equipment .................................................. Total Non-Current Assets ................................................................. Total Assets ...............................................................................

117,000 29,250

87,750 497,750 $700,750

Liabilities and Shareholder Equity Current liabilities Accounts Payable ..................................................................................... Accrued Liabilities .................................................................................... Unearned Revenues ................................................................................. Non-Current Liabilities Notes Payable ........................................................................................... Total Liabilities .................................................................................

$60,000 12,000 18,000

90,000 125,000 215,000

Shareholder Equity Preferred Shares ....................................................................................... Common Shares ....................................................................................... Retained Earnings .................................................................................... Total Shareholder Equity ................................................................. Total Liabilities and Shareholder Equity ..................................

100,000 250,000 *135,750 485,750 $700,750

*Beginning Retained Earnings $124,250 + Net Income $11,500 = Ending Retained Earnings $135,750 Difficulty: Medium Learning Objective: Prepare a 10-column work sheet and financial statements. Section Reference: Using a Work Sheet CPA: Financial Reporting CPA: Management Accounting Bloomcode: Analysis AACSB: Analytic

Pr. C-95 Preparation of financial statements Use the following information to prepare a multi-step Statement of Comprehensive Income, a Statement of Changes in Shareholders Equity, and a classified Statement of Financial Position. Charles Corporation Adjusted Trial Balance December 31, 2023 Cash .................................................................................................................. Accounts Receivable ........................................................................................ Inventory .......................................................................................................... Supplies ........................................................................................................... Equipment ........................................................................................................

Debit $ 33,400 87,400 90,000 7,000 266,000

Credit

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Accumulated Depreciation–Equipment .......................................................... 80,000 Notes Payable................................................................................................... 82,000 Accounts Payable ............................................................................................. 117,000 Common Shares ............................................................................................... 200,000 Retained Earnings ............................................................................................ 16,000 Sales.................................................................................................................. 1,494,400 Sales Returns and Allowances ......................................................................... 8,400 Cost of Goods Sold ........................................................................................... 994,800 Salaries Expense............................................................................................... 280,000 Advertising Expense ......................................................................................... 52,800 Utilities Expense ............................................................................................... 28,000 Repair Expense ................................................................................................. 24,200 Delivery Expense .............................................................................................. 33,400 Rent Expense .................................................................................................... 48,000 Supplies Expense ............................................................................................. 4,000 Depreciation Expense ..................................................................................... 32,000 Interest Expense ............................................................................................... 22,000 Interest Payable ............................................................................................... ___________ 22,000 Totals.......................................................................................................... $2,011,400 $2,011,400 Other Data: 1. Salaries expense is 70% selling and 30% administrative. 2. Rent expense and utilities expense are 80% selling and 20% administrative. 3. $60,000 of notes payable are due for payment within 12 months. 4. Repair expense is 100% administrative. Solution C-95 Charles Corporation Statement of Comprehensive Income Year Ended December 31, 2023 Sales revenue Sales ..................................................................................... Less: Sales returns and allowances .................................... Net sales ...................................................................................... Cost of goods sold ....................................................................... Gross profit .................................................................................. Operating expenses Selling expenses Salaries expense .......................................................... ($280,000 x 70%) Advertising expense ..................................................... Rent expense................................................................ ($48,000 x 80%) Delivery expense .......................................................... Utilities expense........................................................... ($28,000 x 80%)

$1,494,400 8,400 1,486,000 994,800 491,200

$196,000 52,800 38,400 33,400 22,400

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Depreciation expense .................................................. Supplies expense ......................................................... Total selling expenses .......................................... Administrative expenses Salaries expense .......................................................... ($280,000 x 30%) Repair expense............................................................. Rent expense................................................................ ($48,000 x 20%) Utilities expense........................................................... ($28,000 x 20%) Total admin. expenses ......................................... Total operating expenses ............................. Loss from operations .................................................................. Other expenses and losses Interest expense .................................................................. Net loss ........................................................................................

32,000 4,000 $379,000 84,000 24,200 9,600 5,600 123,400 502,400 11,200 22,000 $ 33,200

Charles Corporation Statement of Changes in Shareholders' Equity for Year Ended December 31, 2023 Common Shares

Total Beginning, Jan 1, 2023 Net loss for 2023 Other comprehensive income Comprehensive income

$216,000

Ending, Dec 31, 2023

182,800

Comprehensive Income

Retained Earnings (Deficit)

$ 16,000

(33,200) 0 (33,200)

(33,200)

$200,000

(33,200)

200,000

(17,200)

Charles Corporation Statement of Financial Position December 31, 2023 Assets Current assets Cash...................................................................................... Accounts receivable ............................................................ Inventory .............................................................................. Supplies ............................................................................... Total current assets ..................................................... Non-current assets Equipment ........................................................................... Accumulated depreciation–equipment .............................

$ 33,400 87,400 90,000 7,000 217,800 $266,000 80,000

186,000

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

Total assets ..................................................................

$403,800

Liabilities and Shareholders’ Equity Current liabilities Current Portion of Debt ....................................................... Accounts payable ................................................................ Interest payable ................................................................... Total current liabilities ................................................ Non-current liabilities Notes payable ...................................................................... Total liabilities ............................................................. Shareholders’ equity Common Shares .................................................................. Retained Earnings ............................................................... Total liabilities and shareholders’ equity ...........................

$ 60,000 117,000 22,000 199,000 22,000 221,000 $200,000 (17,200)

182,800 $403,800

Difficulty: Medium Learning Objective: Prepare a 10-column work sheet and financial statements. Section Reference: Using a Work Sheet CPA: Financial Reporting CPA: Management Accounting Bloomcode: Analysis AACSB: Analytic

Test Bank for Intermediate Accounting, Thirteenth Canadian Edition

COMPREHENSIVE EXAMINATION A PART 1 (CHAPTERS 1–6)

Problem

CPA

Topics

Blooms

Approximate Time

A-1

cpa-t001 Multiple Choice (Various Topics)

1, 3, 6, 8, 10—blooms001 2, 4, 5, 7, 9—blooms002

15 min.

A-2

cpa-t001 Adjusting and Reversing* Entries

blooms003

30 min.

A-3

cpa-t001 cpaDefinitions and Key Concepts e003

blooms002

10 min.

A-4

cpa-t001 Discontinued Operations

blooms003

10 min.

A-5

cpa-t001 Financial Statement Classifications

blooms002

10 min.

A-6

cpa-t001 Income and Retained Earnings Statement

blooms003

35 min.

A-7

cpa-t001 Percentage-of-Completion Method

blooms003

10 min.

120 min.

All questions are AACSB: Analytic and Question A-3 is AACSB: Communication and Analytic

A-2

Intermediate Accounting, Thirteenth Canadian Edition

Problem A-1 Multiple Choice (Various Topics) Choose the best answer for each of the following questions and enter the identifying letter in the space provided. ___1.

Which of the following entities is least likely to be a major player in developing financial reporting standards in Canada? a. International Accounting Standards Board b. (Canadian) Accounting Standards Board c. The Federal government d. Financial Accounting Standards Board

___2.

Financial statements are prepared for the end user. Who is responsible for the preparation of financial statements? a. management b. external auditors c. shareholders d. standard setters

___3. Which of the following is not an objective of financial reporting? a. to provide information about an entity’s economic resources, obligations, and equity/net assets b. to provide information that is helpful to investors and creditors and other users in making resource allocation decisions and/or assessing management stewardship c. to provide information that is useful in assessing the economic performance of the entity d. to promote information asymmetry ___4.

A local businessman owns several different companies. His accountant prepares separate annual financial statements for each of these businesses. This is an application of which of the following principle or assumption? a. full disclosure b. periodicity c. economic entity d. matching

___5.

When knowledgeable, independent users achieve similar results or reach consensus regarding the accounting for a particular transaction, which enhancing qualitative characteristic is said to exist? a. comparability b. verifiability c. relevance d. understandability

___6.

A trial balance a. is a list of general ledger account names. b. proves that all transactions have been recorded. c. can be used for the preparation of financial statements. d. can never be used for the preparation of financial statements.

A-3

Comprehensive Examination-A

___7.

Which of the following is correct regarding income statement presentation? a. Income from continuing operations is the last line shown on the income statement. b. IFRS does not allow the use of a single-step income statement. c. Unusual gains or losses must be presented in a separate section after income from continuing operations. d. IFRS requires that both basic and diluted earnings per share be presented, whereas ASPE does not.

___8.

IFRS requires that expenses are presented in the income statement a. by nature or by function. b. by amount or in alphabetical order. c. by geographical area or by the single-step method. d. by current or non-current.

___9.

Which of the following should not be considered as a current asset on the statement of financial position? a. instalment notes receivable due over 18 months in accordance with normal trade practice b. prepaid taxes that cover assessments of the following operating cycle of the business c. equity or debt securities held to finance future construction of additional facilities d. spare parts and supplies inventories

___10. The discrete earnings process is one that a. takes place over several accounting periods. b. has a critical event. c. where substantial completion can be deferred. d. must be accounted for by the completed-contract method.

*Problem A-2 Adjusting and Reversing Entries At December 31, 2023, Hazelnut Corp.’s unadjusted trial balance was as follows: Cash ............................................................................................. $ 39,590 Accounts Receivable ..................................................................... 69,000 Allowance for Expected Credit Losses .......................................... Merchandise Inventory .................................................................. 54,720 Prepaid Rent ................................................................................. 24,000 Investment in Pecan Corp. Bonds ................................................. 70,000 Plant and Equipment ..................................................................... 156,000 Accumulated Depreciation ............................................................ Accounts Payable ......................................................................... Bonds Payable .............................................................................. Common Shares ........................................................................... Retained Earnings......................................................................... Sales Revenue .............................................................................. Cost of Goods Sold ....................................................................... 154,400 Transportation-Out ........................................................................ 11,000 Salaries and Wages Expense ....................................................... 32,000 Interest Expense ........................................................................... 2,040 Rent Revenue ...............................................................................

500

14,740 11,370 90,000 170,000 97,180 222,000

14,400

A-4

Intermediate Accounting, Thirteenth Canadian Edition

Miscellaneous Expense................................................................. Insurance Expense .......................................................................

890 6,550 $620,190 $620,190

Additional data: 1. The balance in the Insurance Expense account contains the premium costs of three policies: Policy 1, remaining cost of $2,550, 1-yr. term, effective May 1, 2022; Policy 2, original cost of $2,700, 3-yr. term, effective Oct. 1, 2023; Policy 3, original cost of $1,300, 1-yr. term, effective Jan. 1, 2023. 2. On September 30, 2023, Hazelnut received $14,400 rent from a lessee for an 18-month lease beginning on that date, which was credited to the Rent Revenue account. 3. All depreciable assets are depreciated at 10% per year. However, any acquisitions and disposals during the year are depreciated at half this rate. There were no acquisitions of PPE during 2023. On December 31, 2022, the balance in the Plant and Equipment account was $230,000. 4. On December 28, 2023, the bookkeeper incorrectly credited Sales Revenue for a receipt on account from a regular customer of $10,000. 5. At December 31, 2023, salaries accrued but unpaid were $4,200. 6. Based upon an aging of the accounts, Hazelnut estimates that 5% of the Accounts Receivable balance on December 31, 2023 will become uncollectible. 7. On August 1, 2023, Hazelnut purchased, as a temporary investment, $70,000, 6% bonds of Pecan Corp. at par. The bonds mature on August 1, 2026. Interest payment dates are July 31 and January 31. 8. On April 30, 2023, Hazelnut rented a warehouse for $2,000 per month, paying $24,000 in advance. Instructions a. Record the necessary correcting and adjusting entries. b. Indicate which of the adjusting entries may be reversed at the beginning of 2024. Problem A-3 Definitions and Key Concepts Provide clear, concise answers for the following: 1. Explain the difference between permanent accounts and temporary accounts. 2. Identify the 5-step process that companies should use to ensure that revenue is measured and reported correctly under the asset-liability approach. 3. Explain the difference between the traditional and expected cash flow approaches within the discounted cash flow model. 4. Explain the merits of classified financial statements. 5. Explain the concept of free cash flow. 6. Explain the conceptual difference between the earnings and asset-liability (contract-based) approaches to accounting for revenues Problem A-4 Discontinued Operations During calendar 2023, Macadamia Ltd. entered into an agreement to sell its Trucking Division to Poodle Ltd., in order to focus its efforts on expansion of its other divisions. For purposes of income statement reporting, the Trucking Division qualifies as a separate component of the business. The Trucking Division incurred a net loss of $250,000 from the beginning of the year to the date of

Comprehensive Examination-A

A-5

sale, December 15, 2023. The combined assets of the Trucking Division had a book value of $7,340,000 and were sold for $9,000,000 on December 15, 2023. Assume Macadamia has an income tax rate of 40%. Instructions Calculate the amounts Macadamia should report for the following items in the Discontinued Operations section of the December 31, 2023 income statement: a. Loss on Operation of Trucking Division. b. Gain/Loss on Disposal of Trucking Division. Problem A-5 Financial Statement Classifications Financial statement classifications used by Cashew Corp. follow: Statement of Financial Position Income or Retained Earnings Statement a. Current Assets j. Sales Revenue b. Investments k. Cost of Goods Sold c. Property, Plant, and Equipment l. Operating Expenses d. Intangible Assets m. Other Revenues and Gains e. Other Assets n. Other Expenses and Losses f. Current Liabilities o. Retained Earnings g. Long-term Debt p. Not on the statements h. Capital Shares i. Retained Earnings Instructions Specify, to the left of each account or item below, the letter of the financial statement classification the account would appear in. Use only the classifications shown. ____ 1. Preferred Shares

___ 16. Merchandise Inventory

____ 2. Loss on Disposal of Equipment

___ 17. Salaries and Wages Expense

____ 3. Buildings

___ 18. Merchandise on order with supplier

____ 4. Office Supplies Expense

___ 19. Interest Revenue

____ 5. Allowance for Expected Credit Losses ___ 20. Selling Expense ____ 6. Notes Payable—Short Term

___ 21. Interest Expense

____ 7. Accumulated Depreciation—Buildings

___ 22. Taxes Payable

____ 8. Mortgage Payable due 2030

___ 23. Insurance Expense

____ 9. Depletion Expense

___ 24. Advertising Expense

____ 10. Freight-Out

___ 25. Long-Term Investments

____ 11. Sales

___ 26. Accounts Receivable

A-6

Intermediate Accounting, Thirteenth Canadian Edition

____ 12. Dividends Declared

_____ 27. Land

____ 13. Retained Earnings

_____ 28. Accounts Payable

____ 14. Cash

_____ 29. Error made in calculating prior year’s depreciation expense

___ 15. Sales Discounts

_____ 30. Gain from early retirement of debt

Problem A-6 Income and Retained Earnings Statements Peanut Corporation is a private corporation using ASPE. At December 31, 2023, an analysis of the accounts and discussions with company officials included the following account balances and other information: Accounts receivable ........................................................................................ $ 102,000 Accrued interest payable ................................................................................. 1,000 Dividend revenue ............................................................................................ 9,000 Sales ............................................................................................................... 600,000 Purchase discounts ......................................................................................... 9,000 Purchases ....................................................................................................... 360,000 Accounts payable ............................................................................................ 30,000 Loss from fire (net of $7,000 tax)..................................................................... 21,000 Selling expenses ............................................................................................. 64,000 Common shares (20,000 issued; no change during 2023) .............................. 200,000 Accumulated depreciation ............................................................................... 90,000 Long-term note payable (due Oct 1, 2027) ...................................................... 100,000 Inventory, Jan 1, 2023 ..................................................................................... 76,000 Inventory, Dec 31, 2023 .................................................................................. 62,500 Supplies inventory ........................................................................................... 40,000 Unearned service revenue .............................................................................. 3,000 Land ................................................................................................................ 370,000 Cash ............................................................................................................... 60,000 Franchise ........................................................................................................ 100,000 Retained earnings, Jan 1, 2023....................................................................... 135,000 Interest expense.............................................................................................. 8,500 Cumulative effect of change from straight-line to accelerated depreciation (net of $6,000 tax) ....................................................................... (18,000) General and administrative expenses ............................................................. 80,000 Dividends declared and paid ........................................................................... 15,000 Allowance for Expected Credit Losses ............................................................ 5,000 Machinery and equipment ............................................................................... 225,000 Unless indicated otherwise, you may assume a 25% income tax rate. General and administrative expenses include depreciation. There are no preferred shares issued. Instructions a. Prepare, in good form, a multiple-step income statement. b. Prepare, in good form, a retained earnings statement.

Comprehensive Examination-A

A-7

Problem A-7 Journal Entries—Percentage-of-Completion Walnut Corp. was awarded a contract to build a bridge in a suburb of Vancouver at a total contract price of $10,000,000. The estimated total costs to complete the project were $8,000,000. Walnut uses the percentage-of-completion method for all such contracts. Instructions a. Prepare the entry to record construction costs of $4,800,000. b. Prepare the entry to record progress billings of $2,200,000. c. Prepare the entry to recognize the profit that can be recognized to date.

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Intermediate Accounting, Thirteenth Canadian Edition

Solutions—Comprehensive Examination A Problem A-1 Solution 1. c 2.

10. b

Problem A-2 Solution a. 1. Prepaid Insurance ......................................................................... 2,475 Insurance Expense................................................................. 2,475 Explanation: Both Policies 1 and 3 have expired, so their costs stay in Insurance Expense. The monthly premium for Policy 2 is $2,700 ÷ 36 = $75. At Dec 31/20, the unexpired portion is 33 months x $75 = $2,475 and needs to be transferred to the asset account. 2. Rent Revenue ............................................................................... 12,000 Unearned Rent ....................................................................... 12,000 Explanation: Monthly rent is $14,400 ÷ 18 = $800. At Dec 31/23, 15 months x $800 = $12,000 remains unearned, and needs to be transferred to the liability account. 3. Depreciation Expense ................................................................... 19,300 Accumulated Depreciation ...................................................... Explanation: Equipment retired during 2023 = $230,000 – $156,000 = $74,000. 10% of $156,000 = $15,600 5% of $74,000 = 3,700 Total depreciation = $19,300 4. Sales Revenue .............................................................................. Accounts Receivable ..............................................................

10,000

5. Salaries and Wages Expense ....................................................... Salaries and Wages Payable..................................................

4,200

6. Loss on Impairment.......................................................................

2,450

19,300

10,000

4,200

A-9

Comprehensive Examination-A

Allowance for Expected Credit Losses ................................... 2,450 Explanation: Corrected ending A/R balance: $69,000 – $10,000 = $59,000. 5% x $59,000 = $2,950. Since the unadjusted Allowance is $500 Cr, the adjustment is $2,950 – $500 = $2,450 7. Interest Receivable ....................................................................... Interest Revenue .................................................................... Explanation: $70,000 × .06 × 5 ÷ 12 = $1,750

1,750

8. Rent Expense ............................................................................... Prepaid Rent .......................................................................... Explanation: 8 months expired at $2,000 per month = $16,000

16,000

1,750

16,000

Items 1, 2, 5, and 7: Items No. 1 and No. 2 represent prepaid items that were initially recorded in temporary accounts. Items No. 5 and No. 7 represent accrued items.

Problem A-3 Solution 1. Permanent accounts (also called real accounts) are assets, liability, and equity accounts. Temporary accounts include revenue, expense, and dividend accounts. Permanent accounts are not closed, while temporary accounts are closed at the fiscal year end. 2.

The 5-step process under the asset-liability approach includes the following: 1. Identify the contract with customers. 2. Identify the separate performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the separate performance obligations. 5. Recognize revenue when each performance obligation is satisfied.

Traditional approach: The discount rate reflects all risks in the cash flows, but the cash flows are assumed to be certain. This is sometimes referred to as the “discount rate adjustment technique.” Expected cash flow approach: A risk-free discount rate is used to discount cash flows that have been adjusted for uncertainty. This is sometimes referred to as the “expected present value technique.”

Classification in financial statements increases their information content and aids in the ease of analysis. This is accomplished through the grouping of items with similar characteristics and separating items with different characteristics.

Free cash flow can be defined as a measure of a company's level of financial flexibility and is calculated as cash flow from operating activities less capital expenditures and dividends.

The earnings approach focuses on the earnings process itself and how value is added. The asset-liability (contract-based) approach focuses on the creation of contractual rights and obligations that are created by sales contracts.

Problem A-4 Solution

A - 10 Intermediate Accounting, Thirteenth Canadian Edition

Amount reported for “Loss on Operation of Trucking Division” equals loss incurred from beginning of year to date of sale (Dec 15/20), net of tax. Loss on Operation of Trucking Division ......................................... $150,000 (net of tax of $100,000, ($250,000 × 40%))

Amount reported for “Gain/Loss on Disposal of Trucking Division” equals the gain or loss on the sale of the assets. Gain on Disposal of Trucking Division ........................................... $996,000 (net of tax of $664,000, ($1,660,000 × 40%))

Problem A-5 Solution 1. h 2.

k or l

10. l 11. j 12. o 13. i and o 14. a 15. j 16. a 17. l 18. p 19. m 20. l

Comprehensive Examination-A

A - 11

21. n 22. f 23. l 24. l 25. b 26. a 27. c 28. f 29. p 30. m

Problem A-6 Solution a. PEANUT CORPORATION Income Statement For the Year Ended December 31, 2023 Sales .................................................................................................... Cost of goods sold: Merchandise inventory, Jan. 1....................................................... Purchases ..................................................................................... Less purchase discounts ............................................................... Net purchases ........................................................................ Merchandise available for sale ...................................................... Less merchandise inventory, Dec. 31............................................ Cost of goods sold.................................................................. Gross profit on sales ............................................................................ Operating expenses: Selling expenses ........................................................................... General and administrative expenses ........................................... Total operating expenses ....................................................... Income from operations ....................................................................... Other revenues and gains: Dividend revenue .......................................................................... Other expenses and losses Interest expense............................................................................ Loss from fire* ............................................................................... Income before income tax .................................................................... Income tax**.................................................................................. Net income for the year ........................................................................

$600,000 $76,000 360,000 (9,000) 351,000 427,000 (62,500) 364,500 235,500 64,000 80,000 144,000 91,500 9,000 (8,500) (28,000)

(36,500) 64,000 (16,000) $ 48,000

A - 12 Intermediate Accounting, Thirteenth Canadian Edition

Earnings per common share (optional)***

$2.40

* actual loss $21,000 + $7,000 = $28,000 ** $64,000 x 25% = $16,000 *** $48,000 ÷ 20,000 = $2.40 b. PEANUT CORPORATION Retained Earnings Statement For the Year Ended December 31, 2023 Retained earnings, January 1, as reported........................................... Cumulative effect of change in depreciation method, net of applicable taxes of $6,000 .................................................... Retained earnings, January 1, as adjusted .......................................... Add: Net income .................................................................................. Subtotal................................................................................................ Deduct: Dividends declared and paid ................................................... Retained earnings, December 31, 2023 ...............................................

$135,000 (18,000) 117,000 48,000 165,000 (15,000) $150,000

Problem A-7 Solution a. Contract Asset/Liability .................................................................. 4,800,000 Materials, Cash, Payables, etc. .............................................. 4,800,000 b.

Accounts Receivable ..................................................................... 2,200,000 Contract Asset/Liability ........................................................... 2,200,000

Contract Asset/Liability .................................................................. 6,000,000 Revenue from Long-term Contract ......................................... 6,000,000 Construction Expense Contract Asset/Liability

4,800,000 4,800,000

Comprehensive Examination-A

A - 13

LEGAL NOTICE

COMPREHENSIVE EXAMINATION B PART 2 (CHAPTERS 7–8)

Problem B-1

B-2

CPA

Topics

cpa-t001 Multiple Choice (Various Topics)

cpa-t001 Key Concepts and Definitions cpae003

Blooms

Approximate Time

1, 5, 6—blooms001 2-4, 7-10—blooms003

15 min.

blooms002

10 min.

B-3

cpa-t001 Note Receivable

blooms002

20 min.

B-4

cpa-t001 cpaFIFO – Perpetual vs. Periodic e003

blooms002

20 min.

B-5

cpa-t001 Year-end Inventory Cut off

blooms002

25 min.

B-6

cpa-t001 Gross Profit Method

blooms002

10 min.

B-7

cpa-t001 Bank Reconciliation*

blooms002

20 min.

120 min. All questions are AACSB Analytic and Questions B-2 and B-4 are Communication and Analytic .

*This topic is dealt with in an Appendix to the chapter.

B-2

Intermediate Accounting, Thirteenth Canadian Edition

Problem B-1 Multiple Choice (Various Topics) For each of the following questions, select the letter of the statement that best answers the question and write it on the line to the left of the question. ___1.

When a customer account is recognized as uncollectible and written off, under the allowance method a. it is always debited to Allowance for Expected Credit Losses. b. it is always debited to Bad Debt Expense. c. it may be debited to Bad Debts Expense if the amount is immaterial. d. it is only debited to Allowance for Expected Credit Losses under IFRS.

___2.

The following information is available for Steelhead Company: Allowance for Expected Credit Losses at December 31, 2022.................. Credit sales during 2023........................................................................... Accounts receivable deemed worthless and written off during 2023 .........

$ 8,000 400,000 9,000

As a result of a review and aging of accounts receivable in early January 2024 it has been determined that an allowance for expected credit loss of $7,500 is needed at December 31, 2023. What amount should Steelhead record as loss on impairment for the year ended December 31, 2023? a. $6,500 b. $7,500 c. $8,500 d. $15,500 ___3.

The stated interest rate is also referred to as the a. effective interest rate. b. yield. c. market rate. d. coupon rate.

___4.

When the stated rate is higher than the effective interest rate, a. the note is exchanged at a discount. b. the excess is amortized by debiting Notes Receivable and crediting the amount of interest income that is recognized. c. the note’s fair value is more than its face value. d. the note’s fair value is equal to its future value.

___5.

“Net realizable value” of an inventory item is now strictly defined as a. the estimated selling price of the item. b. the estimated selling price less estimated costs to sell and complete the item. c. the estimated selling price plus estimated costs to sell and complete the item. d. the original cost price less estimated costs to sell and complete the item.

___6.

In a period of rising prices, the inventory method that tends to give the highest reported inventory value on the statement of financial position is a. FIFO. b. moving average. c. specific identification. d. weighted-average.

Comprehensive Examination B

___7.

B-3

The following information is available for Varden Inc. for last year: Freight-in ................................................................................ $ 20,000 Purchase returns .................................................................... 62,000 Selling expenses .................................................................... 110,000 Ending inventory..................................................................... 310,000 If the cost of goods sold is equal to 400% of selling expenses, what was the cost of goods available for sale? a. $390,000 b. $420,000 c. $720,000 d. $750,000

___8.

Since it began operations ten years ago, Carp Corp. has been using the weighted average method of inventory valuation. Its 2023 ending inventory was $28,000, but it would have been $70,000 if FIFO had been used. Thus, if FIFO had been used, Carp’s income before income taxes would have been a. $42,000 less over the ten-year period. b. $42,000 greater over the ten-year period. c. $42,000 greater in 2023. d. $42,000 less in 2023.

___9.

The 2023 financial statements of Bass Ltd. reported beginning inventory of $260,000, ending inventory of $290,000, and cost of goods sold of $1,300,000 for the year. To one decimal, Bass’s inventory turnover ratio for 2023 is a. 0.2 times. b. 4.5 times. c. 4.7 times. d. 5.0 times.

__*10. If the month-end bank statement shows a balance of $49,000, outstanding cheques are $16,000, a deposit of $7,000 was in transit at month end, and a cheque for $800 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $48,800. b. $40,800. c. $40,200. d. $40,000.

Problem B-2 Definitions and Key Concepts Provide clear, concise answers for the following: 1. What are cash and cash equivalents and how are they reported? 2. Identify the main differences between ASPE and IFRS with respect to the accounting for receivables. 3. Identify the inventory categories of a manufacturing company and describe how they are related.

B-4

Intermediate Accounting, Thirteenth Canadian Edition

Problem B-3 Note Receivable On December 31, 2022, Tangerine Corp. sold product to Orange Limited, accepting a 3%, fouryear promissory note of $400,000 in exchange. Interest is payable annually on December 31, starting December 31, 2023. Tangerine Corp. normally pays 6% interest to borrow funds. Orange Limited, however, normally pays 8% to borrow funds. The product sold is carried on Tangerine’s books at a manufactured cost of $255,000. Assume Tangerine uses the perpetual inventory system. Instructions On Tangerine’s books: a. Prepare the required journal entries to record the transaction at December 31, 2022. Assume that the effective interest method is used. Use the interest tables on the following page (if needed) and round all values to the nearest dollar. b. Prepare all appropriate entries for 2021 in relation to this note. c. Prepare all appropriate entries for 2024 in relation to this note. For use on Problem B-3 (if needed) Table 1 Future Value of 1 Periods 1 2 3 4 5

2% 1.02000 1.04040 1.06121 1.08243 1.10408

3% 1.03000 1.06090 1.09273 1.12551 1.15927

4% 1.04000 1.08160 1.12486 1.16986 1.21665

6% 1.06000 1.12360 1.19102 1.26248 1.33823

8% 1.08000 1.16640 1.25971 1.36049 1.46933

6% 0.94340 0.89000 0.83962 0.79209 0.74726

8% 0.92593 0.85734 0.79383 0.73503 0.68058

Table 2 Present Value of 1 Periods 1 2 3 4 5

2% 0.98039 0.96117 0.94232 0.92385 0.90573

3% 0.97087 0.94260 0.91514 0.88849 0.86261

4% 0.96154 0.92456 0.88900 0.85480 0.82193

Table 3 Future Value of Ordinary Annuity of 1 Periodic Rents 1 2 3 4 5

2% 1.00000 2.02000 3.06040 4.12161 5.20404

3% 1.00000 2.03000 3.09090 4.18363 5.30914

4% 1.00000 2.04000 3.12160 4.24646 5.41632

6% 1.00000 2.06000 3.18360 4.37462 5.63709

8% 1.00000 2.08000 3.24640 4.50611 5.86660

Table 4 Present Value of Ordinary Annuity of 1 Periodic Rents

Comprehensive Examination B

1 2 3 4 5

0.98039 1.94156 2.88388 3.80773 4.71346

0.97087 1.91347 2.82861 3.71710 4.57971

0.96154 1.88609 2.77509 3.62990 4.45182

0.94340 1.83339 2.67301 3.46511 4.21236

B-5

0.92593 1.78326 2.57710 3.31213 3.99271

Problem B-4 Journal Entries for Perpetual and Periodic Inventory Systems Lime Corporation is a supplier of electronic components used in the manufacture of computers. The company uses the FIFO cost flow method. During the month of September 2023, Lime’s inventory records for part LIM-0325, showed the following transactions: Date

Transaction

Units Purchased

Unit Cost

Sep. 1 Sep. 8 Sep. 17 Sep. 23 Sep. 30

Balance Purchase Sale Sale Purchase

900 400

$1.65 $1.67

650

Units Sold

Unit Selling Price

(800) (250)

$4.25 $4.30

$1.75

Instructions a. Assuming Lime uses a perpetual inventory system; prepare the journal entries for each of the above listed transactions. b. Assuming Lime uses a periodic inventory system; explain how the journal entries as compared to part a. would differ. Be specific. Do not prepare journal entries. c. What would be the difference in total cost of goods sold between parts a. and b.? Explain your answer.

Problem B-5 Year-end Inventory Cut-off Lemon Corp.'s business year ends on December 31. It uses the periodic inventory system. Listed below are purchase transactions that occurred during the last few days of 2023 or during the first few days of 2024. The inventory, determined by physical count, was taken after the close of business on December 31, 2023. The only adjusting entry recorded to date has been to enter the December 31 physical inventory on the books and to remove the beginning inventory. Instructions a. On the accompanying chart, indicate the effect of each of the following transactions on the ending inventory and on reported net income for 2023, by writing the words overstated, understated, or no effect in the appropriate column. Both columns must be answered for each transaction. b. Prepare all necessary correcting entries for 2023. Dec. 31/23 Physical Inventory 1.

2023 Income

An invoice for $6,000, terms f.o.b. shipping point, was received and recorded on Dec. 30. The invoice shows that the merchandise was shipped on Dec. 29, and the receiving

B-6

Intermediate Accounting, Thirteenth Canadian Edition

report indicates the merchandise was received on Jan. 2.

_______

An invoice for $250, terms f.o.b. shipping point, was received and recorded on Dec. 30. The invoice shows that merchandise was shipped on Dec. 29, and the receiving report shows the merchandise was received on Dec. 31.

_______

An invoice for $1,000, terms f.o.b. shipping point, was received and recorded on Jan. 2. The invoice shows the merchandise was shipped on Dec. 30, and the receiving report indicates the merchandise was received on Dec. 31.

_______

An invoice for $800, terms f.o.b. destination, was received and recorded on Dec. 30. The receiving report shows the merchandise was received on Jan. 2.

_______

An invoice for $150, terms f.o.b. destination, was received and entered Dec. 29. The receiving report indicates that the merchandise was received Dec. 31.

_______

An invoice for $400, terms f.o.b. destination, was received and recorded on Jan. 2. The receiving report indicates the merchandise was received on Dec. 31.

_______

Merchandise costing $14,000 and with a selling price of $20,000 was on consignment to Grapefruit Ltd., and was on that company's premises on Dec. 31. No entry has been yet been made regarding this consignment. _______

_______

Problem B-6 Gross Profit Method On December 31, 2023, the entire inventory of Clementine Corp. was destroyed by a flood. Sales and purchases for the year had been $2.6 million and $1.2 million, respectively. The beginning inventory (Jan. 1, 2023) was $450,000. In the past, Clementine’s gross profit has averaged 40%. Clementine uses the periodic inventory system. Instructions a. Calculate the estimated cost of inventory destroyed. b. Prepare journal entries at December 31, 2023 to close the sales and related cost of goods sold accounts.

*Problem B-7 Bank Reconciliation Following is the general format of a bank reconciliation with the various categories numbered (1) through (4). Balance per bank statement Items to be added: Items to be deducted: Corrected bank balance

$XX,XXX (1) (2) $YY,YYY

Comprehensive Examination B

Balance per books Items to be added: Items to be deducted: Corrected cash balance

B-7

$AA,AAA (3) (4) $YY,YYY

Instructions a. To the left of the following items, write the number of the place in which the reconciling items would appear on a November bank reconciliation. If any items would not appear on the bank reconciliation, put an NA beside the item. ____ 1. The October bank service charge of $25 was recorded in the books in November. ____ 2. An NSF cheque for $450 was returned with the November bank statement. This cheque will be redeposited in December. The firm has not yet made an entry for this. ____ 3. The first $5,000 deposit shown on the November bank statement was recorded in the books on October 31. ____ 4. The November bank service charge of $21 is included on the November bank statement. ____ 5. The bank collected a $4,500 note receivable for the firm during November plus $125 interest. The firm has not yet recorded this receipt. ____ 6. $15,000 of cheques written in November have not cleared the bank by November 30. ____ 7. All $18,000 of cheques written in October, which had not cleared the bank at October 31, cleared the bank in November. ____ 8. A cheque written in November was recorded in the books at $1,330. However, this cheque cleared the bank in November for $1,303 (which was the correct amount). This cheque was issued as a payment on account. ____ 9. A $15,000 deposit in transit at November 30 is included in the books, but does not show on the bank statement. ____ 10. The bank, in error, credited the firm’s account for $300 in November for another firm’s deposit. b.

Prepare any journal entries required by the information contained in a. above.

B-8

Intermediate Accounting, Thirteenth Canadian Edition

Solutions — Comprehensive Examination B Problem B-1 Solution 1. a 2.

*10. b Solutions to Computational Multiple Choice Questions: 2. $9,000 – $8,000 + $7,500 = $8,500 7.

$310,000 + (400% x $110,000) = $750,000

$1,300,000 ÷ (260,000 + $290,000) ÷ 2 = 4.7

*10. $49,000 – $16,000 + $7,000 + $800 = $40,800

Problem B-2 Solution 1. Cash and cash equivalents are financial assets. Cash consists of coins, currency, and available funds on deposit at a bank, as well as negotiable instruments. Cash equivalents are highly liquid short-term investments that can be exchanged for known amounts of cash. Together they are usually reported under current assets as “cash and cash equivalents” in the statement of financial position unless the funds are restricted or otherwise encumbered. 2.

The two standards are for the most part very similar. Differences include the disclosure requirements, which are more extensive under IFRS, and the use of the effective interest method for the amortization of discounts and premiums for financial assets (required by IFRS, but optional under ASPE).

Manufacturing companies typically have three inventory categories: raw materials, work-inprocess, and finished goods. Amounts for goods and materials that are on hand but have not yet gone into production are reported as raw materials inventory. The cost of the raw material on which production has started but is not yet complete, plus the direct labour cost applied specifically to this material and its applicable share of manufacturing overhead costs, make up the work-in-process inventory. The costs associated with the completed but still

B-9

Comprehensive Examination B

unsold units on hand are reported as finished goods inventory.

Problem B-3 Solution a. Dec 31/22 Notes Receivable .......................................................................... Sales Revenue ....................................................................... Cost of Goods Sold ....................................................................... Inventory ................................................................................ Computation of PV of note: (using 8%)* $400,000 × .73503 = 400,000 x 3% = 12,000 × 3.31213 = Present value of note Face value of note Amount of discount

333,758 333,758 255,000 255,000

$294,012 39,746 333,758 400,000 $ 66,242

OR 4 N 8 I 12000 PMT 400000 FV CPT PV = 333,757 *8% is used because it represents the borrowing rate at which Orange can obtain financing. In similar transactions, this is the rate that an independent borrower and lender would consider reasonable as it represents the market’s estimation of the riskiness of the customer. b.

Dec 31/23 Cash ............................................................................................. Interest Income ...................................................................... Notes Receivable .......................................................................... Interest Income ...................................................................... $333,758 × .08 = $26,701 – $12,000 = $14,701

Dec 31/24 Cash ............................................................................................. Interest Income ...................................................................... Notes Receivable .......................................................................... Interest Income ...................................................................... ($333,758 + $14,701) × .08 = $27,877 – $12,000 = $15,877

12,000 12,000 14,701 14,701

12,000 12,000 15,877 15,877

Problem B-4 Solution a. Sep 1 Balance would have been carried over from previous month. No entry required. Sep 8 Inventory........................................... ............................................. Accounts Payable................................................................... To account for purchase (400 x $1.67 = $668)

668 668

B - 10 Intermediate Accounting, Thirteenth Canadian Edition

Sep 17 Accounts Receivable........................... .......................................... Sales........................................................... ............................ To record sale (800 x $4.25 = $3,400) Cost of Goods Sold........................................................................ Inventory ................................................................................ To update inventory and cost of goods sold (800 x $1.65 = $1,320) Sep 23 Accounts Receivable....................... .............................................. Sales ...................................................................................... To record sale (250 x $4.30 = $1,075) Cost of goods sold............................ ............................................. Inventory ................................................................................ To update inventory and cost of goods sold (100 x $1.65) + (150 x $1.67) = $415.5 Sep 30 Inventory ....................................................................................... Accounts Payable................................................................... To account for purchase (650 x $1.75 = $1,137.50) b.

3,400 3,400

1,320 1,320

1,075 1,075

415.50 415.50

1,137.50 1,137.50

Under the periodic system, the entries to account for purchases would include a debit to purchases, rather than inventory. This is an expense account and is closed at the end of the accounting period. Under the periodic system, there would be no interim entries to update inventory and cost of goods sold. These entries are deferred until the end of the accounting period when cost of goods sold is recognized as a residual amount.

c. Total cost of goods sold would not differ between parts a. and b. Lime uses the FIFO cost flow formula, which assumes that older goods are sold first. This cost flow is the same under both the perpetual and the periodic systems.

Problem B-5 Solution a. 1. Understated/Understated 2. No effect/No effect 3. No effect/Overstated 4. No effect/Understated 5. No effect/No effect 6. No effect/Overstated 7. Understated/Understated b. 1. Inventory ....................................................................................... Cost of Goods Sold .................................................................

6,000 6,000

Comprehensive Examination B

B - 11

2. None 3. Purchases..................................................................................... Accounts Payable ................................................................... Note that the Jan. 2 entry would need to be reversed.

1,000

4. Accounts Payable ......................................................................... Purchases. .............................................................................. (This JE should be reversed in 2024)

800

1,000

800

5. None 6. Purchases..................................................................................... Accounts Payable ................................................................... Note that the Jan. 2 entry would need to be reversed.

400

7. Inventory ....................................................................................... Cost of Goods Sold .................................................................

14,000

400

14,000

Problem B-6 Solution a. Beginning inventory .......................................................... $ 450,000 Add: Purchases................................................................. 1,200,000 Cost of goods available ..................................................... 1,650,000 Sales ................................................................................. $2,600,000 Less 40% .......................................................................... (1,040,000)1,560,000 Estimated inventory lost .................................................... $ 90,000 b. Sales ............................................................................................. 2,600,000 Income Summary ..................................................................... 2,600,000 Cost of Goods Sold ....................................................................... 1,560,000 Loss Due to Fire ............................................................................ 90,000 (Beginning) Inventory ............................................................... 450,000 Purchases ................................................................................ 1,200,000

*Problem B-7 Solution a. 1. NA 2. 4 3. NA 4. 4 5. 3

B - 12 Intermediate Accounting, Thirteenth Canadian Edition

6. 2 7. NA 8. 3 9. 1 10. 2 b. 2. Accounts Receivable ..................................................................... Cash .......................................................................................

450 450

4. Bank Charges Expense ................................................................ Cash .......................................................................................

5. Cash ............................................................................................. Notes Receivable .................................................................... Interest Revenue.....................................................................

4,625

8. Cash ............................................................................................. Accounts Payable ...................................................................

4,500 125

Comprehensive Examination B

B - 13

LEGAL NOTICE

COMPREHENSIVE EXAMINATION C PART 3 (CHAPTERS 9–12)

Problem

CPA

Topics

C-1

cpa-t001 Multiple Choice (Various Topics)

C-2

C-3

Approximate Time

Blooms 3—blooms001 1, 4, 5, 10-13, 17—blooms002 2, 6-9, 14-16, 18-21—blooms003

35 min.

cpa-t001 Assignment of Costs

blooms002

10 min.

cpa-t001 cpaKey Concepts and Definitions e003

blooms002

15 min.

C-4

cpa-t001 Rational Entity Impairment Model

blooms003

25 min.

C-5

cpa-t001 Depreciation Methods

blooms003

20 min.

C-6

cpa-t001 Equity Investment

blooms003

15 min.

120 min.

All questions are AACSB Analytic and Question C3 is Communication and Analytic.

C-2

Intermediate Accounting, Thirteenth Canadian Edition

Problem C-1 Multiple Choice (Various Topics) Choose the best answer for each of the following questions and enter the identifying letter in the space provided. ____1.

When the declining-balance method is used, depreciation expense for a given asset will a. decline by a constant amount each year. b. be the same each year. c. decrease rapidly at first, then slowly over the life of the asset. d. vary from year to year in relation to changes in output.

____2.

Norway Corporation acquired land, buildings, and equipment from a bankrupt competitor at a lump-sum price of $132,000. At the time of acquisition, Norway paid $12,000 to have the assets appraised. The appraisal disclosed the following fair values: Land ..................................................................................... $96,000 Buildings .............................................................................. 76,800 Equipment ............................................................................ 19,200 What costs should be assigned to the land, buildings, and equipment, respectively? a. $96,000, $76,800, and $19,200 b. $66,000, $52,800, and $13,200 c. $72,000, $57,600, and $14,40 d. $48,000, $48,000, and $48,000

____3.

Current Canadian practice indicates that the maximum period over which an intangible asset should be amortized is a. 20 years. b. 28 years. c. 40 years. d. its useful life or legal life, whichever is shorter.

____4.

Purchased goodwill represents a. the excess of the price paid over the fair value of the net assets obtained in a business combination. b. the excess of the price paid over the book value of the net assets obtained in a business combination. c. the difference in the aggregate amount of the market prices of the shares of the combining companies. d. a tangible asset.

____5.

As it is generally used in accounting, what is depreciation? a. It is a process of asset valuation for balance sheet purposes. b. It applies only to long-lived intangible assets. c. It is used to indicate a decline in market value of a long-lived asset. d. It is an accounting process that allocates long-lived asset cost to accounting periods.

Use the following data to answer questions 6–9.

Comprehensive Examination C

C-3

On July 1, 2023, Bosnia Corp. purchased a new piece of equipment for $300,000. The equipment has an estimated useful life of 5 years and an estimated residual value of $25,000. Bosnia uses the calendar year as its fiscal year, and records depreciation to the nearest month. ____6.

What would the straight-line depreciation be for fiscal 2023? a. $60,000 b. $55,000 c. $30,000 d. $27,500

____7.

What would be the double declining-balance depreciation for 2024? a. $72,000 b. $96,000 c. $110,000 d. $120,000

____8.

If Bosnia expensed the total cost of the equipment at the time of purchase, what was the effect on 2023 and 2024 income before taxes, assuming Bosnia uses straight-line depreciation? a. $245,000 understated and $55,000 overstated b. $270,000 understated and $30,000 overstated c. $272,500 understated and $55,000 overstated d. $300,000 understated and $30,000 overstated

____9.

If, at the beginning of 2025, Bosnia decides the equipment still has five more years of life beyond December 31, 2024, with the same residual value, what would be the straight-line depreciation for 2025? (Assume straight-line used in all years.) a. $30,000 b. $32,083 c. $38,500 d. $55,000

____10. Other comprehensive income includes changes in equity a. related to non-owner sourced transactions. b. related to payment of dividends. c. due to errors of other years. d. due to unusual gains and losses of the current year. ____11. The cost model of accounting for PP&E assets a. should be applied to investment property only. b. should be applied to other PP&E assets only. c. can be applied to all classes of PP&E including investment property. d. is not appropriate under current Canadian GAAP. ____12. When an investor is using the equity method and the investee reports net income, the journal entry on the investor’s books will include a a. debit to the Investment account. b. credit to Retained Earnings. c. credit to the Investment account. d. debit to Investment Income or Loss.

C-4

Intermediate Accounting, Thirteenth Canadian Edition

____13. Under IFRS, which of the following is a condition for an investment to be classified as current? a. It must be a cash equivalent. b. It must be accounted for under the cost model. c. It is held primarily for trading purposes. d. It may be held for trading purposes but could be held for long-term appreciation as well. ____14. Russia Inc. owns bonds that are accounted for under the fair value through net income model. On December 31, 2023, the bonds have a carrying value of $248,700. The fair value at that date is $245,000. The entry to record the year-end adjustment will include a debit to a. FV–NI Investments. b. Investment Income or Loss. c. Unrealized Holding Loss on FV–OCI Investments. d. Other Comprehensive Income. ____15. If Latvia Inc. acquired a 30% interest in Lithuania Ltd. on January 1, 2023 for $90,000, and during 2023 Lithuania reported net income of $50,000 and paid a total cash dividend of $20,000, applying the equity method would result in an increase (decrease) to Latvia’s Investment in Lithuania Ltd. account for 2023 of a. $50,000. b. $30,000. c. $9,000. d. $(20,000). ____16. A replacement, which extended the life of a PPE asset, but did not increase the quality or quantity of units produced by the asset, cost $20,000. This expenditure should be debited to a. the related asset account. b. the related asset’s accumulated depreciation account. c. an expense account. d. retained earnings. ____17. Property, plant, and equipment are conventionally presented in the balance sheet at a. historical cost less residual value. b. historical cost less accumulated depreciation. c. fair value less residual value. d. fair value less book value. Use the following information for questions 18–19. Mongolia Corp. is considering acquiring Tibet Corp. The following information relates to Tibet Corp.: Net tangible assets at cost ............................................................ $5,000,000 Net tangible assets at fair value .................................................... $5,500,000 Average net income for the past four years ................................... $ 475,000 Normal rate of return for the industry ............................................. 8% ____*18. What is the amount of goodwill if average excess earnings for the past four years are to be capitalized at the normal rate of return for the industry? a. $400,000

Comprehensive Examination C

b. c. d.

C-5

$437,500 $440,000 $500,000

____*19. What is the total amount that Mongolia should be willing to pay for Tibet if average excess earnings for the past four years are to be capitalized at 14%? a. $5,750,000 b. $5,700,000 c. $5,250,000 d. $4,600,000 Use the following information for questions 20–21. On July 1, 2023, Bosnia Corp. purchased a new piece of equipment for $300,000. The equipment has an estimated useful life of 5 years and an estimated residual value of $25,000. Bosnia uses the calendar year as its fiscal year. The equipment is a Class 8 asset with a maximum CCA rate of 20%. The equipment is considered eligible for the Accelerated Investment Incentive. ____*20. What is the maximum CCA for 2023? a. $60,000 b. $55,000 c. $45,000 d. $27,500 ____*21. Assuming maximum CCA was claimed in 2023, what is the maximum CCA for 2024? a. $48,000 b. $49,500 c. $51,000 d. $54,500 * This topic is dealt with in an Appendix.

Problem C-2 Assignment of Costs Match the following cost items with the appropriate accounts: a. Land c. Land Improvements b. Buildings d. Other ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Interest cost incurred during building construction. Back taxes on land purchased to be used for building site. Assessment by city for drainage system. Building permits. Landscaping shrubs planted after building has been constructed. Demolition costs of building on land bought for plant site. Interest costs incurred after completion of building construction. Recording fees for land. Architect's fees. Grading and filling building site. Parking lots. Fences.

C-6

Intermediate Accounting, Thirteenth Canadian Edition

Problem C-3 Key Concepts and Definitions Provide clear, concise answers for the following: 1. What are the major categories of intangible assets? 2. What are the two models that are used to account for the impairment of intangible assets? Which method provides better information and why? 3. Define depreciation accounting. 4. What impact does depreciation accounting have on the income statement and cash?

Problem C-4 Rational Entity Impairment Model Thyme Corporation's balance sheet includes the following asset: Equipment ..................................................................................... Less: Accumulated depreciation .................................................... Carrying amount (book value) .......................................................

$110,000 (20,000) $90,000

After performing its annual review for impairment, Thyme obtains the following data: Asset value in use ......................................................................... $64,000 Fair value less selling costs ........................................................... 67,000 Instructions Assuming Thyme uses the rational entity impairment model: a. Calculate the recoverable amount. b. Calculate the impairment loss. c. Prepare the entry to record the impairment loss.

Problem C-5 Depreciation Methods A machine costing $180,000 has an estimated residual value of $15,000 and an estimated service life of ten years. What is the annual depreciation for each of the first two full years under the following methods? 1.

Double declining-balance: a. Year one $______________ b. Year two $______________

2. Units of production. Lifetime production is estimated at 110,000 units; the machine produced 12,000 units in Year one and 18,000 in Year two: a. Year one $______________ b. Year two $______________ 3.

Straight-line depreciation method: a. Year one $______________ b. Year two $______________

*4. CCA (assume this is a Class 10 asset with a 30% CCA rate): a. Year one $______________ b. Year two $______________.

Comprehensive Examination C

C-7

Problem C-6 Equity Investments On January 2, 2023, Basil Corp. invested $4,150,000 in Oregano Inc. for 40% of its outstanding common shares. At this time, the book value (equity) of Oregano Inc. was $8,400,000. Oregano’s pays out 25% of its net income in dividends each year. Basil elects two of five members of Oregano’s board of directors. During 2023, Basil received a cash dividend of $250,000 from Oregano Inc. Instructions a. Record the initial purchase of the Oregano Inc. shares by Basil Corp. in 2023. b. Calculate Oregano Inc.’s net income for 2023. c. Record the additional 2023 journal entries related to this investment on Basil’s books.

C-8

Intermediate Accounting, Thirteenth Canadian Edition

Solutions — Comprehensive Examination C Problem C-1 Solution 1. c 2.

10. a 11. c 12. a 13. c 14. b 15 c 16. a 17. b *18. b *19. a *20. c *21. c Solutions to Computational Multiple Choice Questions: 2. Total fair value is $192,000; paid $132,000, which is 68.75% of FV Land: $96,000 x 68.75% = $66,000 Building: $76,800 x 68.75% = 52,800 Equipment: $19,200 x 68.75% = 13,200

Comprehensive Examination C

6. ($300,000 – $25,000) x 1/5 x ½ = $27,500 7. 2023: $300,000 × 2 ÷ 5 × ½= $60,000 2024: $300,000 – $60,000) × 2 ÷ 5 = $96,000 8. 2023: understated by cost of $300,000 and overstated by lack of depreciation expense of $27,500 = net of $272,500 understated 2024: overstated by depreciation expense not recorded of $55,000 9. ($300,000 – $27,500 – $55,000 – $25,000) ÷ 5 = $38,500 15. ($50,000 – $20,000) x 30% = $9,000 (increase) *18. Normal rate of return $5,500,000 x 8% = $440,000; excess is $475,000 – $440,000 = $35,000. Goodwill = $35,000 ÷ 8% = $437,500 *19. $5,500,000 (FV) + ($35,000 ÷ 14%) = $5,750,000 *20. $300,000 x 20% x1.5 = $45,000 *21. ($300,000 – $45,000) x 20% = $51,000

Problem C-2 Solution 1. b 2.

a or c

10. a 11. c 12. c

C-9

C - 10

Intermediate Accounting, Thirteenth Canadian Edition

Problem C-3 Solution 1. The major categories are marketing-related, customer-related, artistic-related, contractbased, and technology-based intangible assets. 2. The two models are the cost recovery impairment model and the rational entity impairment model. The first is used for ASPE and the latter is used in IFRS. Overall, the rational entity model used under IFRS provides better information for users: it provides better representational faithfulness as it is more neutral; it is more relevant; it provides more timely information; and it better reflects the time value of money and the fair value of impaired assets. 3. Depreciation accounting is the systematic and rational allocation of the cost of plant assets to the periods benefited from the use of the assets. 4. Depreciation accounting does not affect cash. Revenues impact cash. Depreciation accounting is a non-cash expense on the income statements that reduces income taxes.

Problem C-4 Solution a. Recoverable amount: The recoverable amount is the higher of the asset's value in use of $64,000 and its fair value less selling costs of $67,000. Thus, the recoverable amount is $67,000. b. Impairment loss: Carrying amount............................................................................ Recoverable amount ..................................................................... Impairment loss ............................................................................. c. Journal entry: Loss on impairment ....................................................................... Accumulated impairment loss .................................................

$90,000 67,000 $23,000

23,000 23,000

Problem C-5 Solution 1. a. $180,000 x 2 ÷ 10 = $36,000 b. ($180,000 – $36,000) x 2 ÷ 10 = $28,800 2.

Depreciation per unit ($180,000 – $15,000) ÷ 110,000 = $1.50 a. 12,000 x $1.50 = $18,000 b. 18,000 x $1.50 = $27,000

a. & b. (same both years) ($180,000 – $15,000) ÷ 10 = $16,500

*4. a. b.

$180,000 x 30% x 1.5 = $81,000 ($180,000 – $81,000) x 30% = $29,700

Problem C-6 Solution a. Investment in Associate. ............................................................... 4,150,000 Cash....................................................................................... 4,150,000

Comprehensive Examination C

C - 11

Total dividend paid by Oregano = $250,000 ÷ 40% = $625,000 Therefore, net income for year = $625,000 ÷ 25% = $2,500,000

Investment in Associate. (40% x $2,500,000)................................ 1,000,000 Investment Income or Loss .................................................... 1,000,000 Cash ............................................................................................. Investment in Associate..........................................................

250,000 250,000

C - 12

Intermediate Accounting, Thirteenth Canadian Edition

LEGAL NOTICE

COMPREHENSIVE EXAMINATION D PART 4 (CHAPTERS 13–17)

Problem

CPA

Topics

Blooms

Approximate Time

D-1

cpa-t001 Current Liabilities

blooms003

25 min.

D-2

cpa-t001 Derivatives

blooms003

20 min.

D-3

cpa-t001 Cash Dividends

blooms003

10 min.

D-4

cpa-t001 Stock Dividends and Stock Splits

blooms002

10 min.

D-5

cpa-t001 Earnings per Share Concepts

blooms002

10 min.

D-6

cpa-t001 Convertible Bonds

blooms003

15 min.

D-7

cpa-t001 Basic and Diluted Earnings per Share

blooms003

20 min.

D-8

cpa-t001 Long-Term Liabilities

blooms003

35 min. 145 min.

All questions are AACSB Analytic.

D-2

Intermediate Accounting, Thirteenth Canadian Edition

Problem D-1 Current Liabilities In each box of cereal that it produces, Snoopy Cereal Corp. includes a special coupon. The purchaser may redeem 10 coupons for a cheese grater (premium). Each grater costs Snoopy $0.90. During 2023, Snoopy purchased 6,000 graters and sold 200,000 boxes of cereal @ $3.50 per box. Based on past experience, Snoopy estimates that 60% of the coupons will be redeemed. During 2023, 45,000 coupons were presented for redemption. During 2024, 8,000 graters were purchased. As well, Snoopy sold 300,000 boxes of cereal at $3.75 per box, and 90,000 coupons were presented for redemption. Instructions (show any calculations) Prepare all the journal entries that would be made regarding the cereal sales and the premium plan in both 2023 and 2024.

Problem D-2 Derivatives On January 3, Linus Ltd. purchases a call option for $200 from Lucy Corp. to buy 1,000 Rerun Inc. shares at an exercise price of $42 per share. The option expires May 1. At this time the current market price of Rerun shares is also $42. On March 31 (Linus’ year end), the market value of the Rerun shares is $53, and the fair value of the option has increased to $14,000. On April 15, Linus takes delivery of (buys) the Rerun shares as agreed in the option contract. The market value of Rerun’s shares is now $54. Instructions (show any calculations) a. Calculate the intrinsic value and the time value of this option at 1. January 3 2 March 31 b. Prepare general journal entries for the following dates: 1. January 3 2. March 31 3. April 15

Problem D-3 Cash Dividends At December 31, 2023, Woodstock Corp. has the following shares outstanding (all no par value): 200,000 common shares ............................................................... $ 1,275,000 $5 preferred, 7,200 shares ............................................................ $ 600,000 The preferred shares are cumulative and participating up to an additional 4%. Dividends have not been paid since December 31, 2020. Woodstock now wishes to declare a total cash dividend of $320,000. Instructions Prepare the entry for the dividend declaration, separating the dividend into the common and preferred portions. Show all calculations.

Comprehensive Examination D

D-3

Problem D-4 Stock Dividends and Stock Splits Stock dividends and stock splits are common forms of corporate share distribution to shareholders. Consider each of the numbered statements below, and decide whether it: A. Applies to both stock dividends and stock splits. B. Applies to stock splits only. C. Applies to stock dividends only. D. Applies to neither. (In each instance, assume the issuing corporation has only one class of shares.) Instructions Print next to the number of each statement below, the single capital letter of the description which applies to the statement. Statements ____ 1. There is no transfer between retained earnings and share capital accounts. ____ 2. There is no change in the total shareholders' equity of the issuing corporation. ____ 3. The retained earnings account is increased. ____ 4. Book value decreases. ____ 5. Retained earnings in the amount of the distribution are transferred to share capital. ____ 6. Book value increases. ____ 7. The total number of shares outstanding is increased. ____ 8. The distribution is a multiple as compared to a percentage of the number of shares previously outstanding.

Problem D-5 Earnings per Share (EPS) Concepts Indicate which of the following types of securities would be included in the calculation of "basic earnings per share," and which would be included in the calculation of "diluted earnings per share." Place a "B" before those which affect only basic EPS, a "D" before those which affect only diluted EPS, a "BD" before those which affect both basic and diluted EPS, and an "N" before those securities which do not affect EPS calculations. Assume that, where applicable, the securities are dilutive. ____ ____ ____ ____ ____ ____ ____ ____

1. 2. 3. 4. 5. 6. 7. 8.

Notes payable Executive stock options Convertible bonds Cumulative, nonconvertible preferred shares Warrants to purchase additional common shares Common shares Nonconvertible bonds Convertible preferred shares

Problem D-6 Convertible Bonds On January 1, 2023, Charlie Corp. issued $5,000,000 (par value) 8%, 10-year convertible bonds

D-4

Intermediate Accounting, Thirteenth Canadian Edition

at par. Interest is to be paid annually on December 31. Each $10,000 bond carries the right to purchase 100 Charlie common shares for $20 each during the life of the bond. The current market rate for similar non-convertible bonds is 9%. Instructions a. Calculate how much of the bond proceeds to allocate to the bond and how much to the option. Charlie adheres to IFRS. b. Prepare the journal entry to record the issuance of the bond.

Problem D-7 Basic and Diluted Earnings per Share The following data relate to Schroeder Ltd. for the calendar year 2023: Net income (30% tax rate) ............................................................. $3,250,000 Average number of common shares outstanding during 2023 ......................................................... 1,200,000 shares 8%, cumulative convertible preferred shares: convertible into 90,000 common shares ................................. $1,800,000 6% convertible bonds; convertible into 60,000 common shares ...................................................................... $2,000,000 Stock options, exercisable at $30 per share .................................. 105,000 shares All the convertible securities and stock options were outstanding all year. The average market price of the common shares in 2023 was $35. Instructions Calculate: a. basic earnings per share b. diluted earnings per share.

Problem D-8 Long-Term Liabilities 1. On March 31, 2019, Peppermint Patty Corp. sold $1,000,000 (par value) 8%, 10-year bonds for $961,500 including accrued interest. The bonds were dated January 1, 2019. Interest is paid semi-annually on January 1 and July 1. On April 1, 2023, Peppermint Patty purchased half of the bonds on the open market at 99 plus accrued interest and retired them. The corporation uses the straight-line method for amortization of bond premiums and discounts. a. Calculate the amount of the gain or loss on retirement of the bonds. b. Prepare the journal entries required on April 1, 2023 to record retirement of the bonds. Assume that interest and premium or discount amortization have been recorded through January 1, 2023. c. Prepare the journal entry on July 1, 2023 to record interest and premium or discount amortization. 2.

On January 1 of the current year, Franklin Ltd. issued $500,000 (par value) 10%, six year bonds when the market rate was 9%, receiving $522,430 cash proceeds. Interest is payable annually on December 31. The corporation uses the effective interest method for amortization of bond premium or discount. a. Calculate the interest expense for the first year. b. Calculate the interest expense for the second year.

Comprehensive Examination D

D-5

On July 1, 2023, Peanuts Inc. issued $400,000 (par value) 10%, ten-year bonds, with interest payable semi-annually on January 1 and July 1. The bonds were issued at $454,360 to yield 8%. The corporation uses the effective interest method for amortization of bond premium or discount. a. Prepare the journal entry on the date the bonds were issued. b. Prepare the adjusting entry at December 31, 2023, the end of the fiscal year. c. Prepare the entry for the interest payment on January 1, 2024.

D-6

Intermediate Accounting, Thirteenth Canadian Edition

Solutions — Comprehensive Examination D Problem D-1 Solution 2023 Inventory of Premiums (6,000 x $0.90).......................................... Cash (or Accounts Payable) ...................................................

5,400 5,400

Cash (or Accounts Receivable) (200,000 x $3.50) ........................ Sales ......................................................................................

700,000

Premium Expense ......................................................................... Inventory of Premiums............................................................ 45,000 ÷ 10 x $0.90 = 4,500 × $0.90 = $4,050

4,050

Premium Expense ......................................................................... Premium Liability ....................................................................

6,750

700,000

4,050

6,750

200,000 × 60% = 120,000 coupons 120,000 – 45,000 redeemed = 75,000 to be redeemed in 2024 75,000 ÷ 10 × $0.90 = $6,750 Note total expense for year = 120,000 ÷10 x $0.90 = 12,000 x $0.90 = $10,800 ($4,050 + $6,750) 2024 Inventory of Premiums (8,000 x $0.90).......................................... Cash (or Accounts Payable) ...................................................

7,200 7,200

Cash (or Accounts Receivable) (300,000 x $3.75) ........................ 1,125,000 Sales ...................................................................................... Premium Liability (balance from 2023) 7,500 x $0.90 ....................... Premium Expense 1,500 x $0.90 ..................................................... Inventory of Premiumx............................................................... 90,000 ÷ 10 x $0.90 = 9,000 x $0.90 = $8,100

6,750 1,350

Premium Expense ............................................................................ Premium Liability .......................................................................

14,850

1,125,000

8,100

14,850

300,000 x 60% = 180,000 180,000 – 15,000 redeemed = 165,000 to be redeemed in 2025 165,000 ÷ 10 x $0.90 = $14,850 Note total expense for year = 180,000 ÷10 x $0.90 = $16,200 ($1,350 + $14,850)

Problem D-2 Solution a. 1. Jan 3 intrinsic value $42 – $42 = $0; time value $200 – $0 = $200 2. Mar 31 intrinsic value ($53 – $42) x 1,000 = $11,000; time value $14,000 – $11,000 = $3,000

D-7

Comprehensive Examination D

1. Jan 3 Derivatives—Financial Assets/Liabilities ....................................... Cash.......................................................................................

200

2. Mar 31 (year end) Derivatives—Financial Assets/Liabilities ($14,000 – $200)............ Gain or Loss on Derivatives ...................................................

13,800

3. Apr 15 FV-NI Investments (1,000 x $54 – fair value) ................................ Gain or Loss on Derivatives .......................................................... Derivatives—Financial Assets/Liabilities ................................. Cash (1,000 x $42 – option price)...........................................

Problem D-3 Solution Dividends ...................................................................................... Dividends Payable, Preferred ................................................. Dividends Payable, Common .................................................

200

13,800

54,000 2,000 14,000 42,000

320,000 132,000 188,000

Calculations: Arrears—7,200 × $5 × 2 ........................................... Current to preferred—7,200 × $5 ............................. Equivalent to Common—$1,275,000 × 6%............... Participating 4%* ......................................................

Preferred $ 72,000 36,000 24,000 $132,000

Common

Total $ 72,000 36,000 76,500 76,500 111,500 135,500 $188,000 $320,000

*$600,000 x 4% = $24,000 to preferred; balance to common

Problem D-4 Solution 1. B 2.

D-8

Intermediate Accounting, Thirteenth Canadian Edition

Problem D-5 Solution 1. N 2.

Problem D-6 Solution a. Note that IFRS requires the use of the residual method. Annual interest $5,000,000 x 8% = $400,000 PV of bond is 10 N 9 I -400000 PMT -5000000 FV CPT PV = 4,679,117 Allocation of issue price to bond and option (residual method) Bond $4,679,117 (PV) Option $5,000,000 – $4,679,117 = $320,883 b.

Journal entry to record issuance of the convertible bond Cash ............................................................................................. 5,000,000 Bond Payable ......................................................................... 4,679,117 Contributed Surplus—Stock Options ...................................... 320,883

Problem D-7 Solution $3,250,000 – $144,000 a. Basic EPS = ——————————— = $2.59 1,200,000 Pref dividend is $1,800,000 x 8% = $144,000 b. Basic Options Subtotal Convertible bonds Subtotal Convertible preferred Subtotal

Shares (denominator) 1,200,000 **15,000 1,215,000 60,000 1,275,000 90,000 1,365,000

Numerator $3,106,000 0 3,106,000 * 84,000 3,190,000 144,000 3,334,000

EPS $2.59 $2.56 $2.50 $2.44

Comprehensive Examination D

D-9

*($2,000,000 × .06) × (1 – .30) = $84,000 ** 105,000 minus (# shares that can be bought back for treasury, i.e., (105,000 x $30) ÷ $35 = 90,000)) = 15,000

Problem D-8 Solution 1. a. Face amount of bonds ............................................................ Total selling price ................................................................... Less accrued interest ($1,000,000 × .08 × 3 ÷ 12).................. Carrying value at Mar 31/19 ................................................... Discount at Mar 31/19 ($1,000,000 – $941,500) ..................... Less discount amortization ($58,500 ÷ 117 × 48 months) ....... Unamortized discount ............................................................. Carrying value at Apr 1/23 ......................................................

$1,000,000 $961,500 20,000 $941,500 $58,500 24,000 34,500 $965,500

Carrying value of half of the bonds ......................................... Less acquisition price ($500,000 × .99) .................................. Loss on retirement.................................................................. b.

$482,750 495,000 $ 12,250

Interest Expense .................................................................... Bonds Payable ($250 × 3) ............................................... Cash ($1,000,000 × .08 × 3 ÷ 12 × ½ ) ............................ (To accrue interest to Apr 1/23)

10,750

Bonds Payable $500,000 – ($34,500 x ½) .............................. Loss on Retirement of Bonds ................................................. Cash ($1,000,000 x .99 x ½) ........................................... (To remove carrying value of bonds)

482,750 12,250

Interest Expense .................................................................... Bonds Payable ($58,500 ÷ 117 × 6 mos. × ½ ) ................ Cash ($500,000 x 8% x ½) ..............................................

21,500

750 10,000

495,000

1,500 20,000

First year expense: $522,430 × .09 = $47,018.70

Second year interest expense: $50,000 – $47,018.70 = $2,981.30 Premium amortization (first year). $522,430 – $2,981.30 = $519,448.70 Book value of bonds at the beginning of the second year. $519,448.70 × .09 = $46,750.38 Interest expense.

Cash....................................................................................... 454,360.00 Bonds Payable ................................................................ 454,360.00

Interest Expense .................................................................... 18,174.40 Bonds Payable ....................................................................... 1,825.60 Interest Payable ($400,000 x 10% x ½) ........................... 20,000.00 (Interest expense: $454,360 × .08 × ½ = $18,174.40)

D - 10

Intermediate Accounting, Thirteenth Canadian Edition

Interest Payable ..................................................................... 20,000.00 Cash ................................................................................ 20,000.00

Comprehensive Examination D

D - 11

LEGAL NOTICE

COMPREHENSIVE EXAMINATION E PART 5 (CHAPTERS 18–21) Problem

CPA

Topics

Blooms

Approximate Time

E-1

cpa-t001 Accounting Changes and Error Corrections

blooms003

30 min.

E-2

cpa-t001 Deferred Income Taxes

blooms003

25 min.

E-3

cpa-t001 Pension Calculations and Accounting cpa-t001 cpaLeases e003

blooms003

35 min.

blooms003

25 min.

E-4

115 min. All questions are AACSB Analytic and Question E4 is Communication and Analytic

E-2

Intermediate Accounting, Thirteenth Canadian Edition

Problem E-1 Accounting Changes and Error Corrections Thor Corp.’s reported pretax incomes for 2023 and the previous two years as follows: 2023 2022 2021 $150,000 $125,000 $95,000 The 2023 income was correctly determined after considering the following accounting changes and error corrections made during the year (the errors were made in previous years but were not discovered until 2023). The income for 2021 and 2022 do not take these items into account and are stated at the amounts determined at the time. 1. Early in 2023, Thor determined that equipment purchased in January 2021 for $136,000, with an estimated life of eight years and residual value of $6,000, is now estimated to have a total eleven-year life (from the date of purchase) but will have only a $1,800 residual value. Thor is using straight-line depreciation for this equipment. 2. Thor discovered that depreciation expense had been understated by $17,000 in 2022, since an adjusting entry for depreciation on machinery was not recorded. 3. On January 1, 2020, Thor bought a piece of machinery for $108,000, with a $12,000 estimated residual value and an eight-year life. At that time, the bookkeeper debited an expense account for this purchase. Thor uses the double-declining depreciation method. 4. Thor, in reviewing its allowance for expected credit losses accounts during 2023, has determined that 1% is the appropriate amount of loss on impairment to be recorded. The company had been using 1.5% as its rate in 2022 and 2021 when the loss on impairment had been $14,000 and $10,000, respectively. Thor would have recorded $24,000 in loss on impairment for 2023 if they had used the old rate. 5. At the beginning of 2023, Thor decided to change from the average cost method of valuing inventories to FIFO and used FIFO all during 2023 (perpetual system). It has determined that the opening inventory on January 1, 2023, which was $55,500 using average cost, would have been $52,500 using FIFO. Assume this change will make its financial statements as reliable and more relevant. Instructions a. For each of the situations above, prepare the journal entry or entries Thor Corp. would have prepared to adjust for these items during 2023. If you think no entry was prepared, write “none.” Ignore income taxes. b. After recording each situation in part a., prepare the appropriate year-end adjusting entry (entries) that should have been made at December 31, 2023. If you think no entry would be required, write “none.” Ignore income taxes.

Problem E-2 Deferred Income Taxes In 2023, the first year of its existence, Spider Ltd.'s accountant, in preparing both the income statement and the tax return, developed the following list of items creating differences between accounting and taxable income: 1. The company sells its merchandise on an instalment contract basis. In 2023, Spider elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2023. These procedures created a $240,000 difference between book and taxable incomes for 2023. Future collections of instalment receivables are expected to result in taxable amounts of $120,000 in each of the next two years. 2. The company depreciates all of its property, plant and equipment using CCA for tax purposes

Comprehensive Examination E

E-3

and straight-line for accounting purposes. This resulted in $42,000 excess CCA over accounting depreciation. This temporary difference will reverse equally over the three-year period from 2024–2026. On July 1, 2023, Spider leased part of its building to Swift Books Ltd. on a two-year operating lease. The monthly rent is $30,000, and Swift paid the first year's rent in advance (July 1, 2023 to June 30, 2024). Spider reported the entire amount on its tax return. This resulted in a $180,000 difference between book and taxable incomes. Assume an operating lease is appropriate in this case. Spider sold $150,000 of bonds issued by the Government of Canada at a gain of $18,000, which was included as other income in its income statement. A taxable capital gain of $9,000 was reported for tax purposes. In 2024, Spider insured the lives of its chief executives. The premiums paid were $12,000 and this amount was shown as an expense on the income statement. However, this amount was not deductible for tax purposes.

Spider is a publicly accountable enterprise adhering to IFRS. Its 2023 income statement showed "Income before income taxes" of $900,000. The currently enacted income tax rate (and for the foreseeable future) is 40%. Except for those items mentioned above, there are no other differences between book and taxable incomes. Instructions a. Calculate the income tax payable for 2023. b. Prepare a schedule of future taxable/deductible amounts at the end of 2023. c. Prepare a schedule of the deferred tax asset and deferred tax liability at the end of 2023. d. Calculate the net deferred tax expense (benefit) for 2023. e. Prepare the journal entry (entries) recording income tax expense, income tax payable, and deferred income taxes for 2023. f. How would the income tax expense and any deferred taxes be disclosed on the financial statements?

Problem E-3 Pension Calculations and Accounting On January 1, 2023, Hulk Ltd. reported the following balances relating to their defined benefit pension plan: Defined benefit obligation ........................................... $1,600,000 Fair value of plan assets ............................................ 1,600,000 Other data related to the pension plan for calendar 2023 are: Current service cost ................................................... 70,000 Contributions to the plan ............................................ 102,000 Benefits paid .............................................................. 100,000 Actual return on plan assets ....................................... 96,000 Interest (discount) rate ............................................... 9%

Instructions a. Calculate the defined benefit obligation at December 31, 2023. b. Calculate the fair value of plan assets at December 31, 2023. c. Calculate defined benefit expense for 2023. d. Prepare the journal entries to record the defined benefit expense and the contributions for 2023.

E-4

Intermediate Accounting, Thirteenth Canadian Edition

Problem E-4 Leases On January 1, 2023, Galactus Corp. (lessor) entered a noncancellable lease agreement with Blade Corp. (lessee) for machinery that was carried in Galactus’s accounting records at $2,265,000 and had a fair value of $2,400,000. Minimum lease payments under the lease agreement, which expires on December 31, 2032, total $3,550,000. Payments of $355,000 are due each January 1. The first payment was made on January 1, 2023 when the lease agreement was finalized. The interest rate of 10%, which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method is being used. Blade expects the machine to have a ten-year life with no residual value, and be depreciated on a straight-line basis. Collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the costs yet to be incurred by Galactus. Both entities are small private corporations that follow ASPE. Instructions a. From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's viewpoint, what kind of lease is the above agreement? b. Ignoring income taxes, what should be the income reported by Galactus from the lease for calendar 2023? c. Ignoring income taxes, what should be the expenses incurred by Blade from this lease for the calendar 2023? d. What journal entries should be recorded by Blade Corp. on January 1, 2023? e. What journal entries should be recorded by Galactus Corp. on January 1, 2023?

E-5

Comprehensive Examination E

Solutions — Comprehensive Examination E Problem E-1 Solution 1. a. None. b. Depreciation Expense ............................................................ Accumulated Depreciation—Equipment .......................... Acc Dep to date ($136,000 – $6,000) ÷ 8 x 2 = $32,500 [($136,000 – $32,500) – $1,800] ÷ 9 = $11,300 2.

a. b.

Retained Earnings .................................................................. Accumulated Depreciation—Machinery ........................... None

11,300 11,300

17,000 17,000

Machinery .............................................................................. 108,000 Accumulated Depreciation—Machinery ........................... 62,438 Retained Earnings ........................................................... 45,562 Acc Dep (rate: 1/8 x 2 = 25%); Yr 1: $108,000 x 25% = $27,000; Yr 2: ($108,000 $27,000) = $81,000; $81,000 x 25% = $20, 250; Yr 3: ($81,000 - $20,250) = $60,750; $60,750 x 25% = $15,188; Total Acc. Dep. ($27,000+$20,250+$15,188) = $62,438 b.

a. b.

Depreciation Expense ............................................................ Accumulated Depreciation ............................................... ($60,750 - $15,188) x 25% = $11,391 None Loss on Impairment ($24,000 ÷ 1.5) ....................................... Allowance for Expected Credit Losses............................. Retained Earnings .................................................................. Inventory (beginning) ....................................................... None

11,391 11,391

16,000 16,000 3,000 3,000

Problem E-2 Solution a. Income tax payable: Pretax financial income ................................................................. $900,000 Permanent differences: Government of Canada bonds................................................ (9,000) Executive insurance premiums ............................................... 12,000 Temporary differences: Instalment contracts ............................................................... (240,000) Excess CCA ........................................................................... (42,000) Rental income ........................................................................ 180,000 Taxable income ............................................................................. 801,000 Tax rate ......................................................................................... 40% Income tax payable ....................................................................... $320,400

E-6

Intermediate Accounting, Thirteenth Canadian Edition

2024 Future taxable (deductible) amounts: Installment sales Depreciation Unearned rent

2025

2026

Total

$120,000 $120,000 14,000 14,000 (180,000)

$14,000

$240,000 42,000 (180,000)

Future Taxable (Deductible) Temporary differences Amounts Instalment sales ............................ $240,000 Depreciation .................................. 42,000 Rent .............................................. (180,000) Totals ..................................... $102,000

Tax Rate 40% 40% 40%

Deferred Tax____ (Asset) Liability $ 96,000 16,800 $(72,000) _______ $(72,000) $112,800

Deferred tax asset at end of 2023 ................................................. $(72,000) Deferred tax asset at beginning of 2023 ........................................ -0Deferred tax (benefit) .................................................................... $(72,000) Deferred tax liability at end of 2023 ............................................... Deferred tax liability at beginning of 2023 ...................................... Deferred tax expense ....................................................................

$112,800 -0$112,800

Deferred tax expense .................................................................... Deferred tax (benefit) .................................................................... Net deferred tax expense for 2023 ................................................

$112,800 (72,000) $ 40,800

Current Tax Expense .................................................................... Deferred Tax Expense .................................................................. Deferred Tax Asset ....................................................................... Deferred Tax Liability ............................................................. Income Tax Payable ...............................................................

320,400 40,800 72,000

Income statement Income before income taxes ......................................................... Income tax expense: Current ................................................................................... Deferred ................................................................................. Net income .................................................................................... Statement of financial position Long-term assets: Deferred tax asset .................................................................. Long-term liabilities: Deferred tax liability ................................................................

112,800 320,400

$900,000 $320,400 40,800

361,200 $538,800

$72,000 $112,800

OR Long-term liabilities: Deferred tax liability ($112,800 – $72,000) .............................

$40,800

Comprehensive Examination E

E-7

Problem E-3 Solution a. Defined benefit obligation, Jan 1 ................................................... $1,600,000 Current service cost ...................................................................... 70,000 Interest cost (9% × $1,600,000) .................................................... 144,000 Benefits paid ................................................................................. (100,000) Defined benefit obligation, Dec 31 ................................................. $1,714,000 b.

Fair value of plan assets, Jan 1 ..................................................... $1,600,000 Actual return.................................................................................. 96,000 Contributions ................................................................................. 102,000 Benefits paid ................................................................................. (100,000) Fair value of plan assets, Dec 31 .................................................. $1,698,000

Current service cost ...................................................................... Interest cost (9% × $1,600,000) .................................................... Actual return on plan assets .......................................................... Defined Benefit expense ...............................................................

$70,000 144,000 (96,000) $118,000

Defined Benefit Expense ............................................................... Net Defined Benefit Liability/Asset ..........................................

118,000

Net Defined Liability/Asset ............................................................ Cash.......................................................................................

102,000

118,000

102,000

Problem E-4 Solution a. From the viewpoint of the lessee (Blade Corp.), the lease is a capital (finance) lease because the present value of the minimum lease payments ($2,400,000) exceeds 90% of the fair market value of the leased property. The lease term also is in excess of 75% of the property's estimated economic life. For these same reasons and because of the predictable collectability, absence of uncertainties surrounding costs yet to be incurred by the lessor, and presence of a dealer's profit, the lease is a sales-type lease to the lessor, Galactus Corp. b.

Profit on sale ................................................................................. $135,000 Interest on outstanding balance ($2,400,000 – $355,000) × 10% .............................................. 204,500 Income of lessor in 2023 ............................................................... $339,500

Interest on outstanding balance ($2,400,000 – $355,000) × 10% .............................................. $204,500 Depreciation ($2,400,000 ÷ 10) ..................................................... 240,000 Expenses incurred by lessee in 2023 ............................................ $444,500

Machinery under Lease ................................................................. 2,400,000 Obligations under Lease......................................................... 2,400,000 Obligations under Lease ............................................................... Cash.......................................................................................

355,000 355,000

E-8

Intermediate Accounting, Thirteenth Canadian Edition

Lease Receivable.......................................................................... 3,550,000 Cost of Goods Sold ....................................................................... 2,265,000 Sales Revenue ....................................................................... 2,400,000 Inventory ................................................................................ 2,265,000 Unearned Interest Income ...................................................... 1,150,000 Cash ............................................................................................. Lease Receivable ...................................................................

355,000 355,000

Comprehensive Examination E

E-9

LEGAL NOTICE

The data contained in these files are protected by copyright. This manual is furnished under license and may be used only in accordance with the terms of such license. The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.

COMPREHENSIVE EXAMINATION F PART 6 (CHAPTERS 22–23) Problem

CPA

Topics

F-1

cpa-t001 Multiple Choice (Various Topics)

F-2

F-3

F-4

F-5

Blooms

Approximate Time

6, 8, 9—blooms001 1, 2, 5, 7—blooms002 3, 4—blooms003

15 min.

cpa-t001 Statement of Cash Flows (Indirect Method)

blooms003

30 min.

cpa-t001 Statement of Cash Flows (Direct Method) cpa-t001 cpaSegmented Reporting e003

blooms003

30 min.

blooms003

10 min.

blooms002

15 min.

cpa-t001 cpaLimitations of Financial Statement e003 Analysis

100 min.

All questions are AACSB Analytic and questions F4 and F5 are AACSB Communication and Analytic.

F-2

Intermediate Accounting, Thirteenth Canadian Edition

Problem F-1 Multiple Choice (Various Topics) Choose the best answer for each of the following questions and enter the identifying letter in the space provided. ____1.

In preparing a statement of cash flows, which of the following transactions would be considered a financing activity? a. purchasing new equipment b. recording net income c. selling common shares d. purchasing inventory

____2.

Which of the following items represents a potential outflow of cash? a. amortization of goodwill b. net loss from operations c sale of plant assets at a loss d. declaration of a stock dividend

____3.

For the year ended December 31, 2023, Oak Corp. reported net income of $600,000. Additional information is as follows: Purchase of new equipment .......................................... $1,000,000 Depreciation of plant assets .......................................... 375,000 Cash dividends declared on common shares ................ 200,000 Sale of long-term bonds ................................................ 75,000 Impairment of goodwill .................................................. 35,000 Based on the information given above, using the indirect method, what is the cash provided by operating activities in the statement of cash flows for 2023? a. $1,210,000 b. $ 975,000 c. $1,010,000 d. $1,085,000

____4.

For the year ended December 31, 2023, Maple Corp. reported net income of $1,400,000. Additional information is as follows: Purchase of new equipment .......................................... $ 300,000 Depreciation on plant assets ......................................... 600,000 Cash dividends paid on common shares ....................... 150,000 Proceeds from sale of old equipment ............................ 180,000 Issuance of preferred shares ......................................... 200,000 Purchase of long-term investment (equity method) ....... 120,000 Based on the information given above, what is the cash provided by (used in) investing activities in the statement of cash flows for 2023? a. $(240,000) b. $(390,000)

Comprehensive Examination F

c. d.

F-3

$260,000 $580,000

____5.

Which of the following would not normally be considered an example of a related party? a. bondholders b. company management c. investors where there is significant influence or joint control d. immediate family members of company management

____6.

In considering interim financial reporting, the International Accounting Standards Board (IASB) recommends that such reporting should be viewed as a. a "special" type of reporting that need not follow generally accepted accounting principles. b. useful only if activity is evenly spread throughout the year so that estimates are unnecessary. c. reporting for an integral part of an annual period. d. reporting for a discrete accounting period.

____7.

For interim reporting, the problem of seasonality is handled by a. estimating the seasonality effects and pro-rating them over the year. b. recognizing and accruing revenues and expenses when they are earned or incurred. c. deferring the recognition of certain revenues and expenses so that income can be more evenly spread throughout the year. d. spreading the seasonality effects retroactively across the previous interim periods.

____8.

Times interest earned is calculated as a. income before interest charges divided by interest charges. b. income before taxes divided by interest charges. c. income before interest charges and taxes divided by interest charges and taxes. d. income before interest charges and taxes divided by interest charges.

____9.

Cash dividends divided by net income is called the a. price earnings ratio. b. earnings per share. c. rate of return on common share equity. d. payout ratio.

Problem F-2 Statement of Cash Flows (Indirect Method) BIRCH CORPORATION Comparative Statements of Financial Position December 31 2023 Cash ............................................................................. $ 43,000 Accounts receivable, net ............................................... 31,000 Inventory ....................................................................... 118,000 Land .............................................................................. 120,000

2022 24,000 38,000 82,000 190,000

F-4

Intermediate Accounting, Thirteenth Canadian Edition

Building ......................................................................... Accumulated depreciation ............................................. Equipment ..................................................................... Accumulated depreciation .............................................

200,000 (50,000) 1,030,000 (118,000) $1,374,000

200,000 (40,000) 600,000 (94,000) $1,000,000

Accounts payable .......................................................... $ 115,000 $ 100,000 4% Bonds payable ........................................................ 320,000 -0Common shares ............................................................ 750,000 750,000 Retained earnings ......................................................... 189,000 150,000 $1,374,000 $1,000,000 Additional data: 1. Net income for the year was $84,000. 2. Cash dividends were paid. 3. Land was sold for $80,000. 4. Old equipment was sold for $70,000. This equipment had cost $150,000 and had accumulated depreciation of $60,000 to date of sale. New equipment was purchased to replace it. Instructions Prepare a statement of cash flows for calendar 2023, using the indirect method.

Problem F-3 Statement of Cash Flows (Direct Method) SYCAMORE CORPORATION Comparative Statements of Financial Position December 31 2023 Cash............................................................................ $ 43,000 Accounts receivable, net ............................................. 35,000 Inventory ..................................................................... 114,000 Land ............................................................................ 120,000 Building ....................................................................... 200,000 Accumulated depreciation ........................................... (50,000) Equipment ................................................................... 1,030,000 Accumulated depreciation ........................................... (118,000) .................................................................................... $1,374,000 Accounts payable (merchandise purchases only) ........ $ 115,000 Salaries payable .......................................................... 20,000 4% Bonds payable ...................................................... 300,000 Common shares .......................................................... 750,000 Retained earnings ....................................................... 189,000 .................................................................................... $1,374,000

2022 24,000 38,000 82,000 190,000 200,000 (40,000) 600,000 (94,000) $1,000,000 $

$ 100,000 -0-0750,000 150,000 $1,000,000

SYCAMORE CORPORATION Income Statement For year ended December 31, 2023 Sales ............................................................................. $ 1,075,000

Comprehensive Examination F

Cost of goods sold ........................................................ Depreciation expense ................................................... Salaries expense........................................................... Rent expense ................................................................ Other operating expenses, including bond interest ........ Net loss on disposal of assets ....................................... Income taxes expense .................................................. Net income ....................................................................

F-5

640,000 94,000 140,000 72,000 14,000 10,000 21,000 $ 84,000

Additional Data: 1. The bonds were sold at par on July 1, 2023. 2. Cash dividends were paid. 3. Land was sold for $80,000. 4. Old equipment was sold for $70,000. This equipment had cost $150,000 and had accumulated depreciation of $60,000 to date of sale. New equipment was purchased to replace it. Instructions Prepare a statement of cash flows for calendar 2023, using the direct method.

Problem F-4 Segmented Reporting Pine Ltd. is a diversified corporation and has developed the following information about its five segments: A B C D E Total sales $180,000 $ 625,000 $125,000 $ 190,000 $ 260,000 Operating profit (loss) (125,000) 140,000 20,000 (130,000) (15,000) Total assets 780,000 2,400,000 525,000 1,650,000 2,650,000 Instructions a. Identify which segments would be considered as reportable segments by applying the following tests: i. revenue test ii operating profit or loss test iii. assets test b. Do the reportable segments, based on the above test results, reflect enough sales to explain a significant portion of the company’s business? Explain.

Problem F-5 Limitations of Financial Statement Analysis A CICA research study identified four sources of uncertainty as being important when considering the usefulness of financial statement information to a decision-maker. Briefly discuss these sources of uncertainty, and any other limitations that may be present when doing financial statement analysis.

F-6

Intermediate Accounting, Thirteenth Canadian Edition

Solutions — Comprehensive Examination F Problem F-1 Solution 1. c 2.

c ($600,000 + $375,000 + $35,000 = $1,010,000

a ($180,000 – $300,000 – $120,000 = $(240,000)

Problem F-2 Solution BIRCH CORPORATION Statement of Cash Flows (indirect method) Year ended December 31, 2023 Cash flows provided by operating activities Net income .................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accounts receivable ............................................ Increase in inventory .............................................................. Increase in accounts payable ................................................. Gain on disposal of land ......................................................... Loss on disposal of equipment ............................................... Depreciation expense—building ............................................. Depreciation expense—equipment ......................................... Cash provided by operating activities ............................................

$ 84,000

$ 7,000 (36,000) 15,000 (10,000) 20,000 10,000 84,000

90,000 174,000

Cash flows provided by (used in) investing activities Sale of land ................................................................................... 80,000 Sale of equipment ......................................................................... 70,000 Purchase of equipment ................................................................. (580,000) Cash used in investing activities.................................................... (430,000) Cash flows provided by (used in) financing activities Payment of cash dividends ........................................................... Issuance of bonds ......................................................................... Cash provided by financing activities.............................................

(45,000) 320,000 275,000

Comprehensive Examination F

Net increase in cash ............................................................................ Cash, January 1, 2023 ......................................................................... Cash, December 31, 2023 ...................................................................

F-7

19,000 24,000 $ 43,000

Problem F-3 Solution SYCAMORE CORPORATION Statement of Cash Flows (direct method) Year ended December 31, 2023 Cash flows provided by operating activities Cash received from customers ............................................... $1,078,000 Cash paid out for merchandise purchases.............................. (657,000) Cash paid for salaries ............................................................. (120,000) Cash paid for rent ................................................................... (72,000) Cash paid for other expenses & bond interest ........................ (14,000) Cash paid for income taxes .................................................... (21,000) Cash provided by operating activities ............................................

194,000

Cash flows provided by (used in) investing activities Sale of land ................................................................................... 80,000 Sale of equipment ......................................................................... 70,000 Purchase of equipment ................................................................. (580,000) Cash used by investing activities ................................................... (430,000) Cash flows provided by financing activities Payment of cash dividends ........................................................... Issuance of bonds ......................................................................... Cash provided by financing activities............................................. Net increase in cash ............................................................................ Cash, January 1, 2023 ......................................................................... Cash, December 31, 2023 ...................................................................

(45,000) 300,000 255,000 19,000 24,000 $ 43,000

Problem F-4 Solution a. Segments A, B, D, and E are reportable because they passed at least one of the tests. i. Revenue test—a segment is reportable if its total sales are $138,000 or more (10% × $1,380,000). Segments A, B, D and E satisfy the revenue test. ii. Operating profit or loss test—a segment's absolute profit or loss must be $27,000 or more [10% of the absolute greater of $160,000 or ($270,000)]. Segments A, B, and D satisfy the operating profit or loss test. iii. Assets test—a segment's identifiable assets must be $800,500 or more (10% × $8,005,000). Segments B, D, and E satisfy the assets test. b. The reportable segments, based on the above test results, exceed the 75% minimum of the company’s combined sales, which reflects enough sales to explain a significant portion of the business. (.75 x $1,380,000) = $1,035,000; revenue of A, B, D and E = $1,255,000

F-8

Intermediate Accounting, Thirteenth Canadian Edition

($180,000+$625,000+$190,000+$260,000)

Problem F-5 Solution There are four sources of uncertainty: 1.

Uncertainty about the nature and role of financial statements. Misunderstanding the nature, purpose, terminology used, and method of preparation of financial statements can lead users to misinterpret and/or place inappropriate reliance on the information.

Uncertainty due to limitations of financial statement measurements and disclosures. The conceptual framework, CPA Canada Handbook recommendations, and accounting practices provide various principles to be followed and methods used. Uncertainty occurs when the resulting measurements and disclosures are not well understood, are thought to be incomplete, or lack relevance in a particular decision context.

Uncertainty about management’s motives and intentions. Management is responsible for determining the accounting policies and methods used to prepare the financial statements. Choice of a policy or method should be based on reflecting underlying economic reality. This source of uncertainty suggests, however, that users may suspect that management’s choices are more motivated by a need to “manage earnings” – e.g. to maximize bonuses over time, or to avoid debt covenant violations.

Other limitations of ratio analysis include: 5.

Ratios are based on historical cost, which can lead to distortions in measuring performance.

Accounting necessarily involves estimates. Estimated items (such as depreciation, site restoration costs, and bad debts) can be significant, and ratios based on significant estimates may be less credible.

Achieving comparability among companies in a given industry may be difficult. Different enterprises often apply different accounting policies. Therefore, the analyst must identify basic differences in their accounting methods and make adjustments accordingly.

Comprehensive Examination F

F-9

LEGAL NOTICE